Certain statements contained in this Annual Report on Form 10-KSB, including, without limitation, statements containing the words “believes,” “anticipates,” “estimates,” “expects,” and words of similar import, constitute “forward-looking statements.” Readers should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks described in this Report, including the “Risk Factors” section beginning on page 14, and the other documents we file with the United States Securities and Exchange Commission (“SEC”).
Currency
All currency references in this Report are in US dollars unless otherwise noted.
Introduction
We are Garuda Capital Corp. (“Garuda”, the “Company” “we”, “our”, “us”), and are based in Vancouver, British Columbia, Canada. We have seven wholly-owned subsidiaries, Hagensborg Foods Ltd. (“Hagensborg”), Hagensborg Seafoods Ltd., Natural Program Inc. (“Natural Program”), Natural Program Ltd., Garuda Gold Corporation, Garuda Minerals Inc. and Garuda Exploration Inc., which changed its name from Garuda Ventures Canada Inc. to Garuda Exploration Inc. on September 20, 2006 (“Garuda Exploration”). We have recently acquired mining interests through Garuda Exploration. Garuda Gold and Garuda Minerals are currently inactive.
Hagensborg is in the business of manufacturing and marketing gourmet foods. Through Hagensborg we manufacture and market both branded and private label chocolates as well as seafood pâtés and we serve wholesale and retail customers both in Canada and the US. All products are directly shipped from our warehouse in Vancouver, British Columbia, Canada.
Natural Program is in the business of developing and marketing herbal remedies. Through Natural Program we operate a Chinese herbal pharmacy to dispense high quality Chinese herbs to practitioners and market a wholesale line of herbal remedies under the Natural Program name.
Natural Program’s main assets are its proprietary formulations which are developed in-house. See the section titled “Natural Program Inc.” on page 7 for a complete description of Natural Program’s history and business.
HAGENSBORG FOODS LTD.
Through our subsidiary Hagensborg, we are in the business of manufacturing and marketing gourmet chocolates and other gourmet foods. Hagensborg has created a new “fairyland” marketing and promotional concept, and has re-packaged its entire product line using this new fairyland theme. All of Hagensborg’s sales personnel have adopted the title of “Chocolate Princess”. We market the gourmet chocolate products to high-end departmental and specialty stores throughout North America. The gourmet food products are also targeted to specialty stores and to mass market retailers. Hagensborg produces two main product categories, namely confectionary and seafood pâtés. These products are sold under the Hagensborg brand name as well as private labels for various customers. Confectionary products currently constitute 85% of Hagensborg’s total revenue while seafood pâtés generate approximately 15% of revenues.
Products of Hagensborg - Chocolate Division
We manufacture and market both branded and private label chocolates. The two main Hagensborg chocolate brands are the “Truffle Pig Bar” and the “Kiss Me” truffle frogs. Our main private label customers for confectionary products are Safeway, Future Fundraising and Nikka Traders.
Kiss Me is a European chocolate truffle in the shape of a frog with a velvety truffle centre. The product is marketed in two different size gift boxes (a 1.16oz box and a 3.5oz box). The target market for Kiss Me truffles consists of upscale gift box chocolate consumers, both male and female, between 25 and 65 years of age, with medium to higher household incomes. We launched this product in July of 2005.
The Truffle Pig bars are manufactured in six flavors: Orange, Mint, Mocha, Peanut Butter, Milk Chocolate and Raspberry Chocolate. They are marketed as all natural, non-hydrogenated single bars. The target market of this product is the indulgent chocolate consumer. Men, between the ages of 25 and 44, in the mid to higher income bracket, are the largest consumers of the bars.
In the short term, Hagensborg will be introducing two new chocolate products. One such new product is the Polar Bar. The Polar Bar is currently on the market as a private label product called the “Peaks” bar. In the long term, Hagensborg plans on developing the Robin Hood bar. The Robin Hood bar will be specifically designed to be sold through charities for the benefit of social causes.
Products of Hagensborg – Seafood Division
Hagensborg seafood pâtés are marketed in six flavors: smoked salmon, salmon, shrimp, rainbow trout with dill, crab and lobster. The products are packed in 3-oz tins and are sold either individually or inside a decorative retail box. Hagensborg owns the proprietary recipes, which are produced on a contract basis by St. Jeans cannery in Nanaimo, B.C. Hagensborg will continue to increase product skews through outsourcing product lines from other producers as well as developing new products in-house. Hagensborg plans on introducing new skews on a regular basis, approximately every 6 months. Hagensborg is planning on expanding its line of high quality pâtés by introducing various canned fish products. This expansion will allow Hagensborg to appeal to the growing market of health conscious consumers.
Market
Gourmet foods consumption is affected by many factors including: climate, purchaser’s disposable income, economic development, distribution and marketing. Since chocolates have a limited shelf life, and our plant is located in Vancouver, British Columbia, we are limited in the areas that we can market our product. Because of this, and the fact that developed nations generally have higher levels of gourmet food consumption in comparison to developing or emerging nations, we have limited where we market our products to North America.
A number of socio-economic forces have contributed to the continuing growth of the confectionary market. Such factors include: a demand for good tasting food, a growing preference for attractive foods, a continuing demand for more variety and a need for self-indulgence. As a result, both the Canadian and U.S confectionary market has experienced steady growth.
Competition
Hagensborg can be considered a niche marketer of specialty food products. Our competition consists of Canadian and US based manufacturers and marketers of gourmet confectionary products and canned seafood pâtés. Competition is based upon brand recognition, taste and cost. Many of our competitors are enjoying a greater portion of market share as they have greater resources and brand recognition.
Marketing Trends
Increasingly health conscious shoppers look for high quality, health-friendly products
This trend is largely a response to the general increase in health consciousness of both the aging baby-boomers and their descendants. Hagensborg’s no-sugar added, all natural chocolates and all natural seafood pâtés are marketed to this growing segment.
Small packages encourage impulse offerings
Specialty foods marketers are making their products easier to purchase by selling them individually wrapped, or in small packages suitable for placement at the register. To this end, we have developed three piece Kiss Me truffle packages and the Truffle Pig bars.
Marketing
Trade Shows
Trade shows are a key forum for meetings with brokers, retail buyers and distributors. Hagensborg is represented at two Fancy Food Shows per year (January in San Francisco, July in New York), and Gift shows in Seattle and Vancouver. In addition, Hagensborg attends distributor shows such as the Consolidated Foods shows for their customers held two times per year.
Magazine Editorials and Television Broadcasts
Hagensborg will continue to pursue both print and television media exposure. Hagensborg has been published in magazines such as Chocolatier magazine (June 2006), In Style and is currently in contact with Martha Stewart Living, Elle and Country Living magazines. In addition to magazine editorials, Hagensborg has been published by The San Francisco Chronicle and The Vancouver Sun. Hagensborg has been presented on CBC Television in January 2006.
Sales Manager Contacts
Hagensborg’s Sales Managers have been developing contacts with distributors, brokers and major retailers (Safeway, Overwaitea, Neiman Marcus and Whole Foods in particular), working with them to place products in their permanent displays, provide promotional support and ensure supply. To widen distribution of Hagensborg’s products through the larger retailers means gaining head office approval then working with each regional division to gain placement in stores.
Product Information
Hagensborg’s Marketing has developed selling presentations for each product/brand, including market information and key selling points. As well as using it for customer meetings, Sales Managers provide this information to brokers who work on Hagensborg’s behalf to ensure they have a strong selling story. This is part of the sales effort to ensure Hagensborg’s brokers and distributors are educated about Hagensborg’s products and can work effectively with potential customers. Retailers are inundated with new products and merchandise to choose from. Providing competitive arguments in a category context makes it easier for them to choose Hagensborg’s products.
Website
The Hagensborg website address appears on packaging and printed materials. The site gives details of all products, retail locations to purchase, company and contact information for customers, retailers and distributors. This is a useful tool for advertising, promotion, educating and in the future, the possibility of ordering for all types of customers. The site is monitored and updated regularly with focus on search engine optimization.
Market Penetration
In 2006 we began our efforts to distribute our products to a higher end consumer by marketing our products to upscale retailers at North America gourmet food products trade shows. As a result of our attendance at these trade shows, we generated several leads and we are currently in negotiations with several chain retail stores to distribute our product. If these negotiations are successful, we expect to achieve sales increases by Spring 2007.
Hagensborg consistently strives for excellence in our product packaging. Our packaging has been redesigned which has resulted in our pâté packaging being recognized through an industry award. In order to develop the best packaging possible, Hagensborg works closely with the English design firm of Turner Duckworth, the same firm that designs for Virgin, Palm Pilot, Coca Cola and Amazon.com. Turner Duckworth is the winner of thirteen Clio Awards. Hagensborg offers more attractive packaging concepts such as its Kiss Me truffle frogs and Truffle pig chocolate bars. In addition, Hagensborg offers different varieties of chocolates by working with both Callebaut and Schokinag Chocolate suppliers.
Hagensborg’s main competitive distinction over other seafood producers is the fact that Hagensborg’s pâtés are all natural, with no added fillers. A key characteristic of Hagensborg is that we use high-quality, all natural ingredients.
We sell products directly to consumers and to a variety of distributor/resellers. Distributor/resellers purchase the product at a 25% discount and resell the products to their consumer base.
Market Expansion
Broadening our distribution base, including finding new markets for existing products, is another strategy we plan to apply in order to expand our business. Although it involves more risk than sole market penetration, developing new markets has a greater potential for revenue generation.
We are currently developing a variety of concepts to attract new markets for our existing products. We are also pursuing a variety of private label opportunities to add to our bottom line by manufacturing for large, national retail chains.
One of the most significant distribution developments in 2006 has been the addition of the Bayside Food Group to our list of distributors. The Bayside Food Group is directly responsible for our largest new account for 2006 – Whole Foods Grocery chain. Whole Foods Grocery chain has over 186 retail locations.
Reliance on Major Customer
During the year ended June 30, 2006, Garuda recognized revenue from three unrelated entities, Safeway, Future Fundraising and Nikka Traders, which together comprised approximately 47% of total revenues. These revenues were for private label chocolate products which we manufactured in our factory, under the brands of our customers (Eg. Safeway Select). Revenue recognized from these three entities was 47% in 2006, compared to 36% in 2005.
Research
During the last year, we redesigned the packaging for our gourmet chocolate products so that they would appeal to a different type of purchaser, namely chocolate connoisseurs who we thought would pay a premium price for high quality chocolates. We obtained information on who was spending money on purchasing high quality chocolates by researching where high end chocolate products were being sold. We sent marketing personnel to those stores that were carrying high end chocolates and we conducted market surveys within those stores regarding the type of people who shopped there, what kind of chocolates they were likely to purchase, at what price and in what quantity. We conducted this research in New York, San Francisco, Vancouver, and Toronto. Our research revealed that persons between the ages of 25 – 65, with medium to high incomes, were most likely to become purchasers of our chocolates. During the past year, we also obtained and reviewed market research reports which described regional areas of chocolate sales and types and prices of chocolates sold.
Product/Market Development
The development of new products for new markets is the most cost-intensive, high-risk method for growth within the specialty food industry. However, the risk can be minimized by acquiring existing businesses with products complementary to our Hagensborg line of products. The advantage of acquiring existing companies with established products is the development cost savings and reduced time to market. Product development will focus on the introduction of the Polar Bar and co-packing panned chocolates.
Other Projects
In addition to the product/market-related strategies discussed above we are currently evaluating the automation of production facilities and new manufacturing equipment to decrease the cost of production and thereby offer more competitive pricing.
Stated Business Objectives
Market existing products
Our strategic focus for the next 12 months will be developing and marketing our existing proprietary brands and private label business in Canada and the US.
Expand distribution to increase volumes
In order to take advantage of economies of scale, we are seeking to expand our national distribution in Canada and the US over the course of the next 12 months. This will be achieved by selecting a pick and pack logistics company in the US to service our smaller customers and brokers that specialize in servicing the department stores, specialty stores, gift basket suppliers and health food chains. We plan to develop sales channels for the club and private label business and by hiring key sales personnel.
Our first priority will be the expansion of distribution. To sustain growth over the long term, we intend to generate a continuing flow of distinctively different, new products through in-house product development and by way of acquisitions. We plan to market these new products on a North America wide basis.
With the continued success of Hagensborg and increasing market demand, we plan to continue expanding sales throughout North America, with a medium term plan to expand into the European and Japanese markets. New client accounts secured so far in 2006 include Shoppers Drug Mart (925 locations), Whole Foods (186 locations) and Wild Oats (110 locations, which includes Vancouver’s popular Capers Markets).
NATURAL PROGRAM INC.
We have a wholly-owned subsidiary, Natural Program, Inc., which was incorporated as a Nevada company on July 7, 2000 (“Natural Program”). Natural Program also has a wholly owned subsidiary, Natural Program Ltd., through which it carries on business in British Columbia. Natural Program is in the business of developing and distributing herbal remedies. Through Natural Program, we operate a Chinese herbal pharmacy to dispense Chinese herbs to practitioners and we market a wholesale line of herbal remedies under the Natural Program name. Natural Program makes prescription formulas for practitioners of traditional Chinese medicine. Our clients are registered practitioners predominantly in British Columbia. Prescriptions are made up on the premises and patients then pick up these formulas from the West Broadway location in Vancouver. The products are all manufactured to Good Manufacturing Practices standards and are free of additives and heavy metals.
Products and Services
Our product line includes the Rescue Line and Travel Line. Our herbal line is imported from Taiwan. The Rescue Line currently consists of five products: Memory, Sleep, Headache, Stress and Energy Rescue. The first product of our new Travel Line is Thrombosin. The remedies are marketed as improving the quality of day-to-day life and offering solutions for common health problems. No independent studies have been performed to evaluate the effectiveness of the formulations.
Stress Rescue
Designed to offer immediate relief of stress, trauma and shock, our Stress Rescue formula is marketed for use in times of emergency, as a restorative tonic, or as a preventative measure. We believe Stress Rescue helps the body adapt to increased demands and is particularly useful in preventing anxiety attacks, relieving fatigue and easing tension and pain.
Energy Rescue
Energy Rescue is a caffeine-free, herbal formulation used to increase endurance, improve athletic performance, restore sexual vitality and invigorate the body and mind. Energy Rescue can also be used to alleviate the effects of jet lag, nervous exhaustion, Chronic Fatigue Syndrome and is designed to help restore the body in cases of depression and physical weakness.
Sleep Rescue
Sleep Rescue is designed to promote a deep, relaxing and revitalizing sleep. We believe Sleep Rescue reduces evening restlessness, restores the nervous system and relieves anxiety, tension and sleeplessness without habit forming or addictive properties.
Headache Rescue
Headache Rescue is intended to alleviate headaches and migraines caused by various factors through its anti-inflammatory and pain relieving properties. We believe Headache Rescue helps to relax muscular tension, promotes rapid recovery, and can be used as a preventative measure.
Memory Rescue
Formulated to enhance memory and concentration, Memory Rescue is marketed as an enhancement to cognitive function and mental abilities. It also claims to counteract mental dullness and depression.
Thrombosin
Thrombosin is an herbal formula which we believe helps prevent the formation of blood clots as a result of lack of circulation. The formation of blood clots, or deep-vein thrombosis (DVT), has been dubbed “economy class syndrome” because it results from long hours of minimal movement suffered especially, but not exclusively, by air travel passengers on long-haul flights. Taken several days before and after flying, Thrombosin is intended to help the prevention of blood clots.
Herbal Laboratories
In addition to the wholesale product lines described above, Natural Program has a division which operates as a Chinese herbal pharmacy called Natural Program Herbal Laboratories. Natural Program Herbal Laboratories dispenses Chinese herbal extracts including traditional Chinese herbal formulas, custom herbal formulas and single herbal extracts in granulated form. Practitioners of traditional Chinese medicine prescribe herbal formulas just like traditional physicians prescribe medications. Patients of Chinese medical practitioners drop off their prescriptions at the Natural Program laboratory where the formulations are mixed by professional herbalists. As an incentive for practitioners to refer their patients to Natural Program, they receive a commission related to the value of the herbs sold.
We carry over 400 single Chinese herbal extracts and more than 350 of the most commonly used formulas. Both are packed in 50g and 100g bottles and may be special ordered in larger quantities.
Distribution
Natural Program’s products are currently distributed through direct sales to natural health food stores and pharmacies on a test market basis in Vancouver, British Columbia. We hope to expand our distribution to the rest of Canada, the US and ultimately Europe and hope to include general grocery and mass food chains. To accomplish this, Natural Program is identifying specialized distributors for each of its geographical markets. To date we do not have any agreements with any distributors located outside of British Columbia, Canada.
In order to support retail sales, we provide product information and educational seminars to sales personnel in order to enable them to effectively sell our products. We also provide point of purchase displays and informational brochures for end-consumers. In the future, we intend to advertise in trade publications and attend industry trade shows.
Competition
The herbal products market is currently dominated by traditional, grass-roots products sold as raw herbs which require preparation such as drying or boiling. The market is underserved by professional products which are safe, easy to use and effective. This is mainly due to the complex regulatory environment and the start-up capital requirements for developing and dispensing herbal remedies.
As a manufacturer and wholesaler of herbal remedies, Natural Program competes with manufacturers of natural medicine products. Other competition includes allopathic pharmaceutical drug companies and natural therapists who supply professional lines of natural health products.
Most competitors can be categorized into the following three groups:
Our focus is to capture the segments of the markets which do not buy from large corporations but prefer smaller, specialized providers. We are also targeting people in today's health-conscious marketplace that prefer to prevent and treat illness with natural remedies as part of a holistic approach to health and well-being, instead of taking chemically prepared medications with unwanted side effects.
Governmental Regulations
The Food and Drug Administration in the US currently requires that manufacturers, processors and packagers of food, drugs, medical equipment and blood follow Good Manufacturing Practices (“GMP”). GMP is a regulatory process that was implemented for consumer protection. It ensures that all aspects of the business are monitored, allowing consumers to feel confident that the products they receive are safe, pure and effective. Some of the aspects involved in the GMP regulatory process are sanitation, cleanliness, personnel qualifications and recordkeeping. These procedures are followed on a daily basis. GMP protects consumers against weak or super potent products, contamination, inconsistency in appearance, improper packaging and mislabeling. Dietary supplements are not yet required, by law, to follow GMP practices. However, GMP regulations should soon apply to dietary supplements. Natural Program already abides by these requirements and can therefore ensure customers of the high quality and purity of the products it delivers.
As of January 1, 2004 the Natural Health Products Directorate has become the regulating body for natural health products (“NHP”) in Canada. Previous regulations were defined by the Food and Drug Regulations. The new regulations will affect manufacturers, distributors, importers, labelers and packagers of NHP. The new regulations require that all NHP have a product license in order to be sold pre-packaged and in open selection areas. Locations which are involved in the production, distribution, importation and sale of NHP will be required to hold a site license and comply with using GMP. Companies which import goods from foreign sites must also provide evidence showing that the imported products meet GMP standards. GMP must be created, implemented and regulated by a qualified Quality Assurance officer.
The transition period for site license compliance applies only to companies which have an establishment license (which Natural Program has already obtained) and have been conducting business before January 1, 2004. Sites with a valid establishment license must be compliant with site license and GMP requirements by January 1, 2006. Sites without a valid Establishment License must have been compliant by January 1, 2004.
All NHP that are pre-packed, and not sold by prescription will require a product license and in turn a NHP number. The purpose of this license is to provide standards of evidence for the quality of the NHP purchased. The Natural Health Products Directorate has provided clearly defined criteria to evaluate each product type. Each product sold by a company must go through the application process. There are different submission types for products. These include Compendial and Non-Compendial. The Compendial submission refers to an application for which a monograph is available. There will be a compilation of over 100 monographs of common NHP for reference.
Non-Compendial describes an application in which a full review is required. Some of the general requirements for an application include: a completed product license application form, proposed label text, quality summary report and evidence of safety and efficiency. Once all product information has been gathered and sent to the Natural Health Products Directorate, the product will be reviewed. If quality, purity and safety can be demonstrated, a product license will be submitted.
Health Canada has instituted a transitional period to help all parties affected by the new regulations to work towards a full understanding of the requirements for compliance. The transition periods apply to NHP with and without drug identification numbers (“DIN”). A NHP with a DIN will have until December 31, 2009 to obtain a NHP number. A NHP without a DIN will have until December 31, 2007. Any new NHP introduced to the market after January 1, 2004 must have a NHP number and therefore a product license.
Natural Program will require a site license, will need to be GMP compliant and will require product licenses for its Rescue Line. However, Natural Program also qualifies for the transition period which means that the product license will not be required until December 31, 2007. A site license and GMP compliance are required by January 2006.
Sources of Raw Materials
Our main Natural Program assets are our proprietary formulations for our liquid herbal remedies which have been developed in-house. Both our herbal extracts and raw materials for our liquid herbal remedies come from international sources. We outsource the manufacturing of our products to specialized providers who comply with GMP standards.
Mining Interests
Garuda has two wholly owned subsidiaries incorporated for the purpose of pursuing opportunities in the mining business. These are Garuda Gold Corporation (“Garuda Gold”), a company incorporated in British Columbia on June 3, 2002 and Garuda Minerals Inc. (“Garuda Minerals”), a Nevada company incorporated on May 6, 2005. Also, Garuda Exploration is now involved in mining activities.
On May 18, 2005, Garuda Minerals entered into a binding letter of intent with Newhaven Resources Ltd. (“Newhaven”) and Aquarian Gold Corporation (“Aquarian”) and obtained an option to acquire a 65% interest in an exploration license in the form of an Environmental Permit for Mineral Exploration on an area of approximately 200 km 2 located near the town of Ho, in the Volta region of Ghana (the “Ho Property”).
On May 18, 2005, Garuda Gold entered into an agreement with Newhaven and Aquarian whereby Garuda Gold obtained an option to acquire a 65% interest in the contract mining of an open pit property with an exposed vein system in a property in Prestia, Ghana (the “Prestia Property”).
Garuda Minerals and Garuda Gold had elected not to exercise their options on the Prestia Property and the Ho Property. Both letters of intent with Newhaven expired on May 18, 2006. We no longer have any rights in the Ho Property or the Prestia Property.
On June 26, 2006, Garuda’s subsidiary, Garuda Exploration, under its former name, Garuda Ventures Canada Inc., entered into an agreement with Xemplar Energy Corp. (“Xemplar”), to acquire a 70% interest in a Corhill uranium-gold-platinum prospective property located in the Northwest Territories. The Corhill property is comprised of 18 mineral claims and covers 30,628 acres. The agreement provides for Garuda Exploration to make a cash payment of approximately $45,000, issue 2,000,000 restricted common shares of Garuda and incur expenditures of approximately
$1,350,000 over 3 years. The property is subject to a 2% net smelter return royalty. We currently do not have available funds to pay the $45,000 required to exercise our rights pursuant to this agreement. We are trying to raise capital to fund our mining operations, including the payments to exercise our option on the Corhill property. If we are unsuccessful in raising additional capital, we will lose our option and our business may fail.
The Corhill Property (the “Property”) consists of 18 contiguous mineral claims in the north of the east-end of Great Bear Lake, 430 km northwest of Yellowknife, Northwest Territories, 80 km north of Port Radium. More information on the Corhill property is contained in our section entitled Description of Property, beginning on page 19 of this report.
Government Regulations
Our current and future exploration and development activities, as well as our future mining and processing operations, are subject to various federal, state and local laws and regulations in the countries in which we conduct our activities. These laws and regulations govern the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic substances and other matters. We expect to be able to comply with those laws and do not believe that compliance will have a material adverse effect on our competitive position. We have obtained, and intend to obtain all licenses and permits required by all applicable regulatory agencies in connection with our exploration activities and any mining operations we carry out. We intend to maintain standards of environmental compliance consistent with regulatory requirements. We have obtained, and will obtain at the appropriate time, environmental permits, licenses or approvals required for our operations.
Employees
Our employees are engaged as follows:
Administration/
Accounting Sales/
Marketing Production/
Operations Total
Garuda Capital Corp. 1 - - 1 Hagensborg Foods Ltd. 3 3 14 20 Natural Program Inc. 2 2 2 6 Mining Interests 0 0 0 0 [/TABLE]
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the US. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be both those most important to the portrayal of our financial condition and that require the most subjective judgment:
Revenue recognition
We ship our products by common carrier and also sell products through brokers, distributors and directly to specialty stores. We receive our product sales price in the form of cash, credit card or on approved terms. Sales revenue and related discounts or volume incentives are recorded when the products are in the hands of the common carrier. Our reserve on accounts receivable takes into consideration future potential credits, if any, from the sale of products to customers. We recognize revenue from sales when there is persuasive evidence that an arrangement exists, products have been rendered, the seller’s price to the buyer is determinable, and collectibility is reasonably assured.
Accounting for marketable securities
Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 115, our investments in marketable securities are considered as available for sale.
Available for sale securities consist of debt and equity securities not classified as trading securities or as securities to be held to maturity. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of other comprehensive income. When the investment is sold, the realized gain or loss is reported as other income or expense on the income statement. Gains and losses on the sale of securities available for sale are determined using the specific identification method and are included in earnings.
Impairment or disposal of long-lived assets
Long-lived assets are reviewed in accordance with SFAS No. 144. Impairment or disposal of long-lived assets losses are recognized in the period the impairment or disposal occurs. Long-lived assets are reduced to their estimated fair value. Wereview long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted operating cash flow analyses to determine if impairment exists. For purposes of recognition and measurement of impairment for assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Inventory valuation and related reserves
Inventories are valued at the lower or average cost of net realizable value. We use a standard cost system for purposes of determining cost where standards are adjusted as necessary to ensure they approximate actual costs. We write down or reserve for estimated obsolete or excess inventory based upon assumptions about future demand and market conditions. We compare current inventory levels on a product basis to our current sales forecast in order to assess our inventory reserve balance. The sales forecasts are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our products, current products, expected future products and various other assumptions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
Stock based compensation
Garuda accounts for stock issued for compensation in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees.” Under this standard, compensation cost is the difference between the fair market of the underlying stock and the exercise price of the option on the grant date. In accordance with SFAS No. 123, “Accounting for Stock Based Compensation,” we disclose the pro forma effects on net income and earnings per share as if compensation had been measured using the “fair value method”.
RISK FACTORS
Set forth below and elsewhere in this report are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.
Garuda Risk Factors
Because our financial statements disclose a going concern uncertainty, there is substantial uncertainty we will continue operations in which case you could lose your investment.
Our financial statements disclose a going concern uncertainty. This means that there is substantial doubt that we can continue as an ongoing business for the next 12 months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue our business. As such we may have to cease operations and you could lose your entire investment.
We will need additional capital and this may result in dilution of existing shareholders.
In order to carry out our business plans it is likely that we will need additional capital. It is also likely that we will raise additional capital by issuing additional equity securities. As a result, current shareholders are likely to experience dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to carry out our business plans. This would result in our continuing to be unprofitable and could cause us to go out of business.
The price and trading volume of our common stock has been highly volatile and could adversely affect an investor’s ability to sell the shares and the available price for the shares when sold.
The price and trading volume of our common stock has been highly volatile. The price range since September 2002 has been from $0.06 per share to $0.71 per share. In addition, the daily trading volume has varied from no shares to 1,200,000 shares. Investors need to consider this volatility, which could result in lower prices being available to the investor if the investor desires to sell their shares at a given time.
Our common stock may be classified as a “penny stock” which could adversely affect an investor’s ability to sell their shares.
We believe that our common stock would be characterized as “penny stock” under U.S. Securities and Exchange Commission regulations. As such, broker-dealers dealing in our common stock will be subject to the disclosure rules for transactions involving penny stocks, which require the broker-dealer to determine if purchasing our common stock is suitable for a particular investor. The broker-dealer must also obtain the written consent of purchasers to purchase our common stock. The broker-dealer must also disclose the best bid and offer prices available for our stock and the price at which the broker-dealer last purchased or sold our common stock. These additional burdens imposed upon broker-dealers may discourage them from effecting transactions in our common stock, which could make it difficult for an investor to sell their shares.
We are dependent on our key personnel and may not be able to easily replace such personnel.
Our success depends, to a significant extent, upon the efforts and abilities of a small number of key management personnel. The loss of the services of one or more of these individuals could adversely affect our businesses. The particular areas of expertise we are dependent upon include overall business planning and finance, the manufacture and marketing of gourmet chocolates and foods and Chinese herbal medicine. Our success is also dependent upon our ability to attract and retain qualified employees and personnel. Competition for such personnel is intense and we may not be able to attract and retain the personnel necessary for the development and operations of our businesses. Our competition for qualified personnel may be hindered by our lack of capital or fringe benefits which larger, more established competitors can provide. We have no “key man” life insurance with respect to any of our key management personnel.
We use Canadian currency and fluctuations in exchange rates could adversely affect our sales and operations.
Much of our sales and supplies of raw materials are denominated in foreign currencies, usually the Canadian dollar. Fluctuations in exchange rates, i.e., between US and Canadian dollar as well as other currencies could result in circumstances where our supplies and our products suddenly become more expensive to us, or to consumers. This would adversely affect our costs, our sales and our result of operations. Due to the recent fluctuations between Canadian and US prices, our revenues from US customers have been affected proportionately. While our cost of goods purchased in Canadian dollars and our revenues from US sales have remained static, once the US funds are converted into Canadian dollars, revenues have decreased due to the decreased value of the US dollar.
The number of shares issuable upon exercise of outstanding common stock purchase warrants and options may adversely affect the market price for our shares.
As of October 6, 2006 we have outstanding warrants and options to acquire up to 20,317,522 shares of common stock at prices between $0.10 per share and $0.20 per share, including 3,200,000 shares registered on Form S-8. Exercise of common stock purchase warrants and options could have an adverse effect on the market for the shares due to the dilution that the exercise will cause.
We do not anticipate paying dividends to shareholders in the foreseeable future.
We have not paid dividends on our common shares and do not intend to in the foreseeable future. Instead, we intend to invest any earnings in the further development of our business. Accordingly, shareholders should not expect to receive any dividends on their shares.
Hagensborg Risk Factors
The business of our subsidiary, Hagensborg, is subject to a number of risks due to the nature of its business and its present state of development. Prospective purchasers should consider carefully, among other factors set forth in this Report, the following:
Our new products will be competing against well established chocolate and gourmet food companies.
Our chocolate and gourmet food products compete in markets dominated by extremely large, well financed and internationally recognized companies. Our ability to compete will depend upon developing brand recognition and distribution methods. Our competitors already have well established brands and distribution methods and many times our financial ability. Focused competition by such giants could substantially limit our potential market and ability to profit from these products. Such competition may result in reduced sales, reduced margins or both. We do not currently have sufficient cash to either develop or market our new products. We plan to raise additional capital for developing and marketing our new products. However, there is no assurance that we can acquire additional funding to carry out our plan. Failure to successfully compete in the global chocolate and gourmet food industry with well-established companies may result in our inability to continue with our operations or prevent us from achieving significant revenues.
We may face product liability for the products we manufacture and sell.
As a business which manufactures and markets products for use by consumers, we may become liable for any damage caused by our products when used in the manner intended. Any such claim of liability, whether meritorious or not, could be time-consuming and result in costly litigation. Although we maintain general liability insurance, our insurance may not cover potential claims of the types described above or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business.
We are a niche marketing business and can be greatly affected by overall economic trends.
Hagensborg may be considered to be a niche marketer of gourmet foods. Gross sales of gourmet foods are affected by the overall economic environment which in turn governs consumer spending. As a result, downturns in the overall economic environment could result in a decrease in demand for such products and a reduction in both gross sales and margins of Hagensborg.
Our sales can be greatly affected by changes in consumer tastes and preferences.
Consumer tastes in gourmet foods are inherently volatile. Hagensborg is dependent upon its ability to gauge the taste of consumers and provide products that satisfy that demand. Consumer tastes may change rapidly and Hagensborg may not be able to market foods which consumers wish to purchase, resulting in a significant reduction in sales and resultant revenues.
Our ability to succeed is dependent upon our ability to grow as well as our ability to manage growth.
The growth of Hagensborg is dependent to a significant degree on its ability to expand the marketing and sales activity to generate additional sales, and our ability to update and expand our product line. In the past two years Hagensborg has introduced several new products. The financial performance of Hagensborg is also dependent upon management’s ability to successfully administer the resulting expanded operations. Hagensborg may not be able to increase its sales of existing products or develop and sell new products on a profitable basis.
Natural Program Risk Factors
The business of Natural Program is subject to a number of risks due to the nature of the business and its present state of development. Prospective purchasers should consider carefully, among other factors set forth in this Report, the following:
We may face product liability for the products we manufacture and sell.
As a business that manufactures and markets products for use by consumers, we may become liable for any damage caused by our products when used in the manner intended. Any such claim of liability, whether meritorious or not, could be time-consuming and result in costly litigation. Although we maintain general liability insurance, our insurance may not cover potential claims of the types described above or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business.
We may become subject to government regulation of herbal remedies, which could adversely affect our ability to sell our products.
The regulatory environment governing herbal remedies varies from country to country and changes at an unpredictable rate. The success of Natural Program is dependent to a significant degree on its ability to comply with industry regulations for product labeling, testing, and the like. If Natural Program is unsuccessful in identifying and complying with changing industry regulations, there may be a material adverse effect on its results. The Food and Drug Administration in the US currently requires that manufacturers, processors and packagers of food, drugs, medical equipment and blood follow GMP. As of January 1, 2004 the Natural Health Products Directorate became the regulating body for NHP in Canada. Previous regulations were defined by the Food and Drug Regulations. The new regulations will affect manufacturers, distributors, importers, labelers and packagers of NHP.
