UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB/A

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  September 30, 2006

[	] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________ to __________

Commission file number  333-109990

MELT INC.

(Exact name of small business issuer as specified in its charter)

 

Nevada		47-0925451
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

22912 Mill Creek Dr, Suite D, Laguna Hills, CA 92653

(Address of principal executive offices)

 

949.707.0456

(Issuer's telephone number)

 

32222 Corte Tomatlan, Temecula, CA 92592

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No [ ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.     Yes [ ]     No  [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  20,280,000 common shares issued and outstanding as of September 30, 2006

Transitional Small Business Disclosure Format (Check one):

Yes [

]

No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No [X ]

 

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Item 1.  Financial Statements.

 

It is the opinion of management that the interim restated consolidated financial statements for the quarter ended September 30, 2006 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

 

 

 

 

 

 

 

 

 

 

MELT INC. AND SUBSIDIARIES

 

RESTATED CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2006 and December 31, 2005

 

 

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- 3 –

 

 

 

MELT INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

ASSETS

 

	September 30,			December 31,
	2006			2005
	Restated
	(Unaudited)
CURRENT ASSETS
Cash	$	416,819		$	220,672
Receivables		687,594			205,724
Receivable on sale of subsidiary		95,000			-
Inventory		5,689			63,000
Construction in process		767,827			-
Prepaid expenses		64			8,688
Total Current Assets		1,972,993			498,084
FIXED ASSETS, NET		32,965			206,300
OTHER ASSETS
Trademark, net		1,383			1,815
Deposits		141,952			15,000
Total Other Assets		143,335			16,815
ASSETS OF DISCONTINUED OPERATIONS (NOTE 5)		-			397,079
TOTAL ASSETS	$	2,149,293		$	1,118,278

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

	September 30,			December 31,
	2006			2005
	Restated
	(Unaudited)
CURRENT LIABILITIES
Accounts payable & accrued expenses	$	749,006		$	81,810
Accrued management fees – related party		64,000			46,000
Notes payable - related party		217,164			224,000
Accrued interest - related party		35,659			25,570
Notes payable		155,816			42,000
Accrued interest		8,813			3,150
Construction deposits		341,245			-
Deferred revenue		450,000			125,000
Total Current Liabilities		2,021,703			547,530
LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 5)		-			32,625
TOTAL LIABILITIES		2,021,703			580,155
MINORITY INTEREST		-			181,827
STOCKHOLDERS’ EQUITY
Common stock; $0.001 par value, 100,000,000
shares authorized, 20,280,000 shares issued
and outstanding		20,280			20,280
Additional paid-in capital		1,077,937			1,077,937
Accumulated deficit		(970,627)			(741,921)
Total Stockholders’ Equity		127,590			356,296
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,149,293		$	1,118,278

 

 

 

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

	For the Three Months Ended						For the Nine Months Ended
	September 30						September 30
	2006			2005			2006			2005
REVENUES	Restated						Restated
Food and supplies	$	229,387		$	91,643		$	714,004		$	359,828
Franchise fees		100,000			100,000			175,000			100,000
Equipment and store sales		807,945			386,761			967,874			386,761
Royalty and marketing fees		49,203			21,481			112,135			35,755
Miscellaneous finders and
professional fees		112,238			-			169,892			-
Total Revenues		1,298,773			599,885			2,138,905			882,344
COST OF SALES		1,044,257			311,143			1,608,429			401,494
GROSS PROFIT		254,516			288,742			530,476			480,850
EXPENSES
Depreciation and amortization		1,838			1,151			20,654			33,594
Professional fees		44,645			22,649			100,073			110,697
Rent		7,098			20,724			41,204			75,451
Salaries and wages		57,369			21,756			178,870			91,259
Management fees		27,600			27,500			83,250			76,000
General and administrative		174,423			38,701			328,816			85,666
Total Expenses		312,973			132,481			752,867			472,667
INCOME (LOSS) FROM OPERATIONS		(58,457)			156,261			(222,391)			8,183
OTHER INCOME (EXPENSES)
Interest expense		(9,551)			(2,940)			(23,755)			(93,191)
Interest income		2,855			-			3,510			-
Loss on sale of fixed assets		-			(32,747)			-			(32,747)
Gain on sale of fixed assets		-			11,350			91,657			11,350
Total Other Income (Expense)		(6,696)			(24,337)			71,412			(114,588)
INCOME (LOSS) BEFORE MINORITY
INTEREST, DISCONTINUED
OPERATIONS AND INCOME TAXES		(65,131)			131,924			(150,979)			(106,405)
MINORITY INTEREST		15,110			13,065			55,578			35,245
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS	$	(50,043)		$	144,989		$	(95,401)		$	(71,160)

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Continued)

(Unaudited)

 

 

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30
	2006			2005			2006			2005
	Restated						Restated
Loss on sale of subsidiary	$	(22,149)		$	-		$	(22,149)		$	-
Loss from discontinued operations		(30,220)			(23,441)			(111,156)			(67,802)
TOTAL LOSS FROM DISCONTINUED		(52,369)			(23,441)			(133,305)			(67,802)
OPERATIONS
INCOME (LOSS) BEFORE INCOME		(102,412)			121,548			(228,706)			(138,962)
TAXES
INCOME TAX EXPENSE		-			-			-			-
NET INCOME (LOSS)	$	(102,412)		$	121,548		$	(228,706)		$	(138,962)
BASIC AND DILUTED NET
INCOME (LOSS) PER SHARE:
Income (loss) per share on continuing
operations	$	(0.00)		$	0.01		$	(0.01)		$	(0.01)
(Loss) per share on discontinued
Operations		(0.01)			(0.00)			(0.00)			(0.00)
Net income (loss) per share	$	(0.01)		$	0.01		$	(0.01)		$	(0.01)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING		20,280,000			19,660,000			20,280,000			19,660,000
FULLY DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING					19,660,000

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

 

 

						Additional
	Common Stock					Paid-in			Accumulated
	Shares		Amount			Capital			Deficit
Balance, December 31, 2005	20,280,000		$	20,280		$	1,077,937		$	(741,921)
Net loss for the Nine months
ended September 30, 2006 -
restated (unaudited)	-			-			-			(228,706)
Balance, September 30, 2006 -
restated (unaudited)	20,280,000		$	20,280		$	1,077,937		$	(970,627)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

	For the Nine Months Ended
	September 30,
	2006			2005
	Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(228,706)		$	(138,962)
Items to reconcile net (loss) to net
cash (used) by operating activities:
Depreciation and amortization		20,655			34,377
Depreciation – discontinued		46,808			57,152
Minority interest		(55,578)			(35,245)
Loss on sale of subsidiary		22,149			-
Gain on sale of fixed assets		(91,657)			-
Beneficial conversion		-			66,667
Changes in operating assets and liabilities:
(Increase) in receivables		(386,870)			(136,864)
Decrease in supplies and inventory		57,311			744
Decrease in supplies and inventory – discontinued		1,565			11,516
(Increase) decrease in prepaid expenses		8,624			(586)
Increase) in prepaid expenses - discontinued		(4,517)			-
(Increase) decrease in deposits		(126,952)			6,988
(Increase) in trademark		-			(1,150)
Increase (decrease) in accounts payable
and accrued expenses		699,107			(105,135)
Increase (decrease) in accounts payable
and accrued expenses – discontinued		(27,305)			15,002
(Decrease) in accounts payable – related party		-			(20,800)
Increase in interest payable		5,663			-
Increase in interest payable – related party		10,089			16,578
Increase in management fees		18,000			40,000
Increase in deferred revenue		325,000			-
(Increase) in construction in process		(767,827)			-
Increase in construction deposits		341,245			-
Net Cash (Used) by Operating Activities		(133,196)			(189,718)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary		50,000			-
Purchase of fixed assets		(33,929)			-
(Increase) in receivable for sale of subsidiary		(95,000)			-
Proceeds from sale of fixed assets		276,900			114,118
Net Cash Provided by Investing Activities		197,971			114,118
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in minority interest		-			15,000
Payments on notes payable		(887)			-
Payments on notes payable – related party		(32,495)			-
Proceeds from notes payable		114,703			192,000
Proceeds from notes payable –related party		25,659			50,911

The accompanying notes are an integral part of the restated consolidated financial statements

 

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MELT INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

 

	For the Nine Months Ended
	September 30,
	2006			2005
	Restated
Net Cash Provided by Financing Activities	$	106,980		$	257,911
INCREASE IN CASH		171,755			182,311
CASH AT BEGINNING OF PERIOD		245,064			94,981
CASH AT END OF PERIOD	$	416,819		$	277,292
Cash from continuing operations		416,819			266,402
Cash from discontinued operations		-			10,890
CASH AT END OF PERIOD	$	416,819		$	277,292
CASH PAID FOR:
Interest	$	3,250		$	-
Income taxes	$	-		$	-

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the restated consolidated financial statements

 

 

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MELT INC. AND SUBSIDIARIES

Notes to the Restated Consolidated Financial Statements

September 30, 2006 and December 31, 2005

 

NOTE 1 -

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements have been omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s most recent audited financial statements and notes thereto included in its December 31, 2005 Annual Report on Form 10-KSB. Operating results for the period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

 

NOTE 2 -

SIGNIFICANT EVENTS

 

On January 27, 2006 the Company signed a Product Purchase Agreement for the future purchase of food products to be sold in both the Melt owned corporate stores and their franchises. The agreement provides for minimum purchases of $3,000,000 over the term of the agreement, which commenced on January 31, 2006 and will expire on January 31, 2009.

 

On May 28, 2006 the Company executed an Asset Purchase Agreement and Bill of Sale with Veronica and Tito Pulido, wherein, the Company agreed to sell the Melt Gelato store located at the 1208 Galleria at Tyler, Riverside California in exchange for $300,000 in cash. Veronica and Tito Pulido assumed the lease for the location and agreed to operate the location as a franchised store. Of the $300,000 received as compensation, $25,000 was recorded as franchise fees, while the remaining $275,000 was recorded as the sales value of the fixed assets associated with the store. As a result of the transaction, a gain on sale of equipment, of $94,592 was recorded in the second quarter.

 

On August 9, 2006, the Company opened a franchised store located at 415 Parkway Plaza, El Cajon, California. The franchisee agreed to manage the construction process of the store. The Company received $25,000 as compensation for franchise fees.

 

On August 17, 2006, the Company entered into a Letter Agreement with a company for investor relations and corporate communications services. The agreement calls for the payment of a $12,000 fee and the issuance of 200,000 shares of the Company’s common stock, earned ratably over a one year term. The agreement may be terminated by either party at any time.

 

On September 14, 2006, the Company opened a franchised store located at 500 Lakewood Center Mall, Lakewood, California. The franchisee agreed to manage the construction process of the store. The Company received $25,000 as compensation for franchise fees.

 

On September 22, 2006 the Company opened a franchised store located at located at 865 Market St, San Francisco, California. Company managed the construction process of the store. The Company received $25,000 as compensation for franchise fees and recognized $516,500 as store sales revenue.

 

 

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MELT INC. AND SUBSIDIARIES

Notes to the Restated Consolidated Financial Statements

September 30, 2006 and December 31, 2005

 

NOTE 2 -

SIGNIFICANT EVENTS (CONTINUED)

 

On September 28, 2006 the Company opened a franchised store located at 4568 East Cactus Road, Phoenix, AZ. The Company managed the construction process of the store. The Company received $25,000 as compensation for franchise fees and recognized $207,438 as store sales revenue.

 

The Company recognizes proceeds and expenditures for the construction of franchise stores where the Company manages the construction process on a gross basis. A total of $723,938 of store construction revenue was recognized during the three months ended September 30, 2006.

 

NOTE 3 -

OUTSTANDING STOCK PURCHASE WARRANTS

 

A summary of the status of the Company’s stock warrants as of December 31, 2005, and September 30, 2006, is presented below:

 

			Weighted			Weighted
	Options		Average			Average
	Warrants		Price			Fair Value
Outstanding, December 31, 2005	930,000		$	0.75		$	0.75
Outstanding, September 30, 2006	930,000		$	0.75		$	0.75
Exercisable, September 30, 2006	930,000		$	0.75		$	0.75

 

		Outstanding						Exercisable
				Weighted
		Number		Average		Weighted		Number		Weighted
Range of		Outstanding		Remaining		Average		Exercisable		Average
Exercise		at		Contractual		Exercise		at		Exercise
Prices		9/30/06		Life		Price		9/30/06		Price
$       0.75		930,000		1.88		$      0.75		930,000		$     0.75

 

NOTE 4 -

CORRECTION OF AN ERROR

Subsequent to the issuance of the September 30, 2006 consolidated financial statements, the Company discovered an error in the way it has been recognizing franchise fee revenue. As a result, the Company revised its franchise fee revenue recognition policy to recognize franchise fees as income when the Company has completed its obligation to the franchisee, the franchise store has opened and there is (a) no remaining obligation or intent to refund an amounts paid, (b) substantially all of the initial services required by the Uniform Franchise Offering Circular have been performed, and (c) there are no other material conditions or obligations related to substantial performance. Previously, the Company recognized the revenue when the franchisee signed the franchise agreement and paid the fee.

The following is a summary of the impact of the correction on the balance sheet as of September 30, 2006 and the statement of operations for the nine months ended September 30, 2006:

 

 

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MELT INC. AND SUBSIDIARIES

Notes to the Restated Consolidated Financial Statements

September 30, 2006 and December 31, 2005

 

NOTE 4 -

CORRECTION OF AN ERROR (CONTINUED)

 

	As						As
	Reported			Adjustment			Adjusted
BALANCE SHEET
Deferred revenue	$	75,000		$	375,000		$	450,000
Total Current Liabilities		1,646,703			375,000			2,021,703
INCOME STATEMENT
Franchise fees	$	550,000		$	(375,000)		$	175,000
Total Revenues		2,513,905			(375,000)			2,138,906
NET INCOME (LOSS)	$	146,294		$	(375,000)		$	(228,706)
NET LOSS PER SHARE	$	(0.00)		$	(0.01)		$	(0.01)

 

NOTE 5 -

SALE OF SUBSIDIARY

 

On August 22, 2006, the Company entered into an agreement to sell its equity interest in its 50% owned subsidiary Villa Melt, LLC to the remaining interest holders for $145,000. A cash payment of $50,000 was received upon closing and a receivable of $95,000 was recorded at September 30, 2006. Upon close of the sale, the Company recognized a loss on sale of assets of $22,149.

 

All operating results of Villa Melt, LLC are included in discontinued operations as of September 30, 2006 and September 30, 2005. No tax benefit has been attributed to discontinued operations. The following is an unaudited summary of the loss from discontinued operations resulting from the sale of Villa Melt, LLC:

 

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
REVENUES	$	75,583		$	147,654		$	312,472		$	446,753
COST OF SALES		29,003			44,078			99,992			140,865
GROSS PROFIT		46,580			103,576			212,480			305,888
EXPENSES
Depreciation and
amortization		11,702			14,901			46,808			49,959
Professional fees		1,520			175			1,520			675
Rent		20,944			37,625			97,345			112,976
Salaries and wages		23,356			41,229			112,026			129,406
General and
administrative		17,728			32,856			65,891			80,443

 

 

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MELT INC. AND SUBSIDIARIES

Notes to the Restated Consolidated Financial Statements

September 30, 2006 and December 31, 2005

 

 

NOTE 5 -

SALE OF SUBSIDIARY (CONTINUED)

 

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Total Expenses	$	76,800		$	126,786		$	323,590		$	373,459
(LOSS) FROM
OPERATIONS		(30,220)			(23,210)			(111,110)			(67,571)
OTHER EXPENSE
Interest expense		-			231			46			231
Total Other
Expense		-			231			46			231
(LOSS) FROM
DISCONTINUED
OPERATIONS	$	(30,220)		$	(23,441)		$	(111,156)		$	(67,802)

 

 

NOTE 6 -

SUBSEQUENT EVENTS

 

During October 2006, the Company sold 1,800,000 restricted shares of common stock together with warrants to purchase 900,000 shares of common stock. The shares of common stock were sold at a price of $0.75 per share, providing the Company $1,350,000 in gross proceeds. The warrants have an exercise price of $0.90 per share if issued in the first year. If issued within the second year, the warrants have an exercise price of $1.00. The warrants expire October 31, 2008.

 

During October 2006, the Company collected $45,000 of the $95,000 receivable for the sale of Villa Melt, LLC (see Note 5).

 

 

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Item 2.  Management's Discussion and Analysis or Plan of Operation.

FORWARD LOOKING STATEMENTS

This quarterly report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to "common shares" refer to the common shares in our capital stock.

As used in this quarterly report, the terms "we", "us", "our", and "Melt" mean Melt Inc. and our wholly-owned subsidiaries, Melt (California) Inc. and Melt Franchising LLC, and our partly owned subsidiary Villa Melt LLC. The term “Melt CA” refers to Melt (California) Inc and the term “Villa Melt” refers to Villa Melt LLC unless otherwise indicated.

You should read the following discussion of our financial condition and results of operations together with the unaudited financial statements and the notes to unaudited financial statements included elsewhere in this filing prepared in accordance with accounting principles generally accepted in the United States. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements.

RESULTS OF OPERATIONS

Nine Months ending September 30, 2006

The period covered by our restated unaudited consolidated financial statements is for the nine months ended September 30, 2006 during which time we generated $2,138,905 in revenue from continuing operations, realized a net loss before discontinued operations of $95,401 and incurred a net loss of $228,706. During the same period last year we generated $882,344 in revenue from continuing operations, realized a net loss from continuing operations of $71,160 and incurred a net loss of $138,962. The revenue was generated from franchise fees, from revenue generated in royalty revenues, from food and supplies sold to our franchise owned stores and from revenue generated from the sale of equipment and build out of stores to our franchisees. The increase in revenues for the current period was largely due to franchise fees, food and supplies sold to franchise owned stores, from the sale of equipment to franchisee’s and from proceeds generated from building out franchise owned stores. Cost of sales from continuing operations amounted to $1,608,429, resulting in gross profit from continuing operations of $530,476, or 25% compared to cost of sales of $401,494, resulting in gross profit from continuing operations of $480,850, or 55% for the same period last year. The percentage decrease is due to the change in the sales mix and margins on sales of food and equipment and store build outs. Rental expenses from continuing operations for the retail stores amounted to $41,204 or 2% of sales and $75,451 or 9% of sales for the same period last year. The decrease is due to increase in sales to franchise owned stores and due to the sale of corporate owned stores. Salaries

 

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and wages from continuing operations amounted to $178,870 or 8% of sales and $91,259 or 10% of sales for the same period last year. The percentage decrease is due to increase in sales made to franchise owned stores, and due to the sale of corporate owned stores. General and administrative expenses from continuing operations amounted to $328,816 or 15% of sales and $85,666 or 10% of sales for the same period last year.

During the period four franchise owned stores opened, the first in El Cajon, CA, the second in Lakewood, CA, the third in Paradise Valley, AZ and the fourth in San Francisco, CA. The opening of the Arizona and San Francisco stores marks the beginning of the Company’s expansion outside of Southern California

Three Months ending September 30, 2006

The period covered by our restated unaudited consolidated financial statements is also for the three months ended September 30, 2006 during which time we generated $1,298,773 in revenue from continuing operations, realized a loss of $50,043 before discontinued operations, and incurred a net loss of $102,412. During the same period last year we generated $599,885 in revenue from continuing operations recognized income of $144,989 before discontinued operations and realized net income of $121,548. The revenue was generated from sales made through our retail stores, from franchise fees, from royalty revenues, food and supplies sold to our franchise owned stores and from the sale of equipment to our franchisees and build out of franchise owned stores. The increase in revenues for the current period was largely due to the build out of the Arizona and San Francisco stores as well as increased franchise fees and food and supplies sold to franchise owned stores. Cost of sales from continuing operations amounted to $1,044,257, resulting in gross profit from continuing operations of $254,516, or 20% compared to cost of sales of $311,143, resulting in gross profit from continuing operations of $288,742, or 48% for the same period last year. The percentage increase is due to the change in the sales mix and margins on sales of food and equipment and building out franchise owned stores. Rental expenses from continuing operations for the retail stores amounted to $7,098 or 1% of sales and $20,724 or 3% of sales for the same period last year. The decrease is due to the sale of our corporate owned stores. Salaries and wages from continuing operations amounted to $57,369 or 4% of sales and $21,756 or 4% of sales for the same period last year. General and administrative expenses from continuing operations amounted to $174,423 or 13% of sales and $38,701 or 6% of sales for the same period last year.

The loss from discontinued operations totaled $30,220 for the three months ended September 30, 2006. During the same period last year the Company incurred a loss from discontinued operations of $23,441.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2006 we had $416,819 cash on hand and a working capital deficit of $48,710. As of September 30, 2006 our total current assets were $1,972,993, and our total assets were $2,149,293.

At September 30, 2006 our total liabilities were $2,021,703, of which all were considered to be current.

For the nine months ended September 30, 2006, net cash used by operating activities was $133,196 compared to $189,718 for the same period last year. Net cash provided by investing activities was $197,971 compared to cash provided by investing activities $114,118 for same period last year. Net cash provided by financing activities was $106,980 compared to $257,911 for the same period last year.

We have no external sources of liquidity in the form of credit lines from banks. Based on our future operations described below, management believes that our available cash will not be sufficient to fund our working capital requirements through September 30, 2007 and, therefore, we will have to raise financing through the sale of our equity securities or arrange a loan from outside sources.

There are no assurances that we will be able to obtain further funds required for our continued operations. We are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to proceed with our expansion program at the level anticipated.

 

 

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FUTURE OPERATIONS

Recent Changes

On August 22, 2006 the Company entered into an agreement to sell its equity interest in its 50% owned subsidiary Villa Melt, LLC. (See Note 5 to the restated consolidated financial statements) This decision marked a change in how the company will grow going forward. With the consummation of this transaction, the company no longer owns any gelato and crepe cafes. This strategy change to be a franchisor only was based on the success of the owner operator aspect of the franchise system. In the future, the company may have to operate some stores to seed new markets, but the intent is to sell those stores quickly.

Immediate Objectives

Our primary objective during the 52 week period ending September 30, 2007 will be to greatly increase the number of franchise owned and operated stores, in California, and to expand across the county into Ohio, New Jersey, Massachusetts, New York, Connecticut, and Illinois.

Retail Locations

As at September 30, 2006, we have 11 stores operating as franchised stores and have subsequently opened 5 additional franchised stores. We opened four new franchise owned stores this quarter and sold two corporate owned stores when we sold our 50% stake in Villa Melt Inc. By December 31, 2007 we plan on opening 16 new franchised owned stores.

Cash Requirements

Presently, our cash is sufficient to fund our normal operating expenses through mid year. Management projects that we will require at least $2,500,000 to fund our operations and proposed capital expansion program over the next twelve months.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

RISK FACTORS

Much of the information included in this quarterly report includes or is based upon estimates, projections or other "forward looking statements". Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other "forward looking statements" involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward looking statements".

Our common shares are considered speculative during the development of our new business operations. Prospective investors should consider carefully the risk factors set out below.

 

 

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RISKS RELATED TO OUR BUSINESS

We have only commenced our business operations in July, 2003 and opened our first retail store in November, 2003 and thus have a limited operating history. If we cannot successfully manage the risks normally faced by start-up companies, our business may fail.

We have a limited operating history. Our prospects are subject to the risks and expenses encountered by start up companies, such as uncertainty regarding level of future revenue and inability to budget expenses and manage growth accordingly, uncertainty regarding acceptance of our products and retail operations and inability to access sources of financing when required and at rates favorable to us. Our limited operating history and the highly competitive nature of the retail confectionery industry make it difficult or impossible to predict future results of our operations. We may not establish a customer following that will make us profitable, which might result in the loss of some or all of your investment in our common stock.

Some of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.

Some of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them.

If we are unable to protect our trade name, our efforts to increase public recognition of our "Melt" brand may be impaired and we may be required to incur substantial costs to protect our trade name.

We currently have a trade marked registered for the trade name "Melt" and have applied for a service mark for "Melt-gelato italiano" and “Melt – café and gelato bar”. However, these measures may not be adequate to prevent the unauthorized use of our trade names. We may be unable to prevent third parties from acquiring and using names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources. Any claims, by or against us, could be time consuming and costly to defend or litigate, divert our attention and resources and result in the loss of goodwill associated with our trade names. An adverse outcome in litigation or similar proceedings could subject us to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing products, require disputed rights to be licensed from others, or require us to cease the marketing or use of our products, any of which could have a material adverse effect on our business, operating results and financial condition.

The establishment and maintenance of brand identity of our "Melt" brand gelato products is critical to our future success. If we are unable to promote and maintain our "Melt" brand our business could fail.

Since we expect that substantially all of our revenues will be generated from purchases by the consumer of our gelato and related products at our retail outlets, market acceptance of our products is critical to our future success. Factors such as market positioning, retail locations, the availability and price of competing products (in particular, frozen deserts), and the introductions of new products will affect the market acceptance of our business.

We believe that establishing and maintaining brand identity of our products will increase the appeal of our products and retail locations to prospective customers. Consumer recognition and a preference of our "Melt" brand products over similar products offered by our competition will be critical to our future success. Promotion and enhancement of our gelato and related products will depend largely on our success in continuing to provide high quality products. In order to attract and retain customers and to promote and maintain our "Melt" brand in response to competitive pressures, we may increase our financial commitment to creating and maintaining a distinct brand loyalty among our customers. Currently, given the large number of factors and variables in achieving and maintaining consumer

 

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recognition and brand loyalty, we cannot anticipate or estimate how much we may be required to spend to establish such loyalty. If we are unable to provide high quality products, or otherwise fail to promote and maintain our "Melt" brand, incur excessive expenses in an attempt to improve, or promote and maintain our brand, we may not be able to successfully implement our business plan and achieve a profitable level of operations.

Due to the nature of our products, we will be subject to specific risks unique to the retail frozen desert industry.

Specialty retail food businesses such as ours are often affected by changes in consumer and competitive conditions, including changes in consumer tastes; national, regional, and local economic conditions and demographic trends; and the type, number, and location of competing businesses. Adverse publicity resulting from food quality, illness, injury, or other health concerns or operating issues stemming from one of our products may adversely affect our retail operations. We, as well as our competitors, are subject to the foregoing risks, the occurrence of any of which would impair or prevent our efforts to establish and expand our frozen desert operations. The occurrence of such risks may result in an investor losing some or all of their investment in our common stock.

Because we face intense competition, an investment in our company is highly speculative.

The retail confectionery industry is characterized by intense and substantial competition. We believe that our business will have to compete with large and established ice cream retailers such as Ben & Jerry's, Haagen-Dazs, Dreyer's, Baskin-Robbins, Dairy Queen and Stone Cold Creamery Company, as well as other small to medium sized ice cream and gelato business entities that provide similar products.

A number of our competitors are well established, substantially larger and have substantially greater market recognition, greater resources and broader distribution capabilities than we have. These existing and future competitors may be able to respond more quickly to new or changing opportunities, product and customer requirements than us and may be able to undertake more extensive promotional activities, offer more retail locations to customers and adopt more aggressive pricing policies than we do. Increased competition by these existing and future competitors could materially and adversely affect our ability to commence, maintain, or expand our operations.

Our operations are subject to governmental regulation associated with the food service industry, the operation and enforcement of which may restrict our ability to carry on our business.

We are in the perishable food industry. The development, manufacture and marketing of products sold by us will be subject to extensive regulation by various government agencies, including the U.S. Food and Drug Administration and the U.S. Federal Trade Commission, as well as various state and local agencies. These agencies regulate production processes, product attributes, packaging, labelling, advertising, storage and distribution. These agencies establish and enforce standards for safety, purity and labelling. In addition, other governmental agencies (including the U.S. Occupational Safety and Health Administration), establish and enforce health and safety standards and regulations in the workplace, including those in our retail locations. Our retail locations will be subject to inspection by federal, state, and local authorities. We will seek to comply at all times with all such laws and regulations. We will obtain and maintain all necessary permits and licenses relating to our operations, and will ensure that our facilities and practices comply with applicable governmental laws and regulations. Nevertheless, there is no guarantee that we will be able to comply with any future laws and regulations. Our failure to comply with applicable laws and regulations could subject us to civil remedies including fines, injunctions, recalls or seizures as well as potential criminal sanctions.

As a result of such regulations we may encounter a variety of difficulties or extensive costs, which could delay or preclude us from marketing our products or continuing or expanding our operations. We cannot predict if all necessary approvals will be granted or that if granted, any approval will be received on a timely basis. If approvals are not obtained or are delayed, this may also preclude us from marketing our products or continuing or expanding our operations.

 

 

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Because our officers, directors and principal shareholders control a substantial portion of our common stock, investors will have little or no control over our management or other matters requiring shareholder approval.

Our officers and directors and their affiliate, in the aggregate, beneficially own 29.4% of issued and outstanding shares of our common stock. As a result, they have the ability to exert significant influence over matters affecting minority shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because our officers, directors and one of our principal shareholders (specifically Glynis Sive, the wife of Clive Barwin) can exercise such influence over our company, investors may not be able to replace our management if they disagree with the way our business is being run. Because control by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.

Because we might not have sufficient insurance to cover any losses that may arise, we might have uninsured losses, increasing the possibility that you would lose your investment.

We may incur uninsured liabilities and losses as a result of the conduct of our business. We do currently maintain comprehensive liability and property insurance. However there can be no assurance that we have coverage sufficient to satisfy potential claims. We do not carry any business interruption insurance. Should uninsured losses occur, any purchasers of our common stock could lose their entire investment.

Because we can issue additional common shares, purchasers of our common stock may incur immediate dilution and may experience further dilution.

We are authorized to issue up to 100,000,000 common shares, of which 20,280,000 are issued and outstanding. Our board of directors has the authority to cause our company to issue additional shares of common stock or issue warrants or options to purchase shares of common stock without the consent of any of our shareholders. Consequently, our shareholders may experience more dilution in their ownership of our company in the future.

Because the Company has entered into leases for new stores with the intention of awarding these stores to suitable new prospective franchisee’s, the company may be required to raise additional capital to build and operate stores in locations that it cannot find suitable franchisees.

Although the Company’s expects to find suitable franchisee’s before the expected lease commencement date there can be no assurances that this will happen, and as a result could put considerable strain on the management and cash needs of the company if the company has to build out and operate these stores.

Item 3.  Controls and Procedures.

As required by Rule 13a-15 under the Exchange Act, as at September 30, 2006 (being the end of the period covered by this quarterly report on Form 10-QSB) we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's president and chief executive officer. Based upon that evaluation, our company's president and chief executive officer concluded that our company's disclosure controls and procedures are effective as at the end of the period covered by this report. Even though we are presenting unaudited restated consolidated financial statements, management believes that the control procedures remain effective. The nature of the restatement is caused by a change in our revenue recognition policy and not by a failure to follow our policy. Our accounting was in accordance with our revenue recognition policy and upon changing our policy we initiated this restatement.

There have been no changes in our company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and

 

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forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

 

PART II  -  OTHER INFORMATION

Item 1.

Legal Proceedings.

A law suit has been filed against one of the franchise owned stores and the company, and a director of the company has been named in the law suit. A cup of hot coffee was spilt and thus burned a minor child. The Company has insurance to cover such law suits and thus it has been determined that no provision for expenses need be made in the companies books at this time. as been. The insurance company is expecting to settle this dispute out of court. no other legal proceeds exist against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, besides mentioned above, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibits required by Item 601 of Regulation S-B

Exhibit Number	Description
(3)	(i) Articles of Incorporation; and (ii) Bylaws
3.1	Articles of Incorporation (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003)
3.2	Bylaws (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003)
(10)	Material Contracts
10.1	Lease Agreement between Melt (California) Inc. and Westfield Corporation Inc., dated October 14, 2003 (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003)

 

 

 

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10.2	Supply Agreement between Melt (California) Inc. and P.G.I. of Saugatuk, Inc., dated September 30, 2003 (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003)
10.3	Operating Agreement between Melt Inc. and Dolce Dolci, LLC dated July 21, 2004 (incorporated by reference from our Form 10-KSB, filed on June 30, 2005)
10.4	Operating Agreement between Melt Inc. and Melt Franchising LLC dated February 25, 2005 (incorporated by reference from our Form 10-KSB, filed on June 30, 2005)
(14)	Code of Ethics
14.1	Code of Ethics of the company (incorporated by reference from our Form 10-KSB, filed on March 30, 2004)
(21)	Subsidiaries of the small business issuer
	Melt (California) Inc. Melt Franchasing LLC
(31)	Rule 13a-14(a)/15d-14(a) Certifications
31.1	Certification under Sarbanes-Oxley Act of 2002
31.2	Certification under Sarbanes-Oxley Act of 2002
(32)	Section 1350 Certifications
32.1	Certification under Sarbanes-Oxley Act of 2002
32.2	Certification under Sarbanes-Oxley Act of 2002

 

*Attached herewith

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MELT INC.

 

By: /s/ Clive Barwin                                                                     

Clive Barwin, President, CEO, Secretary and Director

(Principal Executive Officer)

 

Date: March 29, 2007

 

By: /s/ Scott M. Miller                                                                       

Scott M. Miller, Chief Financial Officer and Executive Vice President

(Principal Financial Officer and Principal Accounting Officer)

 

Date: March 29, 2007