**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 

| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES EXCHANGE ACT OF 1934 |
|---|--------------------------------------------------------------------------------------------------------------------|

**For the Quarterly Period Ended****June            30, 2007**

 

| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES EXCHANGE ACT OF 1934 |
|---|---------------------------------------------------------------------------------------------------------------------|

**For the Transition Period From ________ to _________**

 

Commission File Number**333-119234**

 

**THE FLOORING ZONE, INC.**

(Exact name of registrant as specified in its charter)

                

| **Nevada**                               |   | **20-0019425**      |
|------------------------------------------|--------|---------------------|
| (State or other jurisdiction of          |   | (I.R.S. Employer    |
| incorporation or organization)           |   | Identification No.) |
|                                     |   |                |
| **3219 Glynn Avenue**                    |   |                |
| **Brunswick, Georgia**                   |   | **31520**           |
| (Address of principal executive offices) |   | (Zip Code)          |

 

**(912) 264-0505**

(Registrant’s telephone number, including area code)

 

Check whether the issuer (1) filed all reports required to be filed by            Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for any            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.

YesxNoo

 

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

YesoNox

 

As            of August 17, 2007, the registrant had 19,569,750shares of            common stock, par value $0.001, issued and outstanding.

 

Transitional small business disclosure format.

 

YesoNox

 

 

----

**THE FLOORING ZONE, INC.**

**FORM 10-QSB**

**TABLE OF CONTENTS**

 

PART I            — FINANCIAL INFORMATION

 

| Item 1. Financial Statements                                                                                                    |                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Balance Sheets (Unaudited) as                            of

June 30, 2007                                                                                   |  

  3 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Operations                            (Unaudited) for the

three and six month periods ended June 30, 2007 and                            2006 |  

  5 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash Flows                            (Unaudited) for the

six month periods ended June 30, 2007 and                            2006           |  

  6 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Notes to Condensed Consolidated Financial Statements                            (Unaudited)                                                                                         |   7 |
|                                                                                                                            |                                                                                                                                                                                |
| Item 2. Management’s Discussion and Analysis of                            Financial Condition

and Results of Operations |  

  9                                                                                                                                                               |
|                                                                                                                            |                                                                                                                                                                                |
| Item 3. Controls and Procedures                                                                                                 | 17                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| PART II — OTHER INFORMATION                                                                                               |                                                                                                                                                                                |
|                                                                                                                            |                                                                                                                                                                                |
| Item 6. Exhibits                                                                                                                | 18                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| Signatures                                                                                                                      | 18                                                                                                                                                                                  |

 

2

 

----

**PART I. FINANCIAL INFORMATION**

 

**Item            1. Financial Information**

 

**The Flooring Zone, Inc.**

|   | Condensed Consolidated Balance Sheet |
|--------|--------------------------------------|

June            30, 2007

(Unaudited)

             

|   | ASSETS |
|--------|--------|

|  

                              |  

                              |  

                                                                                                                    |
|--------------------------------------------|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|  

Current assets:                    |  

                              |  

                                                                                                                    |
|  

Cash                               |  

                              |  

$                   6,525 |
|  

Accounts receivable, net           |  

                              |  

9,409                                                                                                                    |
|  

Inventory                          |  

                              |  

116,717                                                                                                                  |
|  

Total current assets               |  

                              |  

132,651                                                                                                                  |
|  

                              |  

                              |  

                                                                                                                    |
|  

Property & equipment, net      |  

                              |  

158,004                                                                                                                  |
|  

                              |  

                              |  

                                                                                                                    |
|  

Other assets:                      |  

                              |  

                                                                                                                    |
|  

Intangible assets, net             |  

                              |  

4,397                                                                                                                    |
|  

Deposits                           |  

                              |  

6,061                                                                                                                    |
|  

Total other assets                 |  

                              |  

10,458                                                                                                                   |
|  

TOTAL ASSETS                       |  

                              |  

$              301,113                             |

 

 

 

See            accompanying notes to financial statements

 

3

 

----

|   | **The Flooring Zone, Inc.** |
|--------|-----------------------------|

Condensed Consolidated Balance Sheet-[continued]

June            30, 2007

(Unaudited)

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

|  

Current liabilities:                                                                     |  

                              |  

                                                                                  |
|--------------------------------------------------------------------------------------------------|--------------------------------------------|------------------------------------------------------------------------------------------------|
|  

Accounts payable                                                                         |  

                              |  

$            267,026  |
|  

Line of credit-related party                                                             |  

                              |  

900,000                                                                           |
|  

Customer deposits                                                                        |  

                              |  

49,179                                                                            |
|  

Accrued liabilities                                                                      |  

                              |  

18,849                                                                            |
|  

Current portion long-term debt                                                           |  

                              |  

280,556                                                                           |
|  

Total current liabilities                                                                |  

                              |  

1,515,610                                                                         |
|  

Long-term liabilities:                                                                   |  

                              |  

                                                                                  |
|  

Note payable-related party                                                               |  

                              |  

1,054,282                                                                         |
|  

Long-term debt

                                                                    |  

                              |  

470,911                                                                           |
|  

Current portion long-term debt                                                           |  

                              |  

(280,556)                                                                              |
|  

Total long-term liabilities                                                              |  

                              |  

1,244,637                                                                         |
|  

Total liabilities                                                                        |  

                              |  

2,760,247                                                                         |
|  

Stockholders’ deficit:                                                             |  

                              |  

                                                                                  |
|  

Preferred Stock, 10,000,000 shares authorized $.001 par                            value |  

                              |  

                                                                                  |
|  

value: No shares issued and outstanding                                                  |  

                              |  

-                                                                                 |
|  

Common stock, 100,000,000 shares authorized $.001                            par         |  

                              |  

                                                                                  |
|  

value; 19,569,750 shares issued and                            outstanding               |  

                              |  

19,570 

                                                                    |
|  

Additional paid in capital                                                               |  

                              |  

627,257                                                                           |
|  

Accumulated deficit                                                                      |  

                              |  

(3,105,961)                                                                            |
|  

Total stockholders’ deficit                                                        |  

                              |  

(2,459,134)                                                                            |
|  

TOTAL LIABILITIES AND STOCKHOLDERS’                            DEFICIT             |  

                              |  

$            301,113  |

             

             

 

See            accompanying notes to financial statements

 

4

 

----

|   | **The Flooring Zone, Inc.** |
|--------|-----------------------------|

|   | Condensed Consolidated Statements of                            Operations |
|--------|----------------------------------------------------------------------------|

|   | For the three month and six month periods ended June 30,                            2007 and 2006 |
|--------|---------------------------------------------------------------------------------------------------|

(Unaudited)

|                                                                                                              |  

Three months ended June 30,                                                                             |  

                              |  

Six months ended June 30,                                                                         |
|-------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                                                                              |  

2007                                                                                                    |  

                              |  

2006                                                                                              |  

                              |  

2007 |  

                              |  

2006 |
|  

Revenues:                                                                                                 |                                                                                                            |                                       |                                                                                                      |   |   |   |   |
|  

Sales                                                                                                     |  

$          211,533                               |  

                              |  

$                                    635,154         |  

                              |  

$            448,092  |  

                              |  

$       1,145,123  |
|  

Sales-Related Party                                                                                       |  

51,083                                                                                             |  

                              |  

138,957                                                                                      |  

                              |  

199,636  |  

                              |  

250,455  |
|  

Net revenues                                                                                              |  

262,616                                                                                            |  

                              |  

774,111                                                                                      |  

                              |  

647,728  |  

                              |  

1,395,578  |
|  

Less cost of sales                                                                                        |  

184,131                                                                                            |  

                              |  

607,384                                                                                      |  

                              |  

414,690  |  

                              |  

1,104,095  |
|  

Gross profit                                                                                              |  

78,485                                                                                             |  

                              |  

166,727                                                                                      |  

                              |  

233,038  |  

                              |  

291,483  |
|  

General and administrative expenses                                                                       |  

125,295                                                                                            |  

                              |  

186,044                                                                                      |  

                              |  

264,186  |  

                              |  

378,180  |
| Loss on sale of assets                                                                                            | 6,579                                                                                                      |                                       | -                                                                                                    |   | 6,579  |   | -  |
|  

Net income (loss) from operations                                                                         |  

(53,389)                                                                                                |  

                              |  

(19,317)                                                                                          |  

                              |  

(37,727) |  

                              |  

(86,697) |
|  

Other income (expense):                                                                                   |  

                                                                                                   |  

                              |  

                                                                                             |  

                              |  

                              |  

                              |  

                              |
|  

Interest expense                                                                                          |  

(19,352)                                                                                                |  

                              |  

(56,536)                                                                                          |  

                              |  

(65,569) |  

                              |  

(87,292) |
|  

Total other income(expense)                                                                               |  

(19,352)                                                                                                |  

                              |  

(56,536)                                                                                          |  

                              |  

(72,148) |  

                              |  

(87,292) |
|  

Net income (loss) before taxes                                                                            |  

(72,741)                                                                                                |  

                              |  

(75,853)                                                                                          |  

                              |  

(103,296) |  

                              |  

(173,989) |
|  

Income taxes                                                                                              |  

-                                                                                                  |  

                              |  

-                                                                                            |  

                              |  

-  |  

                              |  

-  |
|  

Net income (loss)                                                                                         |  

$           (72,741)                             |  

                              |  

$           (75,853)                       |  

                              |  

$          (103,296) |  

                              |  

$        (173,989) |
|  

Income (loss) per share-basic and                                diluted         |  

$                (0.01) |  

                              |  

$               (0.01) |  

                              |  

$               (0.01) |  

                              |  

$              (0.01) |
|  

Weighted average shares                                outstanding- basic and diluted |  

       19,569,750                                               |  

                              |  

     35,403,083                                                     |  

                              |  

      19,569,750  |  

                              |  

        36,986,417  |

 

             

See accompanying notes to financial statements

 

5

 

----

**The Flooring Zone, Inc.**

Condensed Consolidated Statements of Cash Flows

For            the six month periods ended June 30, 2007 and 2006

(Unaudited)

 

|  

                                                                                                           |  

                              |  

6/30/2007                          |  

                              |  

6/30/2006                          |
|-------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|--------------------------------------------|--------------------------------------------|--------------------------------------------|
|  

CASH FLOWS FROM OPERATING ACTIVITIES                                                                            |  

                              |  

                              |  

                              |  

                              |
|  

Net income (loss)                                                                                               |  

$                                  |  

(103,296)                     |  

$                                  |  

(173,989)                          |
|  

Adjustments to reconcile net income (loss) to net cash                            used in operating activities: |  

                              |  

                              |  

                              |  

                              |
|  

Depreciation and amortization                                                                                   |  

                              |  

15,621                        |  

                              |  

11,914                        |
|  

Loss on disposal of assets                                                                                      |  

                              |  

6,579                         |  

                              |  

-                             |
|  

Decrease (increase) in accounts receivable &                            deposits                            |  

                              |  

44,136                        |  

                              |  

(10,780)                           |
|  

Decrease (increase) in inventories                                                                              |  

                              |  

39,544                        |  

                              |  

(172,557)                          |
|  

Increase (decrease) in accounts payable                                                                         |  

                              |  

42,653                        |  

                              |  

(8,422)                            |
|  

Increase (decrease) in accrued liabilities                                                                      |  

                              |  

1,843                         |  

                              |  

(7,592)                            |
|  

Increase (decrease) in customer deposits                                                                        |  

                              |  

16,452                        |  

                              |  

(44,789)                           |
|  

Net cash from operating activities                                                                              |  

                              |  

63,532                        |  

                              |  

(406,215)                          |
|  

CASH FLOWS FROM INVESTING ACTIVITIES                                                                            |  

                              |  

                              |  

                              |  

                              |
|  

Sale of property and equipment                                                                                  |  

                              |  

6,000                         |  

                              |  

-                             |
|  

Net cash from investing activities                                                                              |  

                              |  

6,000                         |  

                              |  

-                             |
|  

CASH FLOWS FROM FINANCING ACTIVITIES                                                                            |  

                              |  

                              |  

                              |  

                              |
|  

Net borrowing(payments) on line of credit-related                            party                              |  

                              |  

-                             |  

                              |  

390,101                       |
|  

Net borrowing(payments) on long term debt                                                                       |  

                              |  

(88,487)                           |  

                              |  

(46,400)                           |
|  

Net cash from financing activities                                                                              |  

                              |  

(88,487)                           |  

                              |  

343,701                       |
|  

NET DECREASE IN CASH                                                                                            |  

                              |  

(18,955)                           |  

                              |  

(62,514)                           |
|  

CASH AT BEGINNING OF PERIOD                                                                                     |  

                              |  

25,480                        |  

                              |  

64,282                        |
|  

CASH AT END OF PERIOD                                                                                           |  

$                                  |  

6,525                         |  

$                                  |  

1,768                         |

 

|  

SUPPLEMENTAL DISCLOSURES   |  

                              |  

                              |  

                              |  

                              |
|------------------------------------|--------------------------------------------|--------------------------------------------|--------------------------------------------|--------------------------------------------|
|  

Cash paid for interest     |  

$                             |  

65,576                             |  

$                             |  

87,347                             |
|  

Cash paid for income taxes |  

                              |  

-                                  |  

                              |  

-                                  |

 

 

See            accompanying notes to financial statements

 

6

 

----

**The Flooring Zone, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**June 30, 2007**

**(Unaudited)**

             

| Note 1 | ORGANIZATION AND INTERIM FINANCIAL                            STATEMENTS |
|--------|--------------------------------------------------------------------------|

             

***Organization***-The Flooring Zone, Inc.            (the (Company) is a corporation organized under the laws of the State of Nevada on May            5, 2003. The Company’s business operations provide for full-service retail floor            covering products and services.

 

***Interim financial statements***-The            accompanying condensed consolidated financial statements are unaudited and have been            prepared in accordance with the applicable regulations of the Securities and Exchange            Commissison’s rules for interim financial information. Accordingly, they do not            include all of the information and footnotes required by accounting principles for            complete financial statements generally accepted in the United States of America. In            the opinion of management, the accompanying consolidated financial statements contain            all adjustments, consisting of normal recurring accruals, necessary for a fair            presentation of our financial position as of June 30, 2007. There has not been any            change in the significant accounting policies of The Flooring Zone, Inc. for the            periods presented. The results of operations for the three months and six months ended            June 30, 2007 and 2006 are not necessarily indicative of the results for a full-year            period. It is suggested that these unaudited condensed consolidated financial            statements be read in conjunction with the consolidated financial statements and the            notes thereto included in the Company’s Annual Report on Form 10-KSB for the            fiscal year ended December 31, 2006 filed with the Securities and Exchange            Commission.

 

| Note 2 | INVENTORY |
|--------|-----------|

 

Inventories are stated at lower of cost or market and consist of the            following:

             

|  

                              |  

                              |  

6/30/07                                                            |
|--------------------------------------------|--------------------------------------------|----------------------------------------------------------------------------|
|  

Flooring material                  |  

                              |  

$                                 116,717 |
|  

Total                              |  

                              |  

$       116,717                 |

             

7

----

**The Flooring Zone, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**June 30, 2007**

**(Unaudited)**

             

| Note 3 | GOING CONCERN |
|--------|---------------|

             

The accompanying financial statements have been prepared on a going            concern basis, which contemplates the realization of assets and the satisfaction of            liabilities in the normal course of business. As shown in the financial statements, the            Company has an accumulated deficit of $3,105,961, and a negative working capital of            $1,382,959. These factors raise substantial doubt about the Company’s ability to            continue as a going concern.

 

Management plans include obtaining additional debt financing to cover            the shortfalls in revenue and allowing the Company to begin purchasing inventory at a            discount, and making changes in operations to reduce expenses. The Company may also            seek additional equity financing through the sale of its shares, although the Company            currently has no commitments for additional equity financing and there is no guarantee            that the Company can obtain equity financing on acceptable terms or at all. If we are            unsuccessful in obtaining additional funding, we may be unable to continue operations            as we have insufficient working capital necessary to meet its expenses and service our            debt. The financial statements do not include any adjustments that might result from            the outcome of this uncertainty.

             

| Note 4 | RECENT ACCOUNTING PRONOUNCEMENTS |
|--------|----------------------------------|

             

In February 2007, the FASB issued SFAS 159 “The Fair Value Option            for Financial Assets and Financial Liabilities.”  This statement permits            entities to choose to measure many financial instruments and certain other items at            fair value that are not currently  required to be measured at fair value. The            objective is to improve financial reporting by providing entities with the opportunity            to mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting provisions.            This statement requires a business entity to report unrealized gains and losses on            items for which the fair value option has been elected in earnings at each subsequent            reporting date. An entity may decide whether to elect the fair value option for each            eligible item on its election date, subject to certain requirements described in the            statement. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We            are currently reviewing the requirements of this statement and, at this point in time,            have not determined the impact, if any, that this statement may have on our results of            operations and financial position.

 

8

 

----

**Item            2. Management’s Discussion and Analysis of Financial Condition and**

|   | **Results of Operations** |
|--------|---------------------------|

 

This discussion summarizes the significant factors affecting our            consolidated operating results, financial condition, liquidity and capital resources            during the three and six months ended June 30, 2007 and 2006. This discussion should be            read in conjunction with the financial statements and financial statement footnotes            included in this registration statement.

 

**Forward-Looking Statements**

 

Certain statements of our expectations contained herein, including, but            not limited to statements regarding sales, commodity price, inflation and deflation,            and capital expenditures. Among other things constitute “forward-looking            statements.” Such statements are based on currently available operating,            financial and competitive information and are subject to various risks and            uncertainties that could cause actual results to differ materially from our historical            experience and our present expectations. These risks and uncertainties include but are            not limited to, fluctuations in and the overall condition of the U.S. economy,            stability of costs and availability of sourcing channels, consumer confidence, our            ability to negotiate favorable terms with suppliers, unanticipated weather conditions            and the impact of competition. Undue reliance should not be placed on such            forward-looking statements as such statements speak only as of the date on which they            are made.

 

**General**

 

The Flooring Zone, Inc. is a Nevada corporation organized on May 5,            2003, to operate full service retail floorcovering stores. We have a wholly-owned            subsidiary, The Flooring Zone of Georgia, Inc. The Georgia corporation was formed in            2000, by the founders of The Flooring Zone, Inc., and was established to develop our            business concept in the retail floorcovering industry. Through our subsidiary we            operate a retail store in Brunswick, Georgia. We also maintain administrative offices            and warehouse facilities at our store location in Brunswick, Georgia.

 

**Going Concern**

 

We will need additional working capital to service our debt and fund our            planned activities, which raises substantial doubt about our ability to continue as a            going concern. We have not generated sufficient revenue from operations to meet our            operating expenses, have accumulated a deficit of $3,105,961 since inception and have a            negative working capital of $1,382,959. This raises substantial doubt about our ability            to continue as a going concern. To continue operations, we will need to obtain            additional funding. This funding may be sought by means of private equity or debt            financing. We currently have no commitments from any party to provide funding and there            is no way to predict when, or if, any such funding could materialize. There is no            assurance that we will be successful in obtaining additional funding on attractive            terms or at all. If we are unsuccessful in obtaining additional funding, we may be            unable to continue operations as we have insufficient working capital necessary to meet            our expenses and service our            debt.    

 

9

 

----

 

**Results of Operations**

 

*Comparison of the three months ended June 30, 2007 and            2006.*

 

Our business plan when we commenced operations was to build a network of            company-owned retail stores throughout the southeastern United States beginning in            Georgia and Florida and spreading from the smaller markets where our existing stores            were located into larger, more profitable markets. Based on that business model, we            spent a great deal of time and effort developing infrastructure and personnel to            support a much larger network of stores than we had at the time. We had planned to fund            the first phase of our expansion into several larger markets through a public offering            of our equity securities. We undertook this public offering during 2005. The public            offering, which closed in September 2005, however, did not provide sufficient funds to            implement our business plan. As a result, during the latter part of 2005 and throughout            2006 and into 2007 we have undertaken various measures to consolidate our operations            and to reduce redundant staffing and unnecessary infrastructure in an effort to control            costs, decrease losses and move the Company toward profitability. While these efforts            have led to decreased sales volumes and revenue, they have also led to decreased            operating expenses and decreasing net losses during the three and six months ended            June 30, 2007.

 

|   | *Revenues* |
|--------|------------|

 

During the three months ended June 30, 2007 we realized a 66% decrease            in net revenues, despite the fact that average retail product prices during the second            quarter 2007 were approximately 10% higher than during the second quarter 2006. This            decrease in net revenues is primarily attributable to the closing of our Yulee, Florida            store during the fourth quarter 2006 and the resulting decrease in sales volume coupled            with an overall slow down in construction in southeastern Georgia, where our store is            located. As a result of the closing of our Yulee store and the slow down in            construction, we anticipate that sales volume and correspondingly revenue will be lower            throughout the 2007 fiscal year as compared to the 2006 fiscal year. We closed the            Yulee store because it was under-performing. While the closing of the Yulee store will            result in lower revenue, we believe we will realize a corresponding decrease in            expenses that will offset the lost revenue.

 

|   | *Gross Profit* |
|--------|----------------|

 

Our gross profit is directly affected by our cost of sales. Cost of            sales includes all direct costs of floor coverings, materials used in installation and            installers’ pay. Our cost of sales and gross profits are directly affected by the            prices we pay for the products we sell. If we are able to purchase product at lower            prices, we are able to improve our gross profit. Our gross profit is also influenced by            changes in the percentage of products sold to retail customers versus contractors. The            prices we can charge contractors are lower than the prices we can charge retail            customers, therefore, our profit margin on product sales to retail customers is            greater. Moreover, we typically also realize profit from the sale of materials used in            installation. Contractors typically use their own subcontractors to install the floor            covering products they purchase. Some subcontractors will provide their own materials            for installation rather than purchase it from us.

 

10

 

----

Cost of sales during the three months ended June 30, 2007 was 70% lower            than during the three months ended June 30, 2006. This decrease in cost of sales is            partially attributable to the 66% decrease in net revenues from sales resulting from            the closing of our Yulee store. As a percentage of net revenues, cost of sales was 71%            during the second quarter 2007 compared to 78% during the second quarter 2006. At the            end of the 2006 fiscal year and throughout the first half of 2007 we took several            steps to decrease our cost of sales as a percentage of revenue and to hopefully improve            our margins. We negotiated agreements with several new vendors to supply our hardwood            and tile needs. Under these agreements we will be able to purchase hardwood and tile            products at lower cost than we were paying during 2006. We also increased our retail            prices to our customers for most flooring products by an average of 10%. We believe            these steps should lead to improved gross margins on product sales. We expect cost of            sales as a percentage of net revenue to continue to be lower throughout 2007. During            the second quarter 2007 our gross profit decreased 53%, but as a percentage of revenue,            improved to 30% from 21% during the second quarter 2006.

 

|   | *General and Administrative                            Expenses* |
|--------|------------------------------------------------------------------|

 

General and administrative expenses for the quarter ended June 30, 2007,            decreased $60,749, or 33%, to $125,295 but as a percentage of sales revenue increased            from 24% during the second quarter 2006 to 48% during the second quarter 2007. During            the three months ended June 30, 2007 and 2006, general and administrative costs            consisted of:

 

|                            | Three months ended |
|---------------------------------|--------------------|
|                            |               | June 30, 2007 |   | June 30, 2006 |
|                            |               |   |   |   |
| Salaries & benefits costs   |               | $ 41,937 |   | $ 68,716 |
| Advertising & display costs |               | 3,293 |   | 5,575 |
| Occupancy costs & utilities |               | 34,686 |   | 69,856 |
| Legal & accounting costs    |               | 22,150 |   | 15,507 |
| Other                           |               | 23,229 |   | 26,390 |
| Total                           |               | $ 125,295 |   | $ 186,044 |

 

The 40% reduction in salaries and benefits costs during the three months            ended June 30, 2007 is the result of a reduction in our work force from the closing of            our Yulee store. At this time we do not anticipate additional reductions to our            workforce. Nor do we anticipate an increase in our workforce until such time as revenue            from operations, need and market conditions justify expansion of our operations. We            anticipate, that salaries and benefits costs will continue to be lower throughout            fiscal 2007 as a result of closing our Yulee store.

 

During the quarter ended June 30, 2007 we decreased our advertising and            display costs by 41% compared to the same period of 2006. As explained above, this            decrease is primarily attributable to the closing of our Yulee store. We anticipate            advertising and display costs will remain lower throughout the rest of 2007.

 

11

 

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Occupancy costs and utilities during the second quarter 2007 compared to            the second quarter 2006 decreased 50% as a result of closing our Yulee store. With the            closing of our Yulee store, we anticipate occupancy costs and utilities will continue            to be lower throughout 2007.

 

Legal and accounting costs increased 43% during the quarter ended June            30, 2007 compared to the quarter ended June 30, 2006. We expect legal and accounting            expenses will continue to increase in the 2007 fiscal year.

 

Other costs decreased 12% during the three months ended June 30, 2007 as            we continued our efforts to control expenses. We anticipate other costs will to remain            fairly constant throughout the rest of 2007.

 

|   | *Loss on Sale of Assets* |
|--------|--------------------------|

 

During the three months ended June 30, 2007 we realized a loss on the            sale of a work truck of $6,579. We realized no similar loss during the three months            ended June 30, 2006, nor do we expect to realize similar losses in upcoming            quarters

 

|   | *Net Income (Loss) from                            Operations* |
|--------|----------------------------------------------------------------|

 

As a result of the closing of our Yulee store during the fourth quarter            2006 with its associated costs, the net loss from operations increased by 177% to            $53,389. This increase was compounded by the loss on the sale of a work truck, as            discussed in the preceding paragraph. We believe that if we can improve product sales            and we are able to continue to reduce costs and expenses we will continue to reduce net            losses from operations as we work to achieve profitability.        

 

|   | *Interest Expense* |
|--------|--------------------|

 

During the second quarter 2007 we incurred interest expense of $19,352            compared to interest expense of $56,536 during the second quarter 2006. Interest            expense decreased 66% as a result of loans from a shareholder at significantly lower            rates than we were previously paying.

 

|   | *Net Loss* |
|--------|------------|

 

Our net loss during the second quarter 2007 was $72,741 compared to            $75,853 during the second quarter 2006. As discussed above, this decrease in net loss            is primarily the result of decreases in the costs of goods sold and general and            administrative expenses even in spite of decreased revenue during the second quarter            2007 compared to the second quarter 2006.

 

|   | *For the six months ended June 30, 2007 and                            2006* |
|--------|------------------------------------------------------------------------------|

 

We incurred a net loss of $103,296 through the six months ended June 30,            2007 compared to a net loss of $173,989 during the six months ended June 30,            2006.      

 

12

 

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|   | *Revenues* |
|--------|------------|

 

During the first six months of 2007 we realized a 54% decrease in net            revenues despite the fact that average retail product prices during the first six            months of 2007 were approximately 10% higher than during the six months ended June 30,            2006. This decrease in net revenues is primarily attributable to the closing of our            Yulee, Florida store during the fourth quarter 2006 and the resulting decrease in sales            volume coupled with an overall slow down in construction in southeastern Georgia, where            our store is located. As a result of the closing of our Yulee store and the slow down            in construction, we anticipate that sales volume and correspondingly revenue will be            lower throughout the 2007 fiscal year as compared to the 2006 fiscal year. We closed            the Yulee store because it was under-performing. While the closing of the Yulee store            will result in lower revenue, we believe we will realize a corresponding decrease in            expenses that will offset the lost revenue.

 

|   | *Gross Profit* |
|--------|----------------|

 

Gross profit during the first six months of 2007 was $233,038, 20% lower            than the $291,483 gross profits realized during the first six months of 2006. During            the first six months of 2007, we realized a 54% decrease in net revenue. We also            realized a 63% decrease in cost of sales during the first six months of 2007 compared            to the first six months of 2006. As a result of decreased revenue and decreased cost of            products sold, cost of sales as a percentage of net revenues decreased from 79% during            the first six months of 2006 to 64% during the first six months of 2007.

 

|   | *General and Administrative                            Expenses* |
|--------|------------------------------------------------------------------|

 

General and administrative expenses for the six months ended June 30,            2007 decreased $113,994, or 31%, to $264,186 compared to the six months ended June 30,            2006. As a percentage of sales revenue, however, general and administrative expense            increased to 41% during the six months ended June 30, 2007 from 27% during the six            months ended June 30, 2006. During the six months ended June 30, 2007 and 2006, general            and administrative costs consisted of:

 

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|                            | Six months ended |
|---------------------------------|------------------|
|                            |             | June 30, 2007 |   | June 30, 2006 |
|                            |             |   |   |   |
| Salaries & benefits costs   |             | $   98,698 |   | $  146,491 |
| Advertising & display costs |             | 5,345 |   | 16,006 |
| Occupancy costs & utilities |             | 75,216 |   | 133,969 |
| Legal & accounting costs    |             | 33,978 |   | 24,505 |
| Other                           |             | 50,949 |   | 57,209 |
| Total                           |             | $  264,186 |   | $  378,180 |

 

 

The 33% reduction in salaries and benefits costs in the six months ended            June 30, 2007 compared to 2006 is the result of a reduction in our work force from the            closing of our Yulee store. At this time we do not anticipate additional reductions to            our workforce. Nor do we anticipate an increase in our workforce until such time as            revenue from operations, need and market conditions justifies expansion of our            operations. We anticipate that salaries and benefits costs will continue to be lower            throughout fiscal 2007 as a result of closing our Yulee store.

 

During the six months ended June 30, 2007 we decreased our advertising            and display costs by 67% compared to the same period of 2006. This decrease is            primarily attributable to the closing of our Yulee store. We anticipate advertising and            display costs will remain lower throughout the rest of 2007.

 

Occupancy costs and utilities during the six months ended June 30, 2007            compared to the same period of 2006, decreased by 44% as a result of the closing of our            Yulee store. We expect costs will be lower throughout the remainder of 2007.

 

Legal and accounting costs increased 39% to $33,978 during the six month            period ended June 30, 2007 compared to the six month period ended June 30, 2006.            We expect legal and accounting costs in future quarters to continue at levels            consistent with or higher than the amounts incurred during the prior fiscal            year.

 

Other costs decreased 11% to $50,949 during the six month period ended            June 30, 2007 compared to the six month period ended June 30, 2006 as we continued our            efforts to control expenses. We anticipate other costs will remain fairly constant            in upcoming quarters.

 

|   | *Net Income* |
|--------|--------------|

 

For the reasons disclosed above, during the six months ended June 30,            2007 we realized a net loss of $103,296 compared to a net loss of $173,989 during the            first six months of 2006. While we expect net losses to decrease in upcoming quarters,            we do expect to continue to realize net losses through the balance of the current            fiscal year.         

 

14

 

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|   | **Liquidity and Capital                            Resources** |
|--------|----------------------------------------------------------------|

 

Our capital resources have consisted of revenues from operations, funds            raised through the sale of our common stock and debt. During the fourth quarter 2005 we            completed a public offering of our securities pursuant to an effective SB-2            registration statement. The funds raised in the public offering have since been            used to fund our operations. As shown in our financial statements, we have an            accumulated deficit of $3,105,961 and negative working capital of $1,382,959. These            factors raise substantial doubt about our ability to continue as a going            concern.

 

We have been working to obtain additional debt financing to cover the            shortfalls in revenue. As noted above, we have also been making changes in operations            to reduce expenses. We may seek additional equity financing through the sale of our            shares, although we currently have no commitments for additional equity financing and            there is no guarantee that we can obtain equity financing on acceptable terms or at            all. As noted above, these factors raise substantial doubt about our ability to            continue as a going concern. Given the foregoing, we may also investigate other            business opportunities that will allow us to realize the highest value for our            shareholders.

 

During the six months ended June 30, 2007 and 2006 cash was primarily            used to fund operations. See below for additional discussion and analysis of cash            flow.

 

|                                                                           | Six months ended June 30, 2007                                     |   | Six months ended June 30, 2006                                                                                                       |
|--------------------------------------------------------------------------------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|                                                                           |                                                               |   |                                                                                                                                 |
| Net cash provided by (used in) operating                            activities | $       63,532             |   | $   (406,215)                                                                                                         |
| Net cash from investing activities                                             | $         6,000  |   | $                                            -  |
| Net cash provided by (used in) financing                            activities | $      (88,487)                      |   | $     343,701                                                                                          |
|                                                                           |                                                               |   |                                                                                                                                 |
| NET DECREASE IN CASH                                                           | $    (18,955)                                  |   | $    (62,514)                                                                                                    |

 

As discussed herein, during the six months ended June 30, 2007 compared            to the six months ended June 30, 2006 product sales, cost of sales and general and            administrative expenses decreased leading to a decrease in net loss from $173,989 to            $103,296. We also realized decreases in accounts payable and inventory as we made a            conscious effort to reduce amounts owed to vendors in an effort to improve our            relations and hopefully the pricing we receive from the vendors we work            with.

 

During the six months ended June 30, 2007 total liabilities increased to            $2,760,247 from $2,489,709 as we continued to rely on loans and a credit line from a            related-party to fund the short falls in our operating revenue.

 

15

 

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As of June 30, 2007 and 2006, we had cash on hand of $6,525 and $1,768,            respectively.

 

**Summary of Material Contractual Commitments**

 

|   | The                            following table lists our significant commitments as of June 30,                            2007. |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

 

| Contractual Commitments             |  

Total              | Payments Due by Fiscal Year |
|-------------------------------------|----------------------------|-----------------------------|
| Less than 1 year                    | 2-3 years                  | 4-5 years                   | After

5 years |
|                                |                       |                        |   |   |   |
| Lines of Credit-Related Party       | $   900,000 | $   900,000  | $         -0- | $           -0- | $           -0- |
| Notes Payable – Related Party | 1,054,282                  | 10,913                      | 29,612 | 32,900 | 980,857 |
| Long-term Debt                      | 470,911                    | 235,145                     | 235,766 | -0- | -0- |
| Operating leases                    | 216,000                    | 24,000                      | 96,000 | 96,000 | -0- |
|  

Total                       | $2,641,193                 | $1,170,058                  | $ 361,378 | $  128,900 | $  980,857 |

 

**Off-Balance Sheet Financing Arrangements**

 

As of June 30, 2007 and 2006 we had no off-balance sheet financing            arrangements.

 

**Critical Accounting Policies**

 

|   | *Revenue Recognition* |
|--------|-----------------------|

 

We recognize revenue according to Staff Accounting Bulletin 104,*Revenue Recognition*which clarifies U.S.            generally accepted accounting principles for revenue            transactions*.*Accordingly, revenue            is recognized when an order has been received, the price is fixed and determinable, the            order is shipped and installed, collection is reasonably assured and we have no            significant obligations remaining. Licensing fees are royalties paid to us for            licensing the use of the name The Flooring Zone. The royalties range from 1-2% of the            licensee’s commercial sales volume.

 

We record accounts receivable for sales which have been delivered but            for which money has not been collected. An allowance for doubtful accounts is provided            for accounts deemed potentially uncollectible based on analysis and aging of accounts.            For customer purchases or deposits paid in advance, we record a liability until            products are shipped or installed.

             

|   | *Merchandise Inventory* |
|--------|-------------------------|

 

We record inventory at the lower of cost or market, cost being            determined on a first-in, first-out method. We do not believe our merchandise            inventories are subject to significant risk of obsolescence in the near-term, and we            have the ability to adjust purchasing practices based on anticipated sales trends and            general economic conditions.

 

16

 

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|   | *Vendor Funds* |
|--------|----------------|

 

We receive funds from vendors in the normal course of business for            purchase-volume-related rebates. Our accounting treatment for these vendor-provided            funds is consistent with Emerging Issues Task Force (EITF) 02-16 “Accounting by a            Customer (Including a Reseller) for Certain Consideration Received From a            Vendor.” Under EITF 02-16, purchase volume rebates should be treated as a            reduction of inventory cost, unless they represent a reimbursement of specific,            incremental and identifiable costs incurred by the customer to sell the vendor’s            product. The purchase volume rebates that we receive do not meet the specific,            incremental and identifiable criteria in EITF 02-16. Therefore, they are treated as a            reduction in the cost of inventory and we recognize these funds as a reduction of cost            of sales when the inventory is sold.

 

**Recently Issued Financial Accounting Standards**

 

In February 2007, the FASB issued SFAS 159 “The Fair Value Option            for Financial Assets and Financial Liabilities.”  This statement permits            entities to choose to measure many financial instruments and certain other items at            fair value that are not currently  required to be measured at fair value. The            objective is to improve financial reporting by providing entities with the opportunity            to mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting provisions.            This statement requires a business entity to report unrealized gains and losses on            items for which the fair value option has been elected in earnings at each subsequent            reporting date. An entity may decide whether to elect the fair value option for each            eligible item on its election date, subject to certain requirements described in the            statement. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We            are currently reviewing the requirements of this statement and, at this point in time,            have not determined the impact, if any, that this statement may have on our results of            operations and financial position.

**Item 3. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

             

We maintain disclosure controls and procedures, as such term is defined            in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as            amended (the “Exchange Act”), that are designed to provide reasonable            assurance that information required to be disclosed by us in the reports that we file            or submit under the Exchange Act is recorded, processed, summarized and reported within            the time periods specified in the SEC rules and forms, and that such information            is accumulated and communicated to our management, including our principal executive            officer and principal financial officer, as appropriate, to allow timely decisions            regarding required financial disclosures. Because of inherent limitations, our            disclosure controls and procedures, no matter how well designed and operated, can            provide only reasonable, and not absolute, assurance that the objectives of such            disclosure controls and procedures are met.

             

17

 

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As of the end of the period covered by this Report we conducted an            evaluation, under the supervision and with the participation of our management,            including our principal executive officer and principal financial officer, of the            effectiveness of the design and operation of our disclosure controls and procedures            pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this            evaluation, our principal executive officer and principal financial officer concluded            that our disclosure controls and procedures were effective as of June 30,            2007.

 

*Changes in Internal Control over Financial Reporting*

             

There were no changes in our internal control over financial reporting            during the quarter ended June 30, 2007 that materially affected, or are reasonably            likely to materially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 6. Exhibits**

 

|   | Exhibits. The following exhibits are included as part of                            this report: |
|--------|--------------------------------------------------------------------------------------------------|

 

|   | Exhibit 31.1 |   | Certification of Principal Executive Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002                                     |
|--------|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |   |                                                                                                                                                                  |
|   | Exhibit 31.2 |   | Certification of Principal Financial Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002                                     |
|   |         |   |                                                                                                                                                                  |
|   | Exhibit 32.1 |   | Certification of Principal Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002                                     |
|   |         |   |                                                                                                                                                                  |
|   | Exhibit 32.2 |   | Certification of Principal Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002

                              |

 

 

**SIGNATURES**

 

In accordance with Section 12 of the Securities Exchange Act of 1934,            the registrant caused this report to be signed on its behalf, thereunto duly            authorized.

 

**THE FLOORING ZONE, INC.**

             

 

| Date:  | August 20, 2007 |   | By:    | /s/ Michael Carroll                                                            |   |
|--------|-----------------|--------|--------|--------------------------------------------------------------------------------|--------|
|   |            |   |   | Michael Carroll                                                                |   |
|   |            |   |   | Chief Executive Officer and Chief Financial                            Officer |   |
|        |                 |        |        |                                                                      |        |  |

             

 

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