SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This periodic report contains certain forward-looking statements with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management. Statements in this periodic report that are not historical facts are hereby identified as “forward-looking statements.”
General Business
Ultra Sun Corp. (“Ultra Sun”) was incorporated under the laws of the state of Nevada on November 5, 2004. Following incorporation in November 2004, Ultra Sun acquired the net assets, business and trade name of Sahara Sun (a DBA of Neil Blosch), for the purpose of continuing operations as a tanning salon business.
Ultra Sun presently operates a tanning salon in Utah under the name Sahara Sun. The salon contains the traditional tanning beds along with spray on tanning machines. It is Ultra Sun’s goal to seek to expand by opening new salons as funds are available. With the fragmented and locally-owned nature of the tanning business, Ultra Sun’s management believes there is opportunity to expand into new markets and that it is possible to acquire established tanning salon businesses.
The tanning salon business has been expanding as improvements in technology and additional products and services have broadened the product offerings. Most tanning salons have switched to machines, typically the clamshell-looking beds, which utilize long wave light sources (UVA) as opposed to the older versions that utilized ultraviolet rays (UVB). Although there may still be damage to the skin caused by UVA, many people prefer it to the UVB machines and sun exposure. Older salons have the older UVA-style beds or have had to upgrade to the newer beds in the last few years as the technology has advanced. This change in technology has allowed for new facilities to open and offer an essentially new product from the older established salons. With the major cost of a facility being the tanning beds, the older facilities have had to incur substantial new cost in upgrading their equipment to compete in the tanning business. This extra cost has allowed new facilities to be established.
The newest and one of our more in demand items is the spray-on tan for people concerned about exposure to sun or tanning bed rays. Additionally, the consumer products that can be offered from skin care to tanning products have expanded over the same time offering additional avenues of revenue for a tanning salon. Tanning salons are also seeing increased demand for services typically found in a day salon, such as massages. With these expansions in services and capabilities, tanning salons are becoming more profitable and reducing the seasonal nature of the business. By being able to better utilize facilities’ space by providing multiple services and customer options, the tanning business has been able to reach into new demographics and revenue streams.
The tanning salon business has developed as a local-owner single shop establishment ownership structure. The only major corporate players in the industry tend to be franchisors. There is little overlapping ownership and no major corporate ownership in the industry. A large salon owner would own five to ten salons. Most of the tanning salons are located in strip malls adjacent to high traffic flow areas near residential communities. Management has found the location near the residential communities is essential as people like the flexibility and ease of being able to run into the salon while running errands or being close to their homes.
The Company believes the tanning salon business in many ways is very generic in that all salons purchase tanning beds from a few suppliers with most beds complying with the same standards. The differentiation among the salons comes in ancillary services offered, design and in customer service. Additionally, the tanning salon business has been driven by the manufacturers of the equipment who have provided most of the training, design and some financing for the businesses.
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The nature of the tanning salon business is often based on a debt financing plan or lease-to-own plan where the equipment to start the business is leased over three to five year periods. This requires large upfront monthly cash outlays to pay for the equipment. Once the equipment is paid for, and a clientele established, the cash flow from the tanning business changes to be cash flow positive for the tanning salon. There are little outlays other than the equipment and facility lease. Most employees are minimum wage level employees.
Products and Services
Ultra Sun is a full-service tanning salon. We offer a range of tanning options and utilize the newest tanning beds. Additionally, we offer alternative tanning solutions with our spray-on tanning machines for people who want to have a tanned look but do not want to have exposure to the sun or tanning beds’ rays. As we have refined our business we have also offered tanning products for sale and are evaluating expanding into other day spa services such as massages.
Management believes that to maximize the fixed overhead cost of the space, a full-service salon on top of the tanning services will maximize the utilization of the facility without adding significant overhead cost. Additionally, the tanning business is somewhat cyclical in that it is busier in the winter months and early spring than in the summer months. As such, management believes that expanding the services offered balances out the overall seasonal cycles.
We have strived to offer a unique environment and have stressed customer service. Our facilities tend to be more upscale in design and we have focused on wealthier demographic regions. Additionally, we have done extensive demographic research prior to opening our salon to make sure the demographics match our perceived target customer. We believe that our target customer tends to be younger and female with enough disposable income that regular tanning sessions are not deemed luxury items.
Marketing Strategy
The tanning business is very regional in nature. Generally, people will go to the tanning salon in their local area. With this in mind, Ultra Sun has chosen locations that demographically have people with high to medium disposable income and in areas that have longer winter months where outside tanning is not readily available. Ultra Sun has focused on strip malls that are newer and offer ready access to customers making it easy and quick for customers to stop by the facilities.
Marketing includes direct mail advertising and discount promotions aimed at a set mile radius from the salon to concentrate on those who would be shopping or driving by frequently. Additionally, we rely on signage that is visible from adjacent roads. With a defined customer base, we are able to keep advertising very directed to our customers. As we expand, we will focus more on branding our Sahara Sun store concepts to differentiate ourselves from other competitors. Presently, we are focused on our direct customer contact as a means to attract customers. In our salon, we have tried to differentiate ourselves by having a more distinctive look that all future salons will mirror. We have strived to offer a higher end finishing to our salon with the use of acid-washed concrete floors, specialty lighting and interior design features to create a higher end appearance. Even with the finishing in our salon, we recognize that our customers tend to focus on location, cleanliness and cost as the driving force in the decisions.
Regulations
We do not believe we face extensive regulations. However, as part of the new health care bill passed and signed into law on March 23, 2010, there is a provision that will add a 10% tax to all tanning salon sales. We believe the additional tax will have a negative effect on our business by increasing the costs of tanning salons. We do believe regulations may be increasing particularly as to customers under 18 as more states and the federal government seek to regulate tanning as something perceived as dangerous to the skin.
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The tanning business is regulated on the state and local level. The primary regulations pertain to the beds used and health code issues. As we do not manufacture any beds, these regulations do not affect us directly since we rely on the manufacturers to deal with any issues prior to selling us the beds. Tanning beds must meet certain specifications and be checked on a regular basis to assure no potential defects or injuries to customers. Health code issues deal with cleanliness of the facility. We do not believe any of the current regulations are going to be an issue in running our facilities. Currently, we are only required to obtain a license from the city of Saratoga Springs, Utah who also inspects our premises to make sure it meets their zoning and use requirements and an operating license from Utah County Health Department. To date, we have not encountered any regulatory issues that make us believe we will face anything but nominal cost associated with complying with regulations.
Description of Property
Ultra Sun leases space for its salon, which also serves as its corporate offices. The facilities are 1,820 square feet in size and have an annual lease rate ranging from $18.75 a square foot in year one of the lease to $21.10 a square foot in year five of the lease with monthly rental ranging from $2,844 to $3,201 over five years. The facilities can be re-leased for one consecutive five-year lease term with three percent rent increases each year over the extension terms. The current lease expires on September 30, 2013.
Technology
In our industry, the technology revolves around the tanning beds and new spray-on tanning procedures. Since we purchase our beds and tanning products, we buy the same technology as our competitors.
Competitors
We face extensive competition from other tanning salons. Most of our competitors are one and two person shops. With the nature of our business, our main competitors are generally other tanning salons in our general geographical area. We believe that there is very little competitive advantage that one salon has over another except as to appearance, service and the ancillary services provided, such as full-service salon features. With this in mind, we intend to focus more on site selection and salon appearance. We intend to have a nicer more upscale feel to our salons through the way the salon is finished including using higher-end finishing touches such as acid-washed concrete floors, specialty lighting and a general nicer quality finish than the typical salon which is framed out with a small reception room and sheet-rocked booths. Although we will try and differentiate our salon and future salons, unfortunately, the typical customer will only travel so far for tanning services and in the end, the location of the salon and price may be the determining factor in where customers will go. As a very small player in the tanning salon business and even in our local market, we do not think our name recognition will help drive customers to our salon. Hopefully, as we expand, we will be able to develop more name recognition.
Concentration of Customers
We do not have any concentration of customers and rely on individuals as customers.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration
We have no patents, trademarks, other than the name Sahara Sun. We also have no franchisees, concessions, royalty agreements or labor contracts. Currently, we are licensed to conduct a tanning salon business with a business license from the City of Saratoga Springs, Utah and also have an operating license from Utah County Health Department.
Research and Development Costs During the Last Two Fiscal Years
We have not engaged in any research and development in the last two years.
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Risks Related to Ultra Sun’s Operations
Ultra Sun’s operations are subject to a number of risks including:
RISK FACTORS ASSOCIATED WITH ULTRA SUN
In order to expand, we will need additional capital which may dilute current stockholders and if we do not find additional financing, we may not be able to expand also making it difficult for us to make a profit.
Ultra Sun has relied on investments and loans from founders and other debt financing to continue its operations. Ultra Sun may still be in need of additional capital to stay in operations and cover any shortfalls in revenue. Therefore, the ultimate success of Ultra Sun may be dependent on its ability to raise additional capital. There is no assurance that any additional funds will be available from any source or, if available, on terms and conditions favorable to Ultra Sun and existing stockholders.
We do not have substantial resources and lost money in our last completed fiscal year bringing into question our ability to stay in business.
We lost money in our last completed fiscal year with net loss of $15,817. Shareholders of Ultra Sun have provided bridge capital to meet any short-term cash needs in the past but there is no requirement for the shareholders to contribute funds in the future. Given the current economic conditions, it is possible that revenue will decrease this year, and for us to need funding to cover shortfalls in our operating capital.
We are a small business and will be dependent on the ability to expand operations to be profitable and increase revenues.
As a small business our business model requires we continue to expand opening new locations. Each salon is limited in the amount of revenue it can generate and the number of customers in its geographical area. Accordingly, to generate additional revenues and profits, we need to be able to expand to new locations which will require additional capital. At this time we have very limited capital and will be dependent on debt and equity financing. There is no assurance we can obtain any debt financing or that the terms of any debt financing will be very favorable. Additionally, equity financing may be difficult in today’s environment given the current economic climate. Without financing, we would likely have to postpone additional salon openings limiting our profitability.
There is ongoing concern over the risk of tanning beds and there is a possibility that regulations in the future will substantially affect our industry or limit the number of customers that seek indoor tanning options.
Although tanning beds do not expose individuals to the sun, there is concern over the dangers of tanning beds and many believe they still cause skin damage including skin cancer. All customers must sign a form indicating they understand the potential dangers of tanning beds including eye and skin injury, allergic reactions, premature aging of the skin and skin cancer. It is possible that governmental agencies will add more regulations to the tanning industry as it continues to grow which would increase our cost. Additionally, it is possible that a customer may be injured or have other health problems related to the tanning experience at our facility and seek redress from us. We currently carry only limited insurance and if we were to lose a lawsuit from an injured customer, it is likely we would not be able to stay in business.