SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] 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 0-27835
COZUMEL CORPORATION
(Exact Name of small business issuer as specified in its charter)
Delaware 33-0619262
(State or other Jurisdiction of I.R.S. Employer Identi-
Incorporation or Organization fication No.)
24351 Pasto Road, #B, Dana Point, California 92629
(Address of Principal Executive Offices) (Zip Code)
(949) 489-2400
(Issuer's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (of for such shorter period that the Registrant was required to file such reports) and (ii) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
| Accelerated filer o |
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| Smaller reporting company þ |
(Do not check if a smaller reporting company) | ||||||
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Common Stock, $.001 par value 1,100,000
Title of Class Number of Shares outstanding
at November 6, 2008
COZUMEL CORPORATION
(A Development Stage Company)
UNAUDITED CONDENSED BALANCE SHEETS
ASSETS
September 30, June 30,
2008 2008
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 1,912 $ --
Prepaid expenses 4,150 5,800
Total current assets 6,062 5,800
Inventory 1,922,910 2,045,438
Other assets – advances to related parties 4,023 3,134
Total assets $1,932,994 $ 2,054,372
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 24,721 $ 13,183
Cash overdraft - -- 141
Advances - related party 94,534 79,534
Convertible - note payable – related party 2,177,260 2,166,260
Total current liabilities 2,296,515 2,259,117
Total liabilities 2,296,515 2,259,117
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding - -- - --
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,000,000 shares issued and outstanding 1,000 1,000
Additional paid in capital 524,387 480,935
Deficit accumulated during the
development stage (888,907) (686,681)
Total stockholders’ equity (deficit) (363,520) (204,746)
Total liabilities and stockholders’ equity (deficit) $ 1,932,994 $ 2,054,372
The accompanying notes are an integral part of these unaudited condensed financial statements.
(A Development Stage Company)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE INCEPTION
MONTHS ENDED (April 20, 1994)
September 30, TO
2008 2007 September 30, 2008
REVENUE $ - -- $ - -- $ - --
OPERATING EXPENSES:
General and administrative 158,775 16,770 296,162
Operating loss (158,775) (16,770) (296,162)
OTHER INCOME (EXPENSE)
Gain on sale of
available-for-sale securities - -- - -- 21,882
Dividend income - -- - -- 8,019
Interest expense – related party (43,452) (42,729) (492,607)
Total other income (expense) (43,452) (42,729) (462,706)
LOSS BEFORE
INCOME TAXES (202,227) (59,499) (888,868)
CURRENT TAX EXPENSE - -- - -- 39
NET LOSS $ (202,227) $ (59,499) $ (888,907)
BASIC LOSS
PER COMMON SHARE $ (.20) $ (.06)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES $ 1,000,000 $ 1,000,000
The accompanying notes are an integral part of these unaudited condensed financial statements.
(A Development Stage Company)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
CUMULATIVE
FOR THE THREE FROM INCEPTION
MONTHS ENDED (April 20, 1994)
September 30, TO
2008 2007 September 30, 2008
Cash Flows from Operating Activities:
Net loss $ (202,227) $ (59,499) $ (888,907)
Adjustments to reconcile net loss to net cash used by
operating activities:
Gain on sale of available-for-sale securities - -- - -- (21,882)
Changes in assets and liabilities:
Increase (decrease) in:
Accounts payable 11,538 - -- 24,721
Cash overdraft (141) - -- - --
(Increase) decrease in:
Prepaid expenses 1,650 1,650 (4,150)
Inventory 122,529 (4,945) 1,922,910
Advances to related party (890) 15,000 4,023
Net cash used by
operating activities (67,541) (47,794) (2,817,151)
Cash Flows from Investing Activities:
Purchase of available-for-sale securities - -- - -- (202,139)
Cash provided by sale of
available-for-sale securities - -- - -- 225,785
Forgiveness of Interest Related Party 43,542 42,729 522,608
Net cash used by investing activities 43,542 42,729 546,254
Cash Flows from Financing Activities:
Advances from related party 15,000 - -- 152,574
Repayment of related party advances - -- - -- (58,040)
Proceeds from convertible note payable - related party 11,000 6,785 2,177,260
Proceeds from sale of common stock - -- - -- 1,015
Net cash provided used by
financing activities 26,000 6,785 2,272,809
Net increase (decrease) in cash 1,912 1,719 1,912
Cash balance at beginning of period - -- 1,199 - -
Cash at end of period $ 1,912 $ 2,918 $ 1,912
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - -- $ - -- $ - --
Income taxes $ - -- $ - -- $ - --
Supplemental Schedule of Non-cash Investing and Financing Activities:
Forgiveness of Debt $ 43,452 $ 42,729 $522,608
The accompanying notes are an integral part of these unaudited condensed financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements - The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2008 and results of operations and cash flows for the three months ended September 30, 2008 and 2007, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2008. The results of operations for the periods ended September 30, 2008 and 2007 are not necessarily indicative of the results of operations to be expected for the full fiscal year.
Reclassifications- Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform with presentation in the current year financial statements.
NOTE 2 - CONVERTIBLE NOTE PAYABLE - RELATED PARTY
In May 2004, the Company issued an 8% convertible note for $150,000 to an entity related to a shareholder of the Company. The conversion price for the Debentures in effect on any Conversion Date shall be thelesser of (a) $0.01 (the “Fixed Conversion Price”)and (b) one hundred percent (100%) of the average of the three (3) lowest closing bid prices per share of the Common Stock during the forty (40) Trading Days immediately preceding the Conversion Date (the “Floating Conversion Price”);provided,however, that the aggregate maximum number of shares of Common Stock that the First Debenture and Second Debenture may be converted into shall be Three Million (3,000,000) shares (the “Maximum Conversion”); and furtherprovided,however, that upon the Maximum Conversion, the Company may, at its option (a) increase the Maximum Conversion or redeem the unconverted amount of the Debentures in whole or in part at one hundred twenty five percent (125%) of the unconverted amount of such Debentures being redeemed plus accrued interest thereon. For purposes of determining the closing bid price on any day, reference shall be to the closing bid price for a share of Common Stock on such date on the OTCBB (or such other exchange, market, or other system that the Common Stock is then traded on), as reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices).
The note matured on December 31, 2005 and is now due on demand. During the three months ended September 30, 2008 and 2007 interest expense was $43,542 and $42,729, respectively. The related party has forgiven the accrued interest as incurred. Due to the related party nature of the forgiveness, the Company accounted for it as a capital contribution.The Company has determined the convertible debentures to not have a beneficial conversion feature; therefore, no beneficial conversion feature has been recorded as of September 30, 2007.
NOTE 3 - INCOME TAXES
At September 30, 2008, the Company has net operating loss carryforwards of approximately $888,907 available to offset future taxable income and expiring beginning in 2009 through 2028.
NOTE 4 - RELATED PARTY TRANSACTIONS
Advances - During the quarter ended September 30, 2008, the officer/shareholder advanced $15,000, consisting of salary accruals of $15,000 per month. At September 30, 2008, the Company owed the shareholder $94,534. The shareholder owned the Company $4.029. No interest is being accrued on the advances.
Note Payable - The Company has a note payable to an entity related to an officer/shareholder of the Company [see note 2].
NOTE 5 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has incurred losses of approximately $888,907 since its inception and has not yet been successful in establishing profitable operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of its common stock or through a possible acquisition with another company. There is no assurance that the Company will be successful in raising this additional capital or achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2007, the FASB issued Statement No. 157, "Fair Value Measurements" (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 become effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact that FAS 157 will have on our financial statements.
In September 2007, the FASB issued Statement No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" (FAS 158). FAS 158 requires that employers recognize the funded status of their defined benefit pension and other postretirement plans on the balance sheet and recognize as a component of other comprehensive income, net of tax, the plan-related gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. We will prospectively adopt FAS 158 on April 30, 2007.
In September 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), which addresses how to quantify the effect of financial statement errors. The provisions of SAB 108 become effective as of the end of our 2007 fiscal year. We do not expect the adoption of SAB 108 to have a significant impact on our financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115" (FAS159). FAS 159 permits companies 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 and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of FAS 159 become effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact that FAS 159 will have on our financial statements.
In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51(“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” (SFAS “161”) as amended and interpreted, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted.
In December 2007, the FASB issued Financial Accounting Standard No. 141(R), “Business Combinations,” or FAS 141(R). FAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. FAS 141(R) applies to all transactions or other events in which the reporting entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the effect FAS 141(R) may have on our consolidated financial statements in future periods.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We have not yet enjoyed any revenues. We had a loss of $202,227 and $59,499 for the three months ended September 30, 2008 and 2007, respectively.. We wrote down inventory by $130,000 in the September 30, 2008 quarter to reflect the worsening market for powerboats, to reflect the reduced value of Hatteras which became lower than our cost basis on the yacht. Our operating expenses consist primarily of $5,000 accrued each month for management compensation; storage costs of under $1,000 per month, accounting and auditing costs and miscellaneous franchise tax, bank charges, and similar costs. Since 2005, other income has been comprised of interest accrued on interest on a related party note. The interest accrued was $43,542 and $42,729, respectively for the three months ended September 30, 2008 and 2007, respectively.
As of September 30, 2008 and June 30, 2008, we have expended $2,052,910 and $2,045,231, respectively for the acquisition of four yachts and their refit. We wrote off $130,000 of this amount in the three months ended September 30, 2008. All of our capital needs through September 30, 2008 have been supplied by advances from an officer and director or proceeds on a convertible debenture that have been advanced by an affiliate of that officer and director. The interest rate on the note is 8%, but due to the related party nature of the note, the interest expense is forgiven and accounted for as additional paid in capital. The interest forgiven as of September 30, 2008 is $532,372. The refit is complete on three yachts and we estimate that the refit of the remaining yacht will require an additional $400,000. We understand that this amount is beyond the financial capability of the current funding source and we intend to carry out a public or private offering of stock or debt as soon as the Registrant can obtain a listing of its common stock. However, we have no arrangement or understanding for any funding. The affiliate is under no legal obligation to continue to supply funding. An additional yacht which we refitted was transferred to our officer in June 2006 at its cost of $154,157, to repay accrued compensation of $55,000 to this person and to furnish a credit against his future compensation, which credit was wholly utilized in the year ended June 30, 2008.
As of June 30, 2008, we had a cash overdraft of $141, and we had cash of $1,192 as of September 30, 2008. Our cash needs to complete the Burger refit is estimated to be $400,000. The other projects are ready for resale. A party affiliated with a shareholder has indicated that it can loan only a portion of these funds to the Company, but is under no legal obligation to do so. If we are unable to obtain sufficient funding, we will not be able to complete projects and realize revenue upon their sale. In the year ended June 30, 2008, our cash needs were met by related party loans of $33,617. In the three months ended September 30, 2008, our cash needs were met by related party loans of $11,000. Subsequent to September 30, 2008, we sold 100,000 shares to an investment fund controlled by our officer and director, for cash of $10,000.
Information included in this report includes forward looking statements, which can be identified by the use of forward-looking terminology such as may, expect, anticipate, believe, estimate, or continue, or the negative thereof or other variations thereon or comparable terminology. The statements in "Risk Factors" and other statements and disclaimers in this report constitute cautionary statements identifying important factors, including risks and uncertainties, relating to the forward-looking statements that could cause actual results to differ materially from those reflected in the forward-looking statements.
Since we have not yet generated any revenues, we are a development stage company as that term is defined in paragraphs 8 and 9 of SFAS No. 7. Our activities to date have been limited to seeking capital; seeking supply contracts and development of a business plan. Our auditors have included an explanatory paragraph in their report on our financial statements, relating to the uncertainty of our business as a going concern, due to our lack of operating history or current revenues, its nature as a start up business, management's limited experience and limited funds. We do not believe that conventional financing, such as bank loans, is available to us due to these factors. We have no bank line of credit available to us. Management believes that it will be able to raise the required funds foroperations from one or more future offerings, in order to effect our business plan.
Our future operating results are subject to many facilities, including:
o our success in completing refits and reselling yachts;
o the effects of rising fuel prices and general economic conditions affecting the market for luxury yachts;
o our ability to obtain additional financing; and
o other risks which we identify in future filings with the SEC.
Any or all of our forward looking statements in this prospectus and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward looking statement can be guaranteed. In addition, we undertake no responsibility to update any forward-looking statement to reflect events or circumstances which occur after the date of this prospectus.
Contractual Obligations and Off-Balance Sheet Arrangements
We do not have any contractual obligations or off balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 4T. Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of disclosure controls and procedures. The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d -14 (c) as of June 30, 2008.Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to management, including our principal executive officer/principal financial officer, as appropriate, to allow timely decisions regarding required disclosure
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - None
Item 2. CHANGES IN SECURITIES - 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
31. Certifications
31.1 Certification of Jehu Hand as Chief Executive and Financial Officer
32. Certifications
32.1 Certification pursuant to 18 U.S.C. Section 1350 of Jehu Hand as Chief Executive and Financial Officer
SIGNATURES
Pursuant to the requirements 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.
COZUMEL CORPORATION
Date: November 14, 2008 By:/s/ Jehu Hand
Jehu Hand,
President and Chief Financial
Officer (chief financial officer
and accounting officer and duly
authorized officer)
