UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2008
OR
[_] 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: 333-120949
NASCENT WINE COMPANY, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Nevada 82-0576512
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 B Paseo de las Americas
San Diego, Ca. 92154
-------------- -----
(Address of principal executive offices) (Zip Code)
(619) 661 0458
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [_]
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.
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes [ ] No [X]
As of August 14, 2008 was 84,749,969.
NASCENT WINE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1.
Unaudited Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures 19
PART II - Other Information
Item 1. Legal Proceedings 28
Item 1 A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
I4tem 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
Exhibit 31.1 Certification of Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 Exhibit
32.1 Certification of Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 Exhibit
32.2 Certification of Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
FORWARD LOOKING STATEMENTS
This report contains information that may constitute "forward-looking
statements." Generally, the words "believe," "expect," "intend," "estimate,"
"anticipate," "project," "will" and similar expressions identify forward-looking
statements, which generally are not historical in nature. All statements that
address operating performance, events or developments that we expect or
anticipate will occur in the future -- including statements relating to volume
growth, share of sales and earnings per share growth, and statements expressing
general views about future operating results -- are forward-looking statements.
Management believes that these forward-looking statements are reasonable as and
when made. However, caution should be taken not to place undue reliance on any
such forward-looking statements because such statements speak only as of the
date when made. Our Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. In addition,
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our Company's historical
experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described in Part II, "Item
1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form
10-K for the year ended December 31, 2007, and those described from time to time
in our future reports filed with the Securities and Exchange Commission 29
2
Item 1.
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission ("Commission"). While these statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim period, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the audited financial statements and footnotes that are included in the
Company's December 31, 2007 annual report on Form 10-KSB previously filed with
the Commission on April 15 , 2008.
3
PART I - FINANCIAL INFORMATION
NASCENT WINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2008 DECEMBER 31, 2007
------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 892,222 $ 961,243
Accounts receivable (less allowance of $923,450 at
June 30, 2008 and $ 547,290 December 31, 2007) 2,887,420 3,878,522
Inventory 2,065,329 2,693,029
Prepaid and other current assets 1,639,882 700,645
------------ ------------
TOTAL CURRENT ASSETS 7,484,853 8,233,439
Property, plant and equipment, net 768,751 736,635
Investment in AIP 2,707,959 --
Amortizable intangibles assets, net 12,055,660 13,166,621
Goodwill 2,567,307 7,480,565
Other noncurrent assets 1,546,295 4,726,545
Assets held for sale 10,278,484 14,697,486
------------ ------------
TOTAL ASSETS $ 37,409,309 $ 49,041,291
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,070,800 $ 2,620,420
Accrued expenses 2,014,904 1,174,148
Accrued interest 467,810 279,351
Line of credit 47,970 --
Notes payable 1,588,739 48,133
Shareholder loans 862,500 630,000
------------ ------------
TOTAL CURRENT LIABILITIES 7,052,723 4,752,052
Liabilities related to assets held for sale 5,577,485 11,281,147
------------ ------------
Total Liabilities 12,630,208 16,033,199
STOCKHOLDERS' EQUITY Preferred stock, 5,000,000 authorized:
Series A convertible preferred stock, $.001 par value,
1,875,000 shares issued and outstanding at
June 30, 2008 and December 31, 2007 1,875 1,875
Series B convertible preferred stock, $.001 par value,
375,000 shares issued and outstanding
at June 30, 2008 and December 31, 2007 375 375
Common stock, $0.001 par value: 195,000,000 shares 84,750 84,426
authorized, 84,749,969 shares issued and outstanding
at June 30, 2008 and 84,425,538 December 31, 2007
Additional paid-in capital 43,497,830 44,351,978
Accumulated other comprehensive income (loss) (138,263) 32,447
Deficit accumulated (18,667,466) (11,463,009)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,779,101 33,008,092
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 37,409,309 $ 49,041,291
============ ============
See accompanying notes to Consolidated Financial Statements
4
NASCENT WINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 30, 2008 JUNE 30, 2007 JUNE 30, 2008 JUNE 30, 2007
------------ ------------ ------------ ------------
NET REVENUES $ 6,452,211 $ 3,669,885 $ 12,412,468 $ 5,943,574
COST OF REVENUE 6,842,631 3,107,637 11,605,192 4,879,218
------------ ------------ ------------ ------------
GROSS PROFIT (390,420) 562,248 807,276 1,064,356
OPERATING EXPENSES
Distribution 512,099 187,508 922,828 282,892
Sales and Marketing 199,926 243,398 450,334 338,782
General and Administrative 1,614,416 1,519,507 2,372,430 2,181,846
Depreciation 37,556 14,182 70,665 26,959
Amortization 388,812 709,584 683,538 926,459
Intangible Impairments (see note 5) 5,341,036 -- 5,341,036 --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 8,093,845 2,674,179 9,840,831 3,756,938
LOSS FROM OPERATIONS (8,484,265) (2,111,931) (9,033,555) (2,692,582)
OTHER INCOME (EXPENSE)
Interest Income 2,415 3,011 6,021 6,052
Interest Expense (223,017) (408,490) (327,800) (956,424)
Warrant Interest Recapture 442,068 -- 884,136 --
Other income (expense),net (1,983,277) -- (1,823,359) --
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,761,811) (405,479) (1,261,002) (950,372)
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (10,246,076) (2,517,410) (10,294,557) (3,642,954)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (10,246,076) (2,517,410) (10,294,557) (3,642,954)
DISCONTINUED OPERATIONS
Income (loss) from Operations 207,884 178,721 265,643 (186,751)
Impairment of Intangibles (1,448,455) -- (1,448,455) --
Gain on Sale of Palermo 4,272,912 -- 4,272,912 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 3,032,341 178,721 3,090,100 (186,751)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (7,213,735) $ (2,338,689) $ (7,204,457) $ (3,829,705)
============ ============ ============ ============
BASIC EARNING PER SHARE
Continuing Operations $ (0.12) $ (0.05) $ (0.12) $ (0.07)
============ ============ ============ ============
Discontinued Operations $ 0.04 $ 0.00 $ 0.04 $ (0.00)
============ ============ ============ ============
Weighted-average Shares Outstanding 84,439,364 54,281,188 84,427,254 53,184,119
Diluted Earnings per Share
Continuing Operations $ (0.12) $ (0.05) $ (0.12) $ (0.07)
============ ============ ============ ============
Discontinued Operations $ 0.04 $ 0.00 $ 0.04 $ (0.00)
============ ============ ============ ============
Weighted-average Shares Outstanding 84,439,364 54,281,188 84,427,254 53,184,119
See accompanying notes to Consolidated Financial Statements
5
NASCENT WINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS'EQUITY
TOTAL
PREFERRED SHARES COMMON SHARES STOCKHOLDERS'
-------------------- ------------------- ADDITIONAL COMPREN- ACCUMULATED
Par Value Par Value PAID-IN SUBSCRIBED HENSIVE INCOME EQUITY
Shares $0.001 Shares $0.001 CAPITAL STOCK INCOME (DEFICIT) (DEFICIT)
-------------------- -------------------------------- ---------- ---------- ------------ --------------
Balance December 31, 2006 52,050,000 $ 52,050 $16,314,477 $ 2,334,727 $ (15) $ (2,056,904) $ 16,644,335
-
Preferred shares issued
for stock for cash 2,250,000 2,250 - - 15,142,027 - - - 15,144,277
Shares issued for service - - 316,023 316 162,055 - - - 162,371
Shares issued for loans - - 3,002,545 3,003 1,265,899 - - - 1,268,902
Shares issued for trucks - - 77,170 77 30,791 - - - 30,868
Shares issued for cash - - 28,484,900 28,485 9,585,424 (2,334,727) - - 7,279,182
Shares issued for
acquisitions - - 244,900 245 119,755 - - - 120,000
Warrants issued - - - - 1,616,800 - - - 1,616,800
Shares issued for
finders fee - - 250,000 250 114,750 - - - 115,000
Net loss - - - - - - - (9,406,105) (9,406,105)
Translation loss - - - - - - 32,462 - 32,462
- - - - - - - - -
Comprehensive loss - - - - - - - - (9,373,643)
---------- --------- ---------- --------- ----------- ---------- ---------- ------------ --------------
Balance December 31, 2007 2,250,000 2,250 84,425,538 84,426.00 44,351,978 - 32,447 (11,463,009) $ 33,008,092
Net loss (7,204,457) (7,204,457)
Warrant interest expense
(recapture) (884,136) (884,136)
Shares issued for service 318,181 318 29,682 30,000
Issuance of penalty shares 6,250 6 306 312
Translation (loss) gain (170,710) (170,710)
Comprehensive loss -
---------- --------- ---------- --------- ----------- ---------- ---------- ------------ --------------
Balance June 30, 2008 2,250,000 $ 2,250 84,749,969 $ 84,750 $43,497,830 $ - $(138,263) $(18,667,466) $ 24,779,101
========== ========= ========== ========= =========== ========== ========== ============ ==============
See accompanying notes to Consolidated Financial Statements
6
NASCENT WINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended
--------------------------------
June 30, 2008 June 30, 2007
------------ ------------
Cash Flows from Operating Activities
Net loss $ (7,204,456) (3,829,704)
Adjustment to reconcile net loss to net cash provided by operations:
Depreciation 255,184 86,328
Amortization 405,714 926,459
Allowance for doubtful accounts 377,261 --
Gain on sale of Palermo (4,272,912) --
Shared-based compensation 30,000 84,000
Warrant interest expense(recapture) (884,136) 556,524
Impairment of amortizable intangibles 4,790,000 --
Impairment of goodwill 11,599,661 --
Impairment of acquisition loans (8,000,000) --
Changes in operating working capital:
(Increase)/decrease in accounts receivable (3,313,150) (2,881,898)
(Increase)/decrease in inventory 637,282 (1,723,114)
(Increase)/decrease in prepaids and other assets (1,039,813) (186,414)
Increase/(decrease) in accounts payable 5,269,116 3,211,730
Increase/(decrease) in accrued expense 1,077,398 (148,592)
Increase/(decrease) in accrued interest 188,459 (48,703)
Increase/(decrease) in other non-current assets (53,977)
------------ ------------
Net change in operating working capital 7,066,087 (123,680)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (138,369) (3,953,384)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchased fixed assets (337,467) (776,504)
Acquisition of Licensed Marks -- (4,400,000)
Acquisition of Pasani/Eco, net of cash acquired -- (1,577,959)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTMENTS ACTIVITIES (337,467) (6,754,463)
CASH FLOWS FROM FINANCING ACTIVITIES
Line of credit, net (163) --
Bridge Loan -- (556,000)
Acquisition loans -- 4,412,500
Shareholder loan advance 250,000
Shareholder loan payment (46,581) (965,425)
Proceeds - bank loans 1,270,245 70,589
Payments - bank loans (395,097)
Capital leases -- 824,567
Common stock subscribed-net of expenses -- 7,286,544
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,078,404 11,072,775
EFFECT OF EXCHANGE RATE CHANGES ON CASH (170,711) 1,082
------------ ------------
NET DECREASE IN CASH 431,857 366,010
CASH--BEGINNING OF PERIOD 1,165,814 476,375
------------ ------------
CASH - ENDING OF PERIOD $ 1,597,671 $ 842,385
============ ============
7
NASCENT WINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock for shareholder loan $ -- $ 1,130,391
============ ============
Issuance of common stock for services $ 30,000 $ 84,000
============ ============
Warrants issued and attached to debt $ -- $ 156,000
============ ============
Warrant issued for interest (recapture) $ (884,136) $ --
============ ============
Issuance of penalty shares $ 312 $ --
============ ============
Impairment of acquisition notes $(8,000,000) $ --
============ ============
Interest paid $ 139,342 $ --
============ ============
See accompanying notes to Consolidated Financial Statements
8
NOTE 1 - COMPANY OVERVIEW
Company History
- ---------------
The Company was incorporated under the laws of the State of Nevada, on December
31, 2002 (Date of inception). The Company had minimal operations until July 1
2006, after the Company purchased the license to distribute Miller Beer in Baja
California, Mexico from Piancone Group International, Inc. (PGII).
In October 2006, the Company purchased the assets and assumed liabilities of
PGII, and in November 2006, when Company purchased the outstanding common stock
of Palermo Italian Foods, LLC. (Palermo). In June 2008, the Company entered into
a transaction to sell Palermo to AIP, Inc., a group led by Victor Petrone,
formerly the President of the Company who remains a member of the Board of
Directors. On May 11, 2007, the Company acquired Pasani S.A de C.V.. (Pasani)
and Eco (Eco), distribution companies based in Mexico City and San Antonio.
In July 2007, the Company acquired Grupo Sur Promociones de Mexico S.A. de C.V.
(Groupo Sur) and related companies. In October 2007, the Company acquired all of
the outstanding capital stock of Targa, S.A. de C.V. (Targa).
During May 2008, the Company announced its decision to evaluate its strategic
options for Pasani, Eco and Grupo Sur.
In June 2008, in accordance with the provisions of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", the assets and liabilities
relating to Pasani, Eco and Grupo Sur have been reclassified as held for
sale in the Consolidated Balance Sheet for June 30, 2008 and December 31, 2007.
The results of operations for the fiscal quarter and six months ended June 30,
2008 and June 30, 2007, have been reported as discontinued operations. In
conjunction with classifying certain subsidiaries as discontinued, the Company
cancelled $8,000,000 of acquisition loans (Pasani $ 3,500,000 and Grupo Sur
$4,500,000).
The Company believes the Pasani, Eco and Grupo are in probable stage of being
sold and their operations and cash flows are clearly distinguishable
operationally and for financial reporting purposes classified as Discontinued
Operations. The Pasani and Eco companies have been disposed. See note subsequent
events for these subsidiaries, the company shall no significant continuing
involvement after their disposal and their operations and cash flows have been
eliminated from our ongoing operations.
The above mentioned transactions were accounted for pursuant to certain
paragraphs of Statement of Financial Accounting Standard 141 (`SFAS 141'),
Statement of Financial Accounting Standard 142 (`SFAS 142') Statement of
Financial Accounting Standard 144 (`SFAS 144'). A discussion of these
transactions are included in notes 10 and 11.
In our opinion, the information presented reflects all adjustments necessary for
a fair statement of interim results. Certain reclassifications have been made to
conform prior year data to current year presentation.
The Company determined in accordance with SFAS No. 131 "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION", that its subsidiaries meets
the criteria to be deemed one reporting unit.
NOTE 2 - GOING CONCERN
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30 2008, the Company had
cash of $892,222 and a working capital of $432,130. The Company had a net loss
from continuing operations $10,246,076 and $10,294,557 for the three months and
six months ended June 30, 2008, $2,517,410 and $3,642,954 for the three months
and six months ended June 30, 2007.
The Company is currently in discussion with several lending institutions for a
working capital credit facility and additional financing. These credit
facilities in conjunction with internally generated funds should be sufficient
to fund our operations for the next twelve months; however, there can be no
assurance funding will be available at terms and conditions acceptable to us.
9
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Best Beer S.A. de C. V., (Best Beer),
International Food Services, Inc. (IFS) and Targa, S.A de C.V (Targa) for the
three months and six months ended June 30 2008 and 2007. The accompanying
consolidated balance sheets include the assets and liabilities of Pasani, Eco
and Grupo Sur as assets held for at June 30 2008, and December 31, 2007. The
results of their operations are disclosed as discontinued operations for the
three months and six months ended June 30, 2008 and 2007, respectively.
The financial statements have been consolidated with the parent company and all
inter-company transactions and balances have been eliminated in consolidation.
Basis of Preparation
- --------------------
The accompanying financial statements have been prepared in accordance with U.S.
Generally Accepted Accounting Principles (GAAP), for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all information and notes required by accounting principles generally
accepted in the United States for complete financial statements. The financial
statements have been prepared assuming that the Company will continue as a going
concern.
Estimates
- ---------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets, and liabilities on the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
The Company, through its Subsidiaries, sells food and beverage products to its
customers in Mexico. Sales of products and related costs of products sold are
recognized using the accrual method in which revenues are recorded as products
are delivered and billings are generated. In accordance with SEC Staff
Accounting Standard 101 Revenue Recognition, the Company recognizes revenue when
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the price is fixed or determinable and (iv) collectability is reasonably
assured. These terms are typically met upon shipment of product to the customer.
Accounts Receivable
- -------------------
The Company has reviewed the outstanding trade accounts receivable and provided
a reserve for slow paying accounts of approximately $923,450 at June 30,, 2008
and $547,290 at December 31, 2007. The Company has insured all its trade
receivables during the first half 2008. Additionally, the Company has developed
standard credit policies.
Inventories
- -----------
Inventories are accounted for on the first-in, first-out basis. Any products
reaching their expiration dates are written off. The Company determined it did
not require a provision for slow moving and/or obsolete inventory for the six
months ended June 30, 2008 and December 31, 2007.
Property, Plant and Equipment
- -----------------------------
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful life of the assets, which is three to ten
years.
10
Business Combinations
- ---------------------
Acquisitions require significant estimates and judgments related to the fair
value of assets acquired and liabilities assumed to which the transaction costs
are allocated under the purchase method of accounting. Certain liabilities are
subjective in nature. We reflect such liabilities based upon the most recent
information available. The ultimate settlement of such liabilities may be for
amounts that are different from the amounts initially recorded. A significant
amount of judgment also is involved in determining the fair value of assets
acquired. Different assumptions could yield materially different results.
Long-Lived Assets
- -----------------
The Company accounts for intangible assets in accordance with SFAS 144 "
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". The Company
acquired long-lived assets during 2007 and 2006. The acquired long -lived assets
are attributed to acquisitions completed during 2007 and 2006. The Company
reviewed the carrying values of its long-lived assets for possible impairment as
of June 30, 2008 and whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable and\or annually. The
Company completed the sale of Palermo as of June 30, 2008, and classified
Pasani, Eco and Grupo Sur as discontinued operations and accordingly the long-
lived assets arising from these acquisition have been impaired.
Per Share Data
- --------------
Basic net earnings (loss) from continuing operations per share is computed by
dividing net earnings (loss)from continuing operations by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) from
continuing operations per share is calculated by dividing net earnings (loss)
from continuing operations and the effect of assumed conversions by the weighted
average number of common and, when applicable, potential common shares
outstanding during the period. A reconciliation of the numerators and
denominators of basic and diluted earnings (loss) from continuing operations per
share is presented below.
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
2008 2007 2008 2007
Basic net loss per share:
Net loss $ (7,213,735) $ (2,338,689) $ (7,204,457) $ (3,389,705)
------------ ------------ ------------ ------------
Weighted average common outstanding 84,439,364 54,281,188 84,427,254 53,184,119
Basic loss per share $ (.09) $ (.04) $ (.09) $ (.07)
============ ============ ============ ============
Diluted loss per share:
Net loss $ (7,213,735) $ (2,338,689) $ (7,204,457) $ (3,389,705)
------------ ------------ ------------ ------------
Weighted average common outstanding 84,439,364 54,281,188 84,427,254 53,184,119
Effect of Preferred Stock and Warrants
------------ ------------ ------------ ------------
Weighted average common outstanding
and potential common shares outstanding -- -- -- --
------------ ------------ ------------ ------------
Diluted net loss per share: $ (.09) $ (.04) $ (.09) $ (.07)
============ ============ ============ ============
Preferred Stock and Warrants (described else where) to purchase shares of common
stock which totaled 63 million for the three and six months ended June 30, 2008
and 24 million for the three and six months ended June 30, 2007, were not
included in the computation of diluted earnings per share as the effect would be
anti-dilutive.
Basic loss per share is calculated by dividing net loss by the weighted-average
number of shares of common shares outstanding. Diluted loss per share includes
the component of basic loss per share and also gives effect to dilutive Common
Stock equivalents. Potential dilutive Common Stock equivalents include stock
options, warrants and preferred stock which convert into Common Stock.
11
Income Taxes
- ------------
The Company follows Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes" (SFAS No. 109) for recording the provision for
income taxes. Deferred tax assets and liabilities are computed based upon the
differences between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expense or benefit is based on the change in the asset or liability each period.
If available evidence suggests that is more likely than not that some portion or
all of the deferred tax assets will not be realized, a valuation allowance is
required to reduce the deferred tax asset to the amount that is more likely than
not to be realized. Future changes in such valuation allowance are included in
the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse.
Advertising
- -----------
The Company expenses advertising as incurred. Advertising expense was
approximately $84,700 and $91,100 for the three months and six months ended June
30, 2008. For the three months and six months ended June 30, 2007 the
advertising expense was $102,000 and $ 160,100, respectively.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
Recent Accounting Pronouncements
- --------------------------------
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" , an amendment of FASB Statement No. 133,
which changes the disclosure requirements for derivative instruments and hedging
activities. 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 SFAS No. 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.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities," which classifies unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) as participating securities and requires them to be
included in the computation of earnings per share pursuant to the two-class
method described in SFAS No. 128, "Earnings per Share.". This Staff Position is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period
earnings per share data presented are to be adjusted retrospectively (including
interim financial statements, summaries of earnings, and selected financial
data) to conform with the provisions of this Staff Position, with early
application not permitted. The adoption of this Staff Position, which will
require us to allocate a portion of net income to these participating
securities, will not have a material effect on our historical or future reported
earnings per share.
NOTE 4 - PROPERTY,PLANT AND EQUIPMENT
Property and equipment consists of the following at June 30:
June 30, 2008 December 31, 2007
------------- -----------------
Distribution equipment $ 639,139 $ 734,458
Office furniture and equipment 185,383 39,902
Computer 62,321 15,823
Autos and trucks 218,399 204,415
Leasehold improvements 112,592 98,404
----------- -----------
Totals $ 1,217,834 1,093,002
Accumulated depreciation $ (449,084) (357,367)
----------- -----------
Property and equipment net $ 768,750 $ 735,635
=========== ===========
12
Depreciation expense for the three months and six months ended June 30, 2008 was
$37,556 and $70,665, respectively and for the three and six months ended June
30, 2007, was $14,182 2007 and $26,959, respectively.
Assets held for sale include $842,341 of property and equipment related to Grupo
Sur, Pasani and Eco (discontinued operations) and $376,436 of accumulated
amortization. Depreciation expense for the three and six months ended June 30,
2008 are included in net income (loss) from discontinued operations.
NOTE 5 - GOODWILL AND INTANGIBLES ASSETS
June 30, 2008 December 31, 2007
------------- ----------------
Intangibles subject to amortization:
Miller Beer Distrtibution Licenses 8,675,000 8,675,000
Customer relations 290,000 290,000
Client lists 500,000
Trademarks 5,300,000 5,300,000
Non-Compete Agreement 70,000 70,000
------------ ------------
14,335,000 14,835,000
Accumulated amortization: (2,279,339) (1,668,379
------------ ------------
Intangibles subject to amortization, net $ 12,055,661 $ 13,166,621
============ ============
Goodwill:
Acquisition of PGII - 4,913,258
Acquisition of Targa 2,567,307 2,567,307
------------ ------------
Total Goodwill $ 2,567,307 $ 7,480,565
============ ============
Intangible asset amortization expense was $388,812 and $683,538 for the three
and six months ended June 30, 2008, respectively $709,584 and $926,459 was the
amortization expense for the three and six months ended June 30, 2007.
Amortization expense for the next five years is estimated to be approximately
$5,431,000.
Pursuant to SFAS No. 144, the Company, as of June 30, 2008, classified certain
subsidiaries as discontinued operations and accordingly impaired the intangible
assets and goodwill of these subsidiaries. The total is as follows:
Impaired Intangibles Impaired Goodwill Total
-------------------- ----------------- -----
Grupo Sur $1,950,000 $1,756,498 $3,706,498
Pasani 2,340,000 2,187,233 4,527,233
Eco - 219,714 219,714
-----------------------------------------------------
Total Impairments $4,290,000 $4,163,445 $8,453,445
Accumulated Amortization:
Grupo Sur $128,840
Pasani 300,122
--------
Total $428,962
Loss from operations reflects $5,341,036 of impairment, which includes $$500,000
attributable to customer list and $4,913,258 of goodwill arising from the
acquisition of PGI during 2006.
13
NOTE 6 - NOTES PAYABLE
The Company had the following bank loans at June 30, 2008:
Bank Interest rates Due Dates Amount
- --------------------------------------------------------------------------------
Genesis 14.00% October 1, 2008 $1,000,000
Cyril Capital, LLC 8.00% October 14, 2008 500,000
City National Bank 8.75% December 31, 2008 19,000
NetBank 14.75% December 15, 2008 32,675
Pentech 18.26% December 1, 2008 37,064
-----------
$1,588,739
===========
NOTE 7 - BRIDGE LOANS
During 2007, the Company obtained Bridge loan financing in varying amounts with
interest payable at rate 8% annually. As additional consideration, the Company
issued warrants to the lenders. At December 31, 2007, these loans have been
paid.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
The Company is authorized to issue 195,000,000 shares of Common Stock at $.001
par value. During the year ended December 31, 2007, the Company issued 316,023
shares of Common Stock for services rendered in the amount of $162,371 and
3,002,545 shares of Common Stock to redeem notes payable to shareholders in the
amount of $1,268,902. The Company issued 77,170 shares of Common Stock for a
truck valued at $30,868, and 244,900 shares of Common Stock as a finder's fee
for the Targa acquisition ($120,000) and 250,000 shares of Common Stock for the
finder's fee for the York preferred stock transaction ($115,000). The Company
received subscriptions for an additional 21,539,900 shares of Common Stock
during the year and issued 28,484,900 shares for cash, including the 6,945,000
shares subscribed at December 31, 2006 in the amount of $2,334,727 for a total
of $9,585,424.
At March 31, 2008, the Company had outstanding warrants, not including the York
Warrants (see below), to purchase 18,120,476 shares of Common Stock at various
price of between $0.25 and $1.05 expiring in 2010. If all warrants were
exercised the Company would receive $7,070,000.
During June 2008, the Company issued 318,181 of Common Stock for services
rendered. Additionally, the Company issued 6,250 of Common Stock as p a penalty
provision of the share purchase agreement completed on June 28, 2007,
Preferred Stock
- ---------------
The Company is authorized to issue 5,000,000 shares of preferred stock at $.001
par value. On July 3, 2007, the Company issued 1,000,000 shares of its Series A
and Series B Convertible Preferred Stock, par value $0.001 per share at $8.00
per share ($8,000,000) to an affiliate York Capital Management (York). The
Series A and Series B Convertible Preferred Stock is convertible into 20,000,000
shares of the Company's Common Stock, par value $0.001, of the Company, based
upon a conversion price of $0.40 per share and a liquidation amount of $8.00 per
share. The holders of the Series A and Series B Convertible Preferred Stock are
entitled to a
stock dividend of 15% payable quarterly in preferred stock for three years
commencing upon the issuance of the Preferred stock .
14
In addition, the Company issued the following warrants to purchase:
Series A-1 500,000 shares of Series A preferred $8.00 per share stock Immediately exercisable and expire July 3, 2010
Warrants
Series A-2 375,000 shares of Series A preferred $8.00 per share stock Immediately exercisable and expire July 3, 2014
Warrants
Series B Variable shares of Series of the average of the convertible
Warrants preferred stock depended Per Share Market Value of and expire
July 3, 2014 on the per market value of Common Stock 30 days
Immediately exercisable shares preceding date of exercise.
In October and November 2007, York exercised their warrants acquiring 2,250,000
shares of Series A and Series B Convertible Preferred Stock in the amount of
$15,144,276. Series A and Series B Convertible Preferred Stock held by York
collectively are convertible into 45,000,000 shares of the Company's Common
Stock.
The Company paid a cash finder's fee of $560,000 and issued to the finder an
aggregate of 1,600,000 common share warrants. Each warrant is exercisable to
purchase one share of Common Stock at any time until July 3, 2010, at a purchase
price of $0.40 per share.
NOTE 9 - ACQUISITIONS TARGA, S.A. DE C.V.
ACQUISITION OF TARGA, S.A. DE C.V.
In October 2007, the Company acquired all of the outstanding capital stock of
Targa, S.A. de C.V. (Targa) for $4,000,000. The Company paid $3,550,000 at the
Close fees of $200,000 and deposited $250,000 in an escrow account, which has
subsequently been released.
Targa is a cheese processor and distributor of imported cheeses into Mexico. Its
office and distribution center is located in Tijuana, Mexico.
Current assets $ 2,482,524
Property and equipment 319,612
Customer relations 290,000
Trade name 1,300,000
Non-compete agreement 70,000
Goodwill 2,567,307
Current liabilities (3,029,443)
--------------
Total Purchase Price $ 4,000,000
==============
NOTE 10 - DISCONTINUED OPERATIONS
Grupo Sur On July 10, 2007, pursuant to a Stock Purchase Agreement we purchased
during 2008 Grupo Sur, an in store merchandising company. After Nascent closed
purchase. Subsequent to the closing of such acquisition, Nascent believed that
Grupo Sur began taking actions that were contrary to the Stock Purchase
Agreement and the related employment agreements. Our attorneys are pursuing
through available channels the return of $1.3million of loans.
On August 8, 2008, Nascent entered into a Settlement Agreement (the "Settlement
Agreement"), effective June 30, 2008 (the "Settlement Date"), with Pasani, S.A.
de C.V. ("Pasani") and Eco Distributing, LLC. On May 11, 2007, the Company
entered into a Stock Purchase Agreement (the "Pasani Purchase Agreement") with
Pasani, and the shareholders of Pasani, Alejandro Gutierrez Pederzini ("Mr.
Pederzini") and Leticia Gutierrez Pederzini (together with Mr. Pederzini, the
"Shareholders"), whereby the Company purchased (the "Acquisition") from the
Shareholders 100% of the outstanding capital stock of Pasani ("Pasani Common
Stock"), in exchange for issuing a Promissory Note to the Shareholders in the
principal amount of USD $1,500,000 (the "Note"). Since the execution of the
Pasani Purchase Agreement, $500,000 of the principle of the Note had been paid
to the Shareholders. Pursuant to the Settlement Agreement, Nascent has returned
the Pasani Common Stock to the Shareholders. In addition, the remaining balance
of the Note has been forgiven and the Shareholders have agreed to pay Nascent
the following: (i) $500,000 in cash within 180 days of the Settlement
Date,$185,000 in additional funds within 180 days of the Settlement Date and
(iii) $312,451.87 in inventory within 180 days of the Settlement Date. In
addition, Pasani is obligated to pay Nascent on or before September 30, 2008,
$92,259.13 for products delivered to Pasani during July 2008.
The Statement of Operations reflects Pasani, Eco and Grupo Sur are classified as
discontinued operations.
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
Grupo Sur Grupo Sur Grupo Sur Grupo Sur
Revenue $ 5,696,000 -- $ 5,696,000 --
------------- ------------- ------------- -------------
Net Profit (Loss) from
Discontinued Operations (1) $ (1,659,000) -- $ (1,659,000) --
============= ============= ============= =============
(1) Includes Impairment Expense $ 2,277,000 -- $ 2,277,000 --
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
Pasani/Eco Pasani/Eco Pasani/Eco Pasani/Eco
Revenue $ 1,505,000 $ 1,136,000 $ 4,027,000 $ 1,136,000
------------- ------------- ------------- -------------
Net Profit (Loss) from
Discontinued Operations (1) $ (3,985,000) $ 55,000 $ (3,927,000) $ 55,000
============= ============= ============= =============
(1) Includes Impairment Expense $ 4,447,000 -- $ 4,447,000 --
NET ASSETS HELD FOR SALE Grupo Sur Pasani- Eco Total
---------- ---------- ----------
Cash $ 106,840 $ 598,609 705,449
Accounts receivable 2,673,534 $3,532,099 6,205,633
Inventory 1,707,851 1,707,851
Prepaid and other current assets 371,237 822,410 1,193,647
Property, plant and equipment,net 370,632 95,272 465,904
---------- ---------- ----------
Assets held for sale $3,522,243 $6,756,241 10,278,484
========== ========== ==========
Accounts payable $ 528,694 $3,663,266 4,191,960
Accrued expenses 642,147 11,901 654,048
Accrued interest
Line of credit
Notes payable 718,510 718,510
Shareholder loans 12,967 12,967
Liabilities related to assets held for ---------- ---------- ----------
sale $1,170,841 $4,406,644 5,577,485
========== ========== ==========
15
NOTE 11 - SALE OF PALERMO
On June 30, 2008, the Company sold Palermo to a group headed by the Company's
former President. The following table summarizes the calculation of the Gain on
the sale of Palermo.
Consideration:
Notes Receivable $1,000,000
Assumption of liabilities 440,000
----------
Total Consideration 1,440,000
Net liability sold 2,832,901
----------
Gain on Sale $4,272,912
NOTE 12 - SEGMENT INFORMATION
The Company operates in one reportable business segment. The Company conducts
its business through its subsidiaries in the Mexico. The Company has
historically disclosed summarized financial information for the geographic area
of operations as if they were segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Such summarized financial information concerning the Company's geographical
operations is shown in the following tables:
United States Mexico
---------------------------
Net income (loss) for the three months ended June 30, 2008 $ 195,740 $(2,146,084)
Net income (loss) for the six months ended June 30, 2008 $ 577 $(1,812,842)
Net income (loss) for the three months ended June 30, 2007 $(1,895,183) $ (9,411)
Net income (loss) for the six months ended June 30, 2007 $(4,145,952) $ (515,670)
Long lived assets (net) at June 30, 2008 $ 90,763 $ 677,988
Long lived assets (net) at June 30, 2007 $ 68,349 $ 343,060
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has unsecured loans from stockholders totaling $862,500 at June 30,
2008. The loans have various due dates and contain interest rates ranging from
10% to 18%. All loans are due on demand.
On May 3, 2006, the Company acquired the exclusive rights from Piancone Group
International, Inc. to market Miller Beer in Baja California, Mexico, in
exchange for 17,500,000 shares of our Common Stock. At that time, neither Sandro
Piancone nor Piancone Group was an affiliate. Concurrent with the acquisition of
these rights, Sandro Piancone became the Company's Chief Executive Officer and a
director. In June 2006, the Company acquired substantially all of the assets of
Piancone Group in exchange for the issuance of 15,000,000 shares of our Common
Stock. Sandro Piancone, Chief Executive Officer and a director of the Company,
was the Chief Executive Officer, a director and the controlling stockholder of
Piancone Group International, Inc., at the time its assets were acquired by the
Company. The Company believes our purchase of Piancone Group's assets was fair
and reasonable.
NOTE 14 -COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company maintains its corporate offices in San Diego, California including
warehouse space. In addition, it maintains warehouse space and offices in
Tijuana, La Paz, Ensenada, Mexicali, Cabo San Lucas, Puerto Penasco and
Mazatlan, Mexico. The Company currently has total leases of 212,000 square feet
at a cost of $80,000 per month. In 2008, the Company acquired approximately 20
new lease trucks.
The total rent paid in for the six months ended June 30, 2008 was approximately
$331,204 and $182,341 for the six months ended June 30, 2007. Future payments on
the operating leases are as follows:
2009 $ 788,002
2010 $ 710,003
2011 $ 650,003
2012 $ 360,000
Thereafter $ -
---------------
$ 2,508,008
16
Dividend Contingency
- --------------------
The holders Series A and the Series B convertible preferred stock commencing on
the date of issuance and for a period of three years following the issuance date
shall be entitled to receive a quarterly dividend at a rate of fifteen percent
of the stated liquidation preference amount. The dividends are payable in
additional shares of Series A and the Series B convertible preferred stock The
Board of Directors has not declared dividends for the Series A and Series B
convertible preferred stock.
Contingency To Issue Additional Stock
- -------------------------------------
Per the terms of the share purchase agreement completed on June 28, 2007,
Nascent Wine Company, Inc. was required to file with the SEC a share
registration statement within 60 days of the share sale transaction.
Furthermore, a failure by the registrant to perform would result in a 1% of the
total shares sold per week penalty in shares, up to a 10% maximum penalty,
payable to the investors (discussed elsewhere herein). The company filed the
SB-2 to register the shares on November 14, 2007. The Company's potential
penalty shares to be issued are approximately 2,818,500 shares. The Company has
provided approximately $565,900 for the cost of the issuance of the penalty
shares.
Concentration of Sales
- ----------------------
For the three and six months ended June 30, 2008, the Company does not have an
individual customer which would represent a concentration.
LEGAL PROCEEDING
From time to time we are involved with legal proceedings, claims and litigation
arising in the ordinary course of business.
Grupo Sur Litigation
- --------------------
On July 10, 2007, Nascent and Grupo Sur Promociones de Mexico, S.A. de C.V., a
Mexican corporation ("Grupo Sur"), entered into a Stock Purchase Agreement
whereby Nascent acquired Grupo Sur. As part of this transaction, Nascent agreed
to retain Grupo Sur's three former owners/ managers, all of whom executed
employment agreements with Nascent.
After the sale of Grupo Sur to Nascent closed, Nascent believed that Grupo Sur
began taking actions that were contrary to the Stock Purchase Agreement and the
employment agreements. Grupo Sur responded that Nascent's purchase of Grupo Sur
never closed and that Nascent failed to pay a portion of the purchase price due
to Grupo Sur under the Stock Purchase Agreement. Grupo Sur asserted that it was
terminating the Stock Purchase Agreement or, alternatively, repudiated the Stock
Purchase Agreement. Grupo Sur, in taking these positions, has withheld and
refused to refund monies that Nascent has paid to it without adequate
justification.
Discussions between Nascent's attorneys and attorneys for Grupo Sur have been
ongoing as the parties attempt to negotiate a mutually acceptable resolution.
Because Grupo Sur has refused to return monies that Nascent paid to it in
connection with the acquisition, Nascent filed a lawsuit on August 13, 2008
against Grupo Sur, Gregory Cowal Robbins, Francesca Wright De Cowal and Iliya
Petar Zogovic Wright in the United States District Court for the District of
Nevada seeking to recover damages for the following claims: breach of contract,
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty, unjust enrichment and conversion.
17
NOTE -15 PRO FORMA STATEMENTS OF OPERATIONS
Pro Forma Statement of operation includes Nascent, Best Beer, IFS and 2007
acquisition of Targa, which was acquired in October 2007.
PRO FORMA FOR
FOR THE THREE
As Reported Discontinued Operations MONTHS ENDED
Palermo Pasani Targa JUNE 30, 2007
------------------------------------------ ------------------
REVENUE $ 7,800,000 (2,900,000) (1,100,000) 2,100,000 $ 5,900,000
GROSS PROFIT 1,200,000 (300,000) (300,000) 400,000 1,000,000
INCOME (LOSS) FROM OPERATIONS (2,300,000) 234,000 56,000 100,000 (2,166,000)
OTHER INCOME (EXPENSE) 400,000 - 400,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (234,000) 56,000 (178,000)
------------------------------------------------------------ ------------------
NET GAIN (LOSS) $ 2,700,000 (234,000) 56,000 100,000 $ 2,622,000
============================================================ ==================
PRO FORMA FOR
FOR THE SIX
As Reported Discontinued Operations MONTHS ENDED
Palermo Pasani Targa JUNE 30, 2007
------------------------------------------ ------------------
REVENUE $ 12,900,000 (5,800,000) (1,100,000) 4,100,000 10,100,000
GROSS PROFIT 2,200,000 (700,000) (300,000) 700,000 1,900,000
INCOME (LOSS) FROM OPERATIONS 2,900,000 242,000 56,000 100,000 3,186,000
OTHER INCOME (EXPENSE) 1,000,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - (242,000) 56,000 (186,000)
------------------------------------------------------------ ------------------
NET GAIN (LOSS) $ 3,900,000 (242,000) 56,000 600,000 3,002,000
============================================================ ==================
NOTE -16 SUBSEQUENT EVENTS
Effective August 1, 2008, Nascent entered into an employment agreement with
Sandro Piancone, Nascent's Chief Executive Officer for an initial term through
July 31, 2012 with automatic annual renewals for an additional five years.
Pursuant to the terms of Mr. Piancone's employment agreement, he will receive an
annual base salary of $150,000. A copy of Mr. Piancone's employment agreement is
attached to this Quarterly Report as Exhibit 10.1.
On August 8, 2008, Nascent entered into a Settlement Agreement (the "Settlement
Agreement"), effective June 30, 2008 (the "Settlement Date"), with Pasani, S.A.
de C.V. ("Pasani") and Eco Distributing, LLC. On May 11, 2007, the Company
entered into a Stock Purchase Agreement (the "Pasani Purchase Agreement") with
Pasani, and the shareholders of Pasani, Alejandro Gutierrez Pederzini ("Mr.
Pederzini") and Leticia Gutierrez Pederzini (together with Mr. Pederzini, the
"Shareholders"), whereby the Company purchased (the "Acquisition") from the
Shareholders 100% of the outstanding capital stock of Pasani ("Pasani Common
Stock"), in exchange for issuing a Promissory Note to the Shareholders in the
principal amount of USD $1,500,000 (the "Note"). Since the execution of the
Pasani Purchase Agreement, $500,000 of the principle of the Note had been paid
to the Shareholders. Pursuant to the Settlement Agreement, Nascent has returned
the Pasani Common Stock to the Shareholders. In addition, the remaining balance
of the Note has been forgiven and the Shareholders have agreed to pay Nascent
the following: (i) $500,000 in cash within 180 days of the Settlement
Date,$185,000 in additional funds within 180 days of the Settlement Date and
(iii) $312,451.87 in inventory within 180 days of the Settlement Date. In
addition, Pasani is obligated to pay Nascent on or before September 30, 2008,
$92,259.13 for products delivered to Pasani during July 2008.
Effective August 14, 2008, Nascent entered into an employment agreement with
Peter V. White, Nascent's Chief Financial Officer for an initial term through
July 31, 2010 with automatic annual renewals for an additional two years.
Pursuant to the terms of Mr. White's employment agreement, he will receive an
annual base salary of $150,000. A copy of Mr. White's employment agreement is
attached to this Quarterly Report as Exhibit 10.2.
On June 28,2008 Nascent's Board of Directors ratified the Company's 2008 Stock
Option Plan (the "Plan"). A copy of the Plan is attached to this Quarterly
Report as Exhibit 4.1
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
consolidated financial statements and the related notes and the other financial
information included the Company's the Annual Report on Form 10-KSB for the year
Ended December 31, 2007. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of any
number of factors
We were incorporated in Nevada in December 2002 as a wine distribution company.
In April 2006, we acquired the right to distribute Miller beer in Baja
California.
Nascent Wine Company, Inc. is the only broad line nationwide distributor of
imported food and beverage products in Mexico. Operating from 11 distribution
centers in Mexico and the US. The company markets and distributes over 2300
national and proprietary brand food and non food items to more than 2,000
customers throughout Mexico.
Nascent currently services over 8,000 sales points including supermarkets,
convenience stores and traditional foodservice accounts including Wal-mart,
Costco, Soriana, Comercial Mexicana, Casa Ley, AMPM, 7-Eleven, OXXO and more.
Nascent has the exclusive right to distribute Miller beer in Baja California.
We also distribute a full line of frozen foods, such as ice cream, frozen
dinners, meats, ice cream and desserts, and a full line of canned and dry goods,
fresh meats and imported specialties. We also distribute a wide variety of
food-related items such as disposable napkins, plates and cups.
Business strategy:
The primary component of our business strategy involves the establishment of a
nationwide footprint in Mexico. We will attempt to accomplish this by attempting
to acquire the most profitable and well positioned distributors in Mexico. We
also plan to obtain exclusive distribution rights to desirable and recognizable
products to command higher operating margins and to use technology to leverage
our operations and absorb acquisitions.
Mexico Market overview:
The population of Mexico is in excess of 110 million people and the country has
a Gross Domestic Product of more than $1 trillion dollars. The foodservice
industry in Mexico is a $46 billion "industry and is fragmented" foodservice; as
the industry is serviced by 25,000 small to medium food service distributors.
Furthermore, the foodservice industry in Mexico carries higher margins than US
foodservice distribution. In Mexico the margins generally range from 25-40%
while the US foodservice industry margins tend to fall between 10-15%.
RECENT EVENTS
Our sales have increased by 52% from last year. The Company has also opened two
new warehouses since last year and has received certification from the
California Milk Board to use the "Real Cheese" logo on its private label
"Nery's" cheese products.
During May 2008, Nascent became the exclusive distributor for Fusion Energy
Drink in Mexico. During May 2008 Nascent signed an agreement to distribute
Rockstar Energy drinks in Mexico. During the second quarter, Nascent announced a
plan to review its growth strategy and on June 30, Nascent sold Palermo Italian
Foods, LLC ("Palermo") to a group of investors headed by Palermo's President,
Victor Petrone, who is also President and a director of Nascent. As of July 31,
2008, Nascent completed the unwinding of its purchase of Pasani pursuant to a
Settlement Agreement which is attached to this Form 10-Q as Exhibit 10.1.
19
At June 30, 2008, the Company recorded the Salesale of Palermo and the
classification of Grupo Sur, Pasani and Eco as discontinued operations.
(thousands)
For the Three Months Ended June 30,
------------------------------------- Inc/Dec
(unaudited) over
2008 2007 2007
------------ ------------ ------------
REVENUE $ 6,452 100.0 $ 3,670 100 $ 2,782 43.1
COST OF REVENUE 6,843 106.1 3,108 84.7 3,735 57.9
-------------------- -------------------- ---------------------
GROSS PROFIT (390) (6.1) 562 15.3 (953) (14.8)
OPERATING EXPENSES:
Distribution 512 7.9 188 5.1 325 5.0
Sales and Marketing 200 3.1 243 6.6 (43) (0.7)
General and Administrative 1,614 25.0 1,520 41.4 95 1.5
Depreciation 389 6.0 14 0.4 375 5.8
Amortization 38 0.6 710 19.3 (672) (10.4)
Intangible Impairments 5,341 82.8 0 - 5,341 82.8
-------------------- -------------------- ---------------------
TOTAL OPERATING EXPENSES 8,094 125.4 2,674 72.9 5,420 84.0
LOSS FROM OPERATIONS (8,484) (131.5) (2,112) (57.5) (6,372) (98.8)
OTHER INCOME (EXPENSE)
Interest Income 2,415 0.0 3 0.1 (596) (0.0)
Interest Expense (223) (3.5) (408) (11.1) 185 2.9
Warrants interest repacture 442 6.9 - - 442 6.9
Other Income (Expense), net (1,983) (30.7) - - (1,983) (30.7)
-------------------- -------------------- ---------------------
TOTAL INCOME (EXPENSE) (1,762) (27.3) (405) (11.0) (1,356) (21.0)
LOSS FROM CONTINUING OPERATIONS (10,246) (158.8) (2,517) (68.6) (7,729) (119.8)
BEFORE PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAX - - -
-------------------- -------------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (10,246) (158.8) (2,517) (68.6) (7,729) (119.8)
DISCONTINUED OPERATIONS
Income (loss) from Operations 208 3.2 179 4.9 29 0.5
Impairment of Intangibles (1,448) (22.4) (1,448) (22.4)
Gain On Sale of Palermo 4,273 66.2 4,273 66.2
-------------------- -------------------- ---------------------
Income (loss) from discontinued operations 3,032 179 4.9 2,854 44.2
-------------------- -------------------- ---------------------
Net (Loss) $ (7,214) (111.8) $ (2,339) (63.7) $ (4,875) (75.6)
==================== ===================== =====================
20
For the Six Months Ended June 30,
------------------------------------- Inc/Dec
(unaudited) over
2008 2007 2007
------------ ------------ ------------
REVENUE $ 12,412 100.0 $ 5,944 100 $ 6,469 52.1
COST OF REVENUE 11,605 93.5 4,879 39.3 6,726 54.2
-------------------- -------------------- ---------------------
-
GROSS PROFIT 807 6.5 1,064 8.6 (257) (2.1)
OPERATING EXPENSES:
Distribution 923 7.4 283 2.3 640 5.2
Sales and Marketing 450 3.6 339 2.7 112 0.9
General and Administrative 2,372 19.1 2,182 17.6 191 1.5
Depreciation 589 4.7 27 0.2 562 4.5
Amortizating 165 1.3 926 7.5 (762) (6.1)
Intangible Impairements 5,341 43.0 0 - 5,341 43.0
-------------------- -------------------- ---------------------
TOTAL OPERATING EXPENSES 9,841 79.3 3,757 30.3 6,084 49.0
LOSS FROM OPERATIONS (9,034) (72.8) (2,693) (21.7) (6,341) (51.1)
0.0
OTHER INCOME (EXPENSE) - - 0.0
Interest Income 6,021 0.0 6,052 0.0 (31) (0.0)
Interest Expense (328) (2.6) (956) (7.7) 629 5.1
Warrants interest repacture 884 7.1 - - 884 7.1
Other Income (Expense), net (1,823) (14.7) - - (1,823) (14.7)
-------------------- -------------------- ---------------------
Total income (expense) (1,261) (10.2) (950) (7.7) (311) (2.5)
LOSS FROM CONTINUING OPERATIONS (10,295) (82.9) (3,643) (29.3) (6,652) (53.6)
BEFORE PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAX - - - - - -
-------------------- -------------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (10,295) (82.9) (3,643) (29.3) (6,652) (53.6)
DISCONTINUED OPERATIONS
Income (loss) from Operations 266 2.1 (187) (1.5) 452 3.6
Impairment of Intangibles (1,448) (11.7) (1,448) (11.7)
Gain On Sale of Palermo 4,273 34.4 4,273 34.4
-------------------- -------------------- ---------------------
(LOSS) FROM DISCONTINUED OPERATIONS 3,090) 24.9 (187) (1.5) 3,277 26.4
-------------------- -------------------- ---------------------
NET (LOSS) $ (7,204) (58.0) $ (3,830) (30.9) $ (3,375) (27.2)
==================== ==================== =====================
21
(1) All costs incurred to bring product to our warehouses and distributions
centers are included in cost of revenue. These items include shipping and
handling costs, agent and broker fees, letter of credit fees, customs duty,
inspection costs, inbound freight and internal transfer costs. Costs associated
with our own distribution and warehousing are recorded in operating expenses.
Our gross margins may not be comparable to others in the industry as some
entities may record and classify these costs differently.
RESULTS OF OPERATIONS:
Results of Operations
Comparison of the 2008 to 2007
Total revenues from continuing operations for the six month period ended June
30, 2008 were $12,412,000as compared to $5,943,000 during the six month period
ended June 30, 2007, representing a 52% increase The increase principally due
the acquisition of Targa in the fourth quarter of 2007.
Total Operating Expenses
Total operating expenses in the 2008 for the six months ended June 30, 2008 were
$9,840,000 as compared to $3,757,000 for the same in 2007 representing a 30 %
increase. The increase in total operating expenses is primarily attributable
Targa, $5,340,000 of impairment and Targa.
Other Income (Expense) in the 2008 for the six months ended June 30, 2008 was
$1,983,000,000 included reserve s and management fees from discontinued
operation.
Net Income (Loss)
Net loss for the 2008 was $7,214,000 as compared to net loss of $2,339,000 for
the 2007, a 75% increase. Loss from continuing operations for the 2008 was
$10,246,000 as compared to loss from continuing operations for the 2007
($2,517,000), an increase greater than 100%. The Company had $3,090,100 income
from discontinued operations in the three months ended June 30, 2008. compared
to ($186,751) in the 2007 Second Quarter. The increase in the 2008 Second
Quarter was primarily attributable to sale of Palermo.
Sale of Palermo:
During the second quarter ended June30, 2008, Nascent's Board of Directors and
Senior Management undertook the review of its strategic focus. The Board, also,
reviewed the fit of the subsidiaries in conjunction with the strategy and
concluded Nascent was veering from its initial goal of identifying and securing
brands, purchasing food products globally and distributing these products into
Mexico. It was decided to diverse Palermo our Italian food distributor serving
for the most party southern Florida. The southern Florida is highly completive .
We decided not to continue deploy our recourses in a location that did not fit
our core focus - Mexico or fight in a highly completive market place . The
decision was made to sell Palermo. Mr. Petrone the former President of Nascent
from a team `AIP, Inc' purchase Palermo. The purchase price was a one year
interesting bearing 12% note for a $1,000,000 the assumption of approximately
$800,000 of liabilities and a 15% interest in AIP. The gain is approximately
$4,000,000 details included elsewhere herein.
DISCONTINUED OPERATIONS
Grupo Sur On July 10, 2007, pursuant to a Stock Purchase Agreement we purchased
during 2008 Grupo Sur, an in store merchandising company. After Nascent closed
purchase. Subsequent to the closing of such acquisition, Nascent believed that
Grupo Sur began taking actions that were contrary to the Stock Purchase
Agreement and the related employment agreements. Our attorneys are pursuing
through available channels the return of $1.3million of loans.
On August 8, 2008, Nascent entered into a Settlement Agreement (the "Settlement
Agreement"), effective June 30, 2008 (the "Settlement Date"), with Pasani, S.A.
de C.V. ("Pasani") and Eco Distributing, LLC. On May 11, 2007, the Company
entered into a Stock Purchase Agreement (the "Pasani Purchase Agreement") with
Pasani, and the shareholders of Pasani, Alejandro Gutierrez Pederzini ("Mr.
Pederzini") and Leticia Gutierrez Pederzini (together with Mr. Pederzini, the
"Shareholders"), whereby the Company purchased (the "Acquisition") from the
Shareholders 100% of the outstanding capital stock of Pasani ("Pasani Common
Stock"), in exchange for issuing a Promissory Note to the Shareholders in the
principal amount of USD $1,500,000 (the "Note"). Since the execution of the
Pasani Purchase Agreement, $500,000 of the principle of the Note had been paid
to the Shareholders. Pursuant to the Settlement Agreement, Nascent has returned
the Pasani Common Stock to the Shareholders. In addition, the remaining balance
of the Note has been forgiven and the Shareholders have agreed to pay Nascent
the following: (i) $500,000 in cash within 180 days of the Settlement
Date,$185,000 in additional funds within 180 days of the Settlement Date and
(iii) $312,451.87 in inventory within 180 days of the Settlement Date. In
addition, Pasani is obligated to pay Nascent on or before September 30, 2008,
$92,259.13 for products delivered to Pasani during July 2008.
The Statement of Operations reflects the sale of Palermo and, Pasani, Eco and
Grupo Sur classification and such subsidiaries are classified as discontinued
operations.
Pasani and Eco:
The Statement of Operations reflects the sale of Palermo and Pasani Eco and
Grupo Sur classification as discontinued operations.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
o NET LOSS $7.2 million
o LOSS FROM OPERATION $10.2million
INCLUDES:
o Write down of Inventory $0.7 million
o Reserve for Bad Debts $0,4 million
o Reserve for Notes $1.3 million
o Managements Fees - $1.0 million
o Impairment of intangibles $5.3 million
Total One time adjustments $8.7 million
Adjusted Loss from Operations for the six month ended June 30,2008 is $1.5
million.
RESULTS FROM DISCONTINED OPERATIONS
o NET INCOME $3.0 million
INCLUDES:
o Income from discontinued operations $0.3 million
o Impairment $1.4 million
o Gain on Sale $4.3 million
The Company is in a restart mode having completed cathartic quarter ended June
30, 2008, including selling Palermo and classifying Pasani, Eco-Pac and Grupo
Sur in the
The major contributor to the $1.5 million adjusted loss from operations is the
effects of not having in place a line of credit. Without a line of credit we are
constrained in the purchase of inventory which creates adverse effects on
revenue.
22
EBITDA
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2008 2007 2008 2007
---- ---- ---- ----
Loss from operations $10,800,000 $2,500,000 $10,900,000 $(3,600,000)
--------------- ---------------- ---------------- ----------------
Adjustments
Add:
Targa 100,000 600,000
Management Fees 1,000,000 1,000,000
Reserve Loans 1,300,000 1,300,000
Impairment 5,300,000 5,300,000
Depreciation 40,000 14,000 165,000 27,000
Amortization 400,000 700,000 600,000 900,000
--------------- ---------------- ---------------- ----------------
8,040,000 814,000 8,365,000 1,527,000
--------------- ---------------- ---------------- ----------------
EBITDA - (deficit) (2,760,000) (1,686,000) (2,535,000) (2,073,000)
=============== ================ ================ ================
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared assuming that we will
continue as a going concern. The Company has had net losses for the years ended
December 31, 2007 and December 31, 2006, respectively.
We commenced operations in 2006 and acquired the Miller Beer license and
started-up our Best Beer company, acquired Palermo and raised substantial equity
financing. Additionally, we completed three acquisitions in 2007. The costs
associated with these acquisitions and the associated cost of funding the
acquisitions was a major contributor to the generation of these losses. We are
installing certain control metrics to assist management in maximizing operating
income.
CASH FLOW
Cash used in operations of $ results for the most from an increase in accounts
receivable and inventory supporting the ramp-up of sales offset in part by an
increase in accounts payable.
Cash provided by financing activities of $1,078,404 results from notes payable
of $875,148 and an increase in Shareholders $ 203,419.
The Current Assets and Liabilities have been restated to reflect the sale of
Palermo and the classicization of Pasani, Eco and Grupo Sur as assets and
liabilities held for sale.
23
WORKING CAPITAL ANALYSIS
(in thousands)
June 30, December 31,
2008 2007 Increase
--------------- -------------- ---------------
Current Assets:
Cash $ 892 $ 961 $ 0
Accounts Receivable 2,887 3,879 (991)
Inventory 2,065 2,693 (628)
Prepaid 1,640 701 939
--------------- -------------- ---------------
Total Current Assets 7,485 8,233 (479)
--------------- -------------- ---------------
Current Liabilities:
Accounts Payable $ 2,071 $ 2,620 $ (550)
Accrued Liabilities 2,015 1,174 841
Accrued Interest 468 279 188
Line credit 48 - 48
Notes Payable 1,589 48 1,541
Shareholders Loans 863 630 233
--------------- -------------- ---------------
Total Current Liabilities 7,053 4,752 2,301
--------------- -------------- ---------------
Working Capital (Deficit) $ 432 $ 3,481 $ (3,049)
=============== ============== ===============
Working Capital of $430,000 as of June 30 2008, reflects a decrease of
$3,000,000 restated for assets held for sale as of December 31, 2007. Current
assets decreased $ $480,00 resulting principally for $900,000 decrease in
accounts receivable and a $620,000 decrease in inventory . Current liabilities
increased $2,300,000 resulting from increased accrued liabilities notes payable
and shareholders loans.
On April 1, 2008 we entered into a $1,000,000 senior bridge loan agreement with
Genesis Merchants Partners, LP. The terms are: (i)interest of 14% per annum,
payable monthly; (ii) the loan is due and payable within 180 days, at that time
107% of principal will become due and payable; The bridge loan may be extended
to 360 days from closing at the Company's option, at that time 115% of principal
will be due and payable.
A closing fee of 3% of principal will at time of closing. If the loan is
extended an additional 2% closing fee will be due. The loan is secured by the
assets of the Company. The senior bridge loan is required to be repaid from the
proceeds of a working capital credit agreement the Company may enter into.
On May 14, 2008, Mr. James E. Buckman and Mr. Yehuda "Mitch" Wolf resigned from
the board of directors of the Company effective immediately. Messrs. Buckman and
Wolf informed us that they were resigning in order to avoid the possibility of
any conflict of interest due to the fact that the we recently commenced
discussions with York Capital Management ("York") regarding a possible
transaction between the parties. Messrs. Buckman and Wolf are employed by York
and were appointed to the Nascent's board of directors in connection with York's
investment in the Company,
On July 31, 2008 we entered into a settlement agreement with the Sellers of
Pasani and Eco-Pac to unwind the purchase agreement. During the remainder of
2008 we will receive payments for products we sold during the tern of the
purchase, as well as, refunds of loans we made to Pasani during the
relationship. We will receive approximately $1.1 million over the six months
commencing June 30, 2008.
24
On July 10, 2007, Nascent and Grupo Sur Promociones de Mexico, S.A. de C.V., a
Mexican corporation ("Grupo Sur"), entered into a Stock Purchase Agreement
whereby Nascent acquired Grupo Sur. As part of this transaction, Nascent agreed
to retain Grupo Sur's three former owners/ managers, all of whom executed
employment agreements with Nascent.
After the sale of Grupo Sur to Nascent closed, Nascent believed that Grupo Sur
began taking actions that were contrary to the Stock Purchase Agreement and the
employment agreements. Grupo Sur responded that Nascent's purchase of Grupo Sur
never closed and that Nascent failed to pay a portion of the purchase price due
to Grupo Sur under the Stock Purchase Agreement. Grupo Sur asserted that it was
terminating the Stock Purchase Agreement or, alternatively, repudiated the Stock
Purchase Agreement. Grupo Sur, in taking these positions, has withheld and
refused to refund monies that Nascent has paid to it without adequate
justification.
Discussions between Nascent's attorneys and attorneys for Grupo Sur have been
ongoing as the parties attempt to negotiate a mutually acceptable resolution.
Because Grupo Sur has refused to return monies that Nascent paid to it in
connection with the acquisition, Nascent filed a lawsuit on August 13, 2008
against Grupo Sur, Gregory Cowal Robbins, Francesca Wright De Cowal and Iliya
Petar Zogovic Wright in the United States District Court for the District of
Nevada seeking to recover damages for the following claims: breach of contract,
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty, unjust enrichment and conversion
On August 5, 2008, Nascent Wine Company, Inc. (the "Company") was granted an
extension until October 14, 2008 to pay in full loan (the "Cyril Loan") payable
to Cyril Capital, LLC ("Cyril") pursuant to a loan agreement (the "Loan
Agreement") in the principal amount of $500,000 plus interest, that was
originally due on August 14, 2008. Cyril agreed to such extension in exchange
for a fee in the amount of $20,000.
We are in discussions with several sources of financing including short and long
tern debt as well as equity. However, there can be no assurance that any equity
or debt financing will be available to us to satisfy either obligation. Our
short requirements are $1 million to pay the Cyril loan and working capital.
INFLATION/ENERGY
We believe that the recent significant increase in energy has had a negative
effect on our margins . We are able to pass on some of the increased commodity
costs in certain circumstances, however, for the most part we are absorbing
these increased commodity costs resulting from the energy costs. .
CONTACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at June and the
effects we expect such obligations to have on liquidity and cash flow in future
periods.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
------------------------------------------------------------------------------------------
TOTAL LESS THAN 2-3 3-5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS
Debt obligations (1) $ 2,499,209 $ 2,499,209 $ - $ - $ -
Operating leases $ 2,508,009 $ 788,003 $ 710,003 $ 650,003 $ 360,000
25
Item 3. QUANTITATIVE AND QUALITATIVES DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in foreign currency exchange
rates. We purchase some of our inventory offshore from suppliers who require
payment in Euros. Additionally, a certain amount of our domestic inventory
purchases are commodity priced and are subject to the volatility in pricing Our
Mexican subsidiaries purchase a portion of inventory from suppliers who require
payment in U.S. Dollars..
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 2007, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act.") pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. These
controls and procedures are designed to provide assurance that information
required to be disclosed 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's rules and forms and that such information is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, in a manner that is intended to allow
timely decisions regarding required disclosures.
As a result of this evaluation and recognizing the material weaknesses that we
identified in our Annual Report on Form 10-KSB for the year ended December 31,
2007. In making this determination, we took into account the remedial actions
that we are taking or planning to take with respect to these material
weaknesses.
In any case, based on a number of factors, including our performance of manual
procedures to provide assurance of the proper collection, evaluation and
disclosure of the information included in our consolidated financial statements,
management has concluded that the consolidated financial statements included in
this Quarterly Report on Form 10-Q fairly present, in all material respects, our
financial position, results of operations and cash flows for the periods
presented in conformity with GAAP and that they are free of material errors.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed under the supervision of our principal executive and principal
financial officers to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2007 based on the criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").
As a result of the material weaknesses described in our Annual Report on Form
10-K for the year ended December 31, 2007, we did not maintain effective
internal control over financial reporting based on the criteria established in
Internal Control-Integrated Framework issued by COSO.
26
Since we originally identified those material weaknesses in connection with the
preparation of our financial statements for the period ended December 31, 2007,
we have been working to identify and remedy the causes of the problems that led
to the existence of those material weaknesses, and we believe that:
o we identified the primary causes of and appropriate remedial
actions for these problems;
o we have, except as otherwise noted below and subject to the
completion of testing that we are conducting and plan to
complete as of December 31, 2008, remedied substantially all
of these material weaknesses; and
o we are continuing to implement additional appropriate
corrective measures to enable us to determine that those
material weaknesses have been fully remedied.
With respect to testing, we have adopted, and pursued during the fourth quarter
of 2007, a program that is designed to evaluate whether the remedial actions we
have taken have been in effect for a sufficient period of time to determine
their effectiveness as well as to test the effectiveness of those remedial
actions. Notwithstanding our efforts, there is a risk that we ultimately may be
unable to achieve the goal of fully remedying these material weaknesses and that
the corrective actions that we have implemented and are continuing to implement
may not fully remedy the material weaknesses that we have identified or prevent
similar or other control deficiencies or material weaknesses from having an
adverse impact on our business and results of operations or our ability to
timely make required SEC filings in the future.
The remedial actions that we have taken to remedy these material weaknesses may
be regarded as material changes in our internal control over financial reporting
that have occurred since December 31, 2007. Due, among other things, to the
difficulties that we experienced in preparing timely financial statements. Those
changes include the following:
1. For all periods ended on or after December 31, 2007, we adopted procedures to
conduct additional detailed transaction reviews and control activities to
confirm that our financial statements for each period present fairly, in all
material respects, our financial position, results of operations and cash flows
for the periods presented in conformity with GAAP.
2. These reviews and control activities include performing physical inventories
and detailed account reconciliations of all material line-item accounts
reflected on our Consolidated Balance Sheets and Consolidated Statements of
Operations in order to confirm the accuracy of, and to correct any material
inaccuracies in, those accounts as part of the preparation of our financial
statements.
3. For periods ended on or after December 31, 2007, with respect to our failure
to maintain a timely and accurate period-end financial statement closing process
and our failure to effectively monitor our accounting function and our oversight
of financial controls, we introduced new leadership to our accounting and
financial functions and in certain operating functions. This included appointing
a new Chief Financial Officer effective appointing a new controller and
appointing new subsidiary controllers.
4. For periods ended on or after December 31, 2007, we reaffirmed and clarified
our account reconciliation policies through additional procedural details and
guidelines for completion, which expressly require (a) reconciliations of all
material accounts no less frequently than monthly, (b) that any discrepancies
noted be resolved in a timely fashion and (c) that all proposed reconciliations
be reviewed in detail and on a timely basis by appropriate personnel to
determine the accuracy and appropriateness of the proposed reconciliation.
27
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time we are involved with legal proceedings, claims and litigation
arising in the ordinary course of business On July 10, 2007, Nascent and Grupo
Sur Promociones de Mexico, S.A. de C.V., a Mexican corporation ("Grupo Sur"),
entered into a Stock Purchase Agreement whereby Nascent acquired Grupo Sur. As
part of this transaction, Nascent agreed to retain Grupo Sur's three former
owners/ managers, all of whom executed employment agreements with Nascent.
After the sale of Grupo Sur to Nascent closed, Nascent believed that Grupo Sur
began taking actions that were contrary to the Stock Purchase Agreement and the
employment agreements. Grupo Sur responded that Nascent's purchase of Grupo Sur
never closed and that Nascent failed to pay a portion of the purchase price due
to Grupo Sur under the Stock Purchase Agreement. Grupo Sur asserted that it was
terminating the Stock Purchase Agreement or, alternatively, repudiated the Stock
Purchase Agreement. Grupo Sur, in taking these positions, has withheld and
refused to refund monies that Nascent has paid to it without adequate
justification.
Discussions between Nascent's attorneys and attorneys for Grupo Sur have been
ongoing as the parties attempt to negotiate a mutually acceptable resolution.
Because Grupo Sur has refused to return monies that Nascent paid to it in
connection with the acquisition, Nascent filed a lawsuit on August 13, 2008
against Grupo Sur, Gregory Cowal Robbins, Francesca Wright De Cowal and Iliya
Petar Zogovic Wright in the United States District Court for the District of
Nevada seeking to recover damages for the following claims: breach of contract,
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty, unjust enrichment and conversion.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors as previously
disclosed in our Annual Report on Form 10-KSB for the year ended December 31,
2007
Item 3. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company issued 324,431 of shares of Common Stock Par Value $0.001. 6,250 was
issued pursuant to penalty shares discussed elsewhere here in and 318,181 shares
of Common Stock Par Value $0.001 as payment for consulting fees.
Item 4. DEFAULTS ON SENIOR SECURITIES
NONE
Item 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Item 6. OTHER INFORMATION
NONE
Item 7.
(a) Exhibits
The following Exhibits are incorporated herein by reference or are filed with
this report as indicated below.
Exhibit No. Description
- ----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
28
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, hereunto duly authorized.
Nascent Wine Company, Inc.
Dated: August 14, 2008 By: /s/ Sandro Piancone
------------------------------
Sandro Piancone
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/ Sandro Piancone Chief Executive Officer Date: August 14,, 2008
- -------------------------- and Director
Sandro Piancone
/s/ Peter V. White Chief Financial Officer, Date: August 14, 2008
- -------------------------- Treasurer and Director
Peter V. White