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: September 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 November 10 2008, there were 87,552,190 shares of common stock
outstanding.
* Excludes filings on Form 8-K as provided in Rule 144(c)(1) under the
Securities Act of 1933, as amended.
NASCENT WINE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited Financial Statements 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk 30
Item 4T. Controls and Procedures 31
PART II - Other Information
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits 33
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, availability of future financing, and statements expressing general
views about future operating results -- are forward-looking statements.
Management believes that these forward-looking statements are reasonable as of
the time 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 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 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.
2
Item 1.
PART I - FINANCIAL INFORMATION
NASCENT WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 715,434 $ 961,243
Accounts receivable (net of allowance of $916,745 at
September 30, 2008 and $ 547,290 December 31, 2007) 2,609,464 3,878,522
Inventory (net of reserve of $78,770 at September 30, 2008 2,193,886 2,693,029
and 0 at December 31, 2007)
Prepaid and other current assets 1,380,201 694,145
Notes Receivable 1,544,066 4,726,545
Assets held for sale 3,522,243 15,559,121
------------ ------------
TOTAL CURRENT ASSETS 11,965,294 28,512,605
Property and equipment,net 708,713 736,635
Amortizable intangible assets, net 11,796,222 13,166,621
Goodwill 2,567,307 7,480,565
Other noncurrent assets 76,503 6,500
------------ ------------
TOTAL ASSETS $ 27,114,039 $ 49,902,926
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 49,036 $ --
Accounts payable 3,213,393 2,620,420
Accrued expenses 458,101 1,149,148
Accrued interest 195,203 279,351
Notes payable 1,661,588 73,133
Shareholder loans -- 8,000,000
Acquisition loans 862,500 630,000
Liabilities related to assets held for sale 2,470,841 4,142,782
------------ ------------
TOTAL CURRENT LIABILITIES 8,910,662 16,894,834
Contingencies and Commitments $ -- $ --
STOCKHOLDERS' EQUITY
Preferred stock, 5,000,000 authorized:
Series A convertible preferred stock, $.001 par value,
1,875,000 shares issued and outstanding at
September 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 September 30, 2008 and December 31, 2007 375 375
Common stock, $0.001 par value: 195,000,000 shares 87,362 84,426
authorized, 87,362,245 shares issued and outstanding
at September 30, 2008 and 84,425,538 at December 31, 2007,
respectively.
Additional paid-in capital 43,055,456 44,351,978
Accumulated other comprehensive income 44,671 32,447
Accumulated Deficit (24,986,362) (11,463,009)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,203,377 33,008,092
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,114,039 $ 49,902,926
============ ============
See accompanying notes to Consolidated Financial Statements
3
NASCENT WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
NET REVENUES $ 4,095,127 $ 2,105,813 $ 14,823,165 $ 8,049,385
COST OF REVENUE 3,188,857 1,931,008 13,109,618 6,810,224
------------ ------------ ------------ ------------
GROSS PROFIT 906,270 174,805 1,713,547 1,239,161
OPERATING EXPENSES
Distribution 609,808 109,596 1,532,636 409,615
Sales and Marketing 116,769 113,645 567,103 452,429
General and Administrative 1,135,806 458,879 3,505,580 3,188,596
Depreciation 37,258 15,058 107,923 42,017
Amortization 259,081 325,834 942,619 687,293
Intangible Impairments -- -- 5,341,036 --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,158,722 1,023,012 11,996,897 4,779,950
LOSS FROM OPERATIONS (1,252,452) (848,207) (10,283,350) (3,540,789)
OTHER INCOME (EXPENSE)
Interest Income 24,037 2,961 30,058 9,014
Interest Expense (122,526) (428,208) (450,326) (1,383,534)
Warrant Interest Recapture 442,068 (1,460,300) 1,326,204 (1,460,300)
Other income (expense),net (1,786,663) -- (1,624,577) --
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,443,084) (1,885,547) (718,641) (2,834,820)
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (2,695,536) (2,733,754) (11,001,991) (6,375,609)
PROVISION FOR INCOME TAXES 1,100 -- 1,100 --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,696,636) (2,733,754) (11,003,091) (6,375,609)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,624,916) 158,255 (2,520,261) (28,496)
------------ ------------ ------------ ------------
NET LOSS $ (6,321,552) $ (2,575,499) $(13,523,352) $ (6,404,105)
============ ============ ============ ============
BASIC EARNING PER SHARE
Continuing Operations $ (0.03) $ (0.08) $ (0.13) $ (0.10)
============ ============ ============ ============
Discontinued Operations $ (0.04) $ 0.00 $ (0.03) $ (0.00)
============ ============ ============ ============
Weighted-average Shares Outstanding 84,664,970 35,000,000 84,664,970 63,266,449
DILUTED EARNINGS PER SHARE
Continuing Operations $ (0.03) $ (0.08) $ (0.13) $ (0.10)
============ ============ ============ ============
Discontinued Operations $ (0.04) $ 0.00 $ (0.03) $ (0.00)
============ ============ ============ ============
Weighted-average Shares Outstanding 84,664,970 35,000,000 84,664,970 63,266,449
See accompanying notes to Consolidated Financial Statements
4
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 2,250,000 2,250 - - 15,142,027 - - - 15,144,277
stock for cash
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 $44,351,978 $ - $32,447 $(11,463,009) $ 33,008,092
Net loss (13,523,353) (13,523,353)
Warrant interest expense
(recapture) (1,326,204) (1,326,204)
Shares issued for service 318,181 318 29,682 30,000
Shares issued for penalty 6,250 6 306 312
Shares issued for penalty 2,612,276 2,612 (306) 2,306
Translation (loss) gain 12,224 12,224
Comprehensive loss -
-
---------- ------- ------------ -------- ----------- ----------- ------- ------------- -------------
Balance September 30, 2008 2,250,000 $2,250 87,362,245 $ 87,362 $43,055,456 $ - $44,671 $(24,986,362) $ 18,203,377
========== ======= ============ ======== =========== =========== ======= ============= =============
See accompanying notes to Consolidated Financial Statements
5
NASCENT WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
FOR THE NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, JUNE 30,
2008 2007
------------ ------------
Cash Flows from Operating Activities
Net loss $(11,766,854) (6,404,105)
Adjustment to reconcile net loss to net cash provided by operations:
Depreciation 137,153 158,912
Amortization 807,649 1,252,294
Allowance for doubtful accounts 370,556 --
Allowance for inventory obsolescence 78,770 --
Allowance for uncollectible note receivable 1,300,000 --
Allowance for investment in AIP 2,707,959 --
Gain on sale of Palermo (1,548,940) --
Gain on exchange rate (344,151) --
Loss on sale of Pasani 3,165,921 --
Loss on sale of Eco 1,520,623 --
Shared-based compensation 30,000 129,000
Recapture of interest on warrants (1,326,204) 2,245,736
Impairment of amortizable intangibles 4,206,498 --
Impairment of management fees (intercompany A/R) 996,300 --
Impairment of goodwill 4,913,258 --
Impairment of accrued interest on acquisition loans (310,855) --
Impairment of acquisition loans (8,000,000) --
Changes in assets and liabilities, net of discontinued operations:
(Increase)/decrease in accounts receivable 503,146 (10,234,684)
(Increase)/decrease in notes receivable (394,212) --
(Increase)/decrease in inventory 420,373 (4,054,339)
(Increase)/decrease in prepaids and other assets (686,056) (1,321,387)
(Increase)/decrease in other noncurrent assets (70,003) --
Increase/(decrease) in accounts payable 1,591,873 (1,628,283)
Increase/(decrease) in accrued expense (691,047) (1,236,745)
Increase/(decrease) in accrued interest 226,707 116,423
------------ ------------
Net cash used in continuing operations (2,161,536) (20,977,178)
Net cash used in discontinued operations (378,758) 13,375,939
------------ ------------
Net cash used in operating activities (2,540,294) (7,601,239)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchased fixed assets (83,566) (1,279,740)
Acquisition of Licensed Marks -- (400,000)
Proceeds from sale of Eco Pak 70,000 --
Acquisition of Pasani/Eco Pak and Grupo, net of cash acquired -- (1,145,397)
Other investment
------------ ------------
Net cash used in continuing operations (13,566) (4,738,485)
Net cash used in discontinued operations 221,265 1,899,246
------------ ------------
Net cash used in investing activities 207,699 (2,839,239)
CASH FLOWS FROM FINANCING ACTIVITIES
Line of credit, net 49,036 --
Bridge Loan -- (2,217,500)
Shareholder loan advance 232,500 93,265
Shareholder loan payment -- (2,188,794)
Proceeds - bank loans 1,610,917 330,044
Payments - bank loans (22,462) (218,852)
Proceeds from the sale of Preferred Stock -- 7,343,305
Proceeds from the sale of Common Stock -- 8,459,183
Capital leases -- (17,931)
------------ ------------
Net cash used in continuing operations 1,869,991 11,582,720
Net cash used in discontinued operations -- 344,008
------------ ------------
Net cash used in financing activities 1,869,991 11,926,728
EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,224 (56,890)
------------ ------------
NET DECREASE IN CASH (450,380) 1,429,360
CASH--BEGINNING OF PERIOD (INCLUDING $204,571 REPORTED
UNDER ASSETS HELD FOR SALE AT DECEMBER 31, 2007) 1,165,814 476,376
------------ ------------
CASH - ENDING OF PERIOD $ 715,434 $ 1,905,736
============ ============
6
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 $ -- $ 1,171,872
============ ============
Issuance of common stock for services $ 30,000 $ --
============ ============
Warrants issued and attached to debt $ -- $ --
============ ============
Warrant issued for interest (recapture) $ (1,326,204) $ --
============ ============
Impairment of acquisition notes payable $ (8,000,000) $ --
============ ============
Receipt of stock in lieu of cash payment for note receivable $ 2,707,959 $ --
============ ============
Interest paid $ 223,620 $ --
============ ============
Promissory note for sale of Palermo $ 1,000,000 $ --
============ ============
AIP payment of promissory note by assuming certain liabilities $ 162,432 $ --
============ ============
Income taxes paid $ 1,100 $ 810
============ ============
Acquisition loans issued for the purchase of Pasani $ -- $ 4,000,000
============ ============
Fixed assets purchased through capital leases $ -- $ 793,273
============ ============
See accompanying notes to Consolidated Financial Statements
7
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, when the Company purchased the license to distribute Miller Beer in Baja
California, from Piancone Group International, Inc. (PGII).
In October 2006, the Company purchased the assets and assumed the liabilities of
PGII, and in November 2006, the Company purchased the outstanding common stock
of Palermo Italian Foods, LLC. (Palermo). In June 2008, the Company sold Palermo
to AIP, Inc., a company founded by Victor Petrone, formerly the President and a
Director of the Company on May 11, 2007, the Company acquired Pasani S.A de C.V.
(Pasani) and Eco Pac Distributing, LLC (Eco)which are distribution companies
based in Mexico City and San Antonio. On July 31, 2008, the Company entered into
a settlement with the former owners of those companies to transfer such
companies back to them (see Note 10 below). 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).
In May 2008, the Company announced its decision to evaluate strategic options
for Pasani, Eco and Grupo Sur. 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 Sheets at September
30, 2008 and December 31, 2007, and the assets and liabilities relating to
Palermo have been reclassified as held for sale in the Consolidated Balance
Sheet at December 31, 2007.
The results of operations of Palermo, Pasani, Eco and Grupo Sur for the
respective periods of ownership for the three and nine months ended September,
30, 2008 and 2007, have been reported as discontinued operations.
NOTE 2 - GOING CONCERN
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2008, the Company
had cash of $715,000 and working capital of $4,811,000. The Company had net
losses from continuing operations of $2,697,000 and $11,004,000 for the three
and nine months ended September 30, 2008, and $2,734,000 and $6,676,000 for the
three and nine months ended September 30, 2007, respectively.
The Company is currently in discussions with several lending institutions for a
working capital credit facility and additional financing. Management believes
that the existing working capital resources and cash forecasted by management to
be generated by operations, together with planned short-term and long-term
borrowings, lines of credit and/or capital raised through the sale of equity or
equity-based securities will be sufficient to fund operations through at least
the next twelve months. However, there is no assurance that external funding
will be available on terms and conditions acceptable to the Company, or at all,
or that we will be successful with our operating plans. If events and
circumstances occur such that the Company does not meet its current operating
plans and raise sufficient external financing, the Company may be required to
further reduce expenses or take other steps which could have a material adverse
effect on its future performance, including but not limited to, the premature
sale of some or all of its assets or product lines on undesirable terms, merger
with or acquisition by another company on unsatisfactory terms, or the cessation
of operations.
8
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") and International Food Services, Inc. "IFS" for the three and nine months
ended September 30, 2008 and 2007, and Targa for the three and nine months ended
September 30, 2008. The accompanying consolidated balance sheets include the net
assets of Grupo Sur as assets held for sale at September 30 2008, and the net
assets of Grupo Sur as assets held for sale at December 31, 2007. The results of
operations of Palermo, Pasani, Eco and Grupo Sur are disclosed as discontinued
operations for the three and nine months ended September 30, 2008 and for the
respective periods since acquisition for the three and nine months ended
September 30, 2007.
All significant inter-company transactions and balances have been eliminated in
consolidation.
Basis of Preparation
- --------------------
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 periods, 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. The financial statements have been prepared
assuming that the Company will continue as a going concern. See Note 2 above.
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. The Company applies the provisions of
SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" for the
sale of products. SAB No. 104, which supersedes SAB No. 101, "Revenue
Recognition in Financial Statements", provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 104
outlines the basic criteria that must be met to recognize revenue and provides
guidance for the disclosure of revenue recognition policies. In general, the
Company recognizes revenue related to product sales when (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable, and (iv) collectibility is reasonably assured.
9
Accounts Receivable
- -------------------
The Company has reviewed the outstanding trade accounts receivable and has
provided a reserve for slow paying accounts of approximately $916,745 at
September 30, 2008 and $547,290 at December 31, 2007. The Company has obtained
an insurance policy with AIG which insure its trade receivables losses incurred
from customer non-payment 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 provided a reserve
for slow moving inventory of $78,790 for the nine months ended September 30,
2008 and zero at December 31, 2007.
Property 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.
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. The Company reflects 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 is also 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 Statement of
Financial Accounting Standards (SFAS) No. 144 " Accounting For The Impairment or
Disposal of Long-Lived Assets".
The Company acquired certain 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 September 30, 2008 and whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company completed the sale of Palermo as of
June 30, 2008. Additionally, on July 31, 2008, the Company entered into a
Settlement Agreement with the former owners of Pasani and Eco Pak terminating
the Purchase Agreement. The Company has classified Grupo Sur as discontinued
operations and accordingly the net assets have been classified as held for sale.
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 dilutive common shares
outstanding during the period.
10
Preferred stock and warrants (described in Note 8 below) to purchase shares of
common Stock, which represented 63 million potential common shares for the three
and nine months ended September 30, 2008 and 25 million potential common shares
for the three and nine months ended September 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 potential
dilutive common shares. Potential dilutive common shares include stock options,
warrants and preferred stock which is convertible into common stock.
Income Taxes
- ------------
The Company follows SFAS 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 $0 and $91,100 for the three and nine months ended September 30,
2008, respectively. For the three and nine months ended September 30, 2007,
advertising expense was $51,800 and $ 211,900, respectively.
Foreign Currency Translation
- -----------------------------
Our functional currency is the U.S. dollar. The functional currency of our
foreign operations, generally, is the respective local currency for each foreign
subsidiary. Assets and liabilities of foreign operations denominated in local
currencies are translated at the spot rate in effect at the applicable reporting
date. Our consolidated statements of operations are translated at the weighted
average rate of exchange during the applicable period. The resulting unrealized
cumulative translation adjustment, net of applicable income taxes, is recorded
as a component of accumulated other comprehensive income (loss) in stockholders'
equity. Realized and unrealized transaction gains and losses generated by
transactions denominated in a currency different from the functional currency of
the applicable entity are recorded in other income (loss) in the period in which
they occur.
11
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
Recent Accounting Pronouncements
- --------------------------------
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No.
161, "Disclosures About Derivative Instruments And Hedging Activities - An
Amendment Of FASB Statement No. 133," which changed the disclosure requirements
for derivative instruments and hedging activities. Entities are now 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. Management does not believe that the adoption of this
Staff Position will have a material effect on the Company's historical or future
reported earnings (loss) per share.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2008
and December 31, 2007:
September 30, December 31,
2008 2007
--------------------------------
Distribution equipment $ 611,137 $ 734,458
Office furniture and equipment 177,333 39,902
Computer 71,859 15,823
Autos and trucks 208,291 204,415
Leasehold improvements 107,947 98,404
--------------------------------
Totals $1,176,567 1,093,002
Accumulated depreciation $ (467,854) (356,367)
--------------------------------
Property and equipment, net $ 708,713 $ 736,635
================================
12
Depreciation expense for the three and nine months ended September 30, 2008 was
$37,258 and $107,923, respectively, and $15,058 and $42,017 for the three and
nine months ended September 30, 2007, respectively.
Assets held for sale include $370,632 of property and equipment related to Grupo
Sur (discontinued operations) and $341,547 of accumulated depreciation.
Depreciation expense for the three and nine months ended September 30, 2008 are
included in net income (loss) from discontinued operations.
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
In 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 were reclassified as held for sale and the
results of operations of these subsidiaries were reclassified as discontinued
operations. In conjunction with these reclassifications, the Company performed
an impairment analysis of the intangible assets and goodwill of these
subsidiaries and determined that the carrying amounts of these assets were not
recoverable and should be impaired. The Company recorded an impairment charge of
$8,453,445 in the second quarter of 2008.
In accordance with SFAS No. 144, the Company also performed an impairment
analysis of the intangible assets and goodwill of PGII in June 2008, and
determined that the carrying amounts of intangible assets and goodwill were not
recoverable and should be impaired. The Company recorded an impairment charge of
$5,341,036 in the second quarter of 2008 related to these assets, consisting of
$500,000 of intangible assets and $4,913,258 of goodwill.
As of September 30, 2008 As of December 31, 2007
--------------------------------------------------------------------
Gross Carrying Accum. Gross Carrying Accum.
Amount Amortization Amount Amortization
--------------------------------------------------------------------
Intangibles subject to amortization:
Miller Beer Distribution Licenses $ 8,675,000 $ (2,083,129) $ 8,675,000 $ (1,432,503)
Client lists - - 500,000 (16,666)
--------------------------------------------------------------------
Total for Nascent 8,675,000 (2,083,129) 9,175,000 (1,449,169)
Customer relations 290,000 (46,399) 290,000 (6,042)
Trademarks 5,300,000 (398,750) 5,300,000 (210,834)
Non-Compete Agreement 70,000 (10,500) 70,000 (2,334)
--------------------------------------------------------------------
Total for Targa $ 5,660,000 $ (455,649) $ 5,660,000 $ (219,210)
--------------------------------------------------------------------
$14,335,000 $ (2,538,778) $14,835,000 $ (1,668,379)
====================================================================
------------------- -----------------
Intangibles subject to amortization, net $11,796,222 $13,166,621
=================== =================
Aggregate amortization expense:
For the three months ending September 30, 2008 $ 259,081
For the three months ending September 30, 2007 $ 325,834
For the nine months ending September 30, 2008 $ 943,000
For the nine months ending September 30, 2007 $ 687,000
Estimated amortization expense for the years ended:
- ---------------------------------------------------
December 31, 2009 $ 1,182,758
December 31, 2010 $ 1,182,758
December 31, 2011 $ 1,182,758
December 31, 2012 $ 1,182,758
December 31, 2013 $ 1,182,758
Impairment of Intangibles as of September 30, 2008
- ----------------------------------------------------------------------------------------------------------
Impairment Accumulated Net
of Intangibles Amortization Intangibles
-----------------------------------------------------
PGII - Client List $ 500,000 $ 72,222 $ 427,778
Grupo Sur 1,950,000 128,840 1,821,160
Pasani 2,340,000 300,122 2,039,878
Eco Pak - - -
-----------------------------------------------------
Total $ 4,290,000 $ 428,962 $ 3,861,038
13
Goodwill:
The changes in the carrying amounts of goodwill for the nine months ended are as
follows:
Nascent Targa Grupo Sur Pasani Eco Palermo
-------------------------------------------------------------------------------------
Balance as of January 1, 2008 $ 4,913,258 $ 2,567,307 $ 1,756,498 $ 2,187,233 $ 219,714 $ 2,522,958
Goodwill impairment - PGII (4,913,258) - - - - -
Goodwill Included in gain on sale of Palermo - - - - - (2,522,958)
Goodwill included in loss on sale of Pasani (2,187,233)
Goodwill included in loss on sale of Eco (219,714)
Goodwill impairment - - (1,756,498) -
-------------------------------------------------------------------------------------
Balance as of September 30, 2008 $ - $ 2,567,307 $ - $ - $ - $ -
=====================================================================================
NOTE 6 - NOTES PAYABLE
The Company had the following loans outstanding at September 30, 2008:
Interest
Bank Rate Due Dates Amount
- --------------------------------------------------------------------
Genesis 14% March 31,2009 $ 1,000,000
Cyril Capital, LLC 8% December 14, 2008 500,000
City National Bank 9% December 31, 2008 16,000
NetBank 15% December 15, 2008 31,084
Pentech 18% December 1, 2008 34,504
Steven Kownacki 2.5%/month December 1, 2008 80,000
----------------
$ 1,661,588
================
On March 31, 2008, the Company sold a $1,000,000 Senior Secured Promissory Note
(the "Note") to Genesis Merchant Partners, LP, a Delaware limited partnership
("Genesis"). Interest accrues on the amount of the Note at a rate of 14% per
annum and is payable monthly to Genesis. The Note is secured by all assets of
the Company, and had an original maturity date of September 30, 2008. The
Company elected to extend the term of the loan to March 31, 2009 for a fee of
$20,000. On November 3, 2008, in connection with the extension of the Note, the
Company entered into a Collateral Assignment of Contracts agreement (the
"Assignment"). Pursuant to the Assignment, the Company assigned to Genesis, as
additional security for the obligations under the Note, the Company's rights to
receive payments under (i) the promissory note in the amount of $1,000,000 made
by AIP, Inc., and (ii) the settlement agreement with Pasani.
14
On February 13, 2008, the Company entered into a loan agreement with Cyril
Capital, LLC ("Cyril") in which Cyril lent the Company $500,000. The loan was
due and payable on August 14, 2008. The primary security for the loan was the
Company's inventory and accounts receivable. The secondary security was the
personal guarantee of Sandro Piancone, the Company's Chief Executive Officer. In
the event that the loan, including interest at 8% per annum, was not repaid on
August 14, 2008, a penalty of 10% would apply. However, the Company opted to
extend the term of the loan by 60 days to October 14, 2008 for a fee of $20,000.
On October 14, 2008, the Company extended the term of the loan again by 60 days
for a fee of $20,000. During the extension period, the loan is not in default
and the penalty will not apply. Interest at the base rate of 8% per annum will
continue to accrue.
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. See Note 8 below. These loans were paid at
December 31, 2007.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
The Company is authorized to issue 195,000,000 shares of common stock. During
the three and nine months ended September 30, 2007, the Company issued 925,160
and 31,591,707 shares of common stock, respectively. 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 stockholders in the
amount of $1,268,902. The Company issued 77,170 shares of common stock to
purchase a truck valued at $30,868 and 244,900 shares of common stock valued at
$120,000 as a finder's fee for the Targa acquisition and 250,000 shares of
common stock valued at $115,000 as a finder's fee for the York preferred stock
transaction. 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 September 30, 2008, the Company had outstanding warrants, not including the
York Warrants (see below), to purchase 18,120,476 shares of common stock at
prices 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 shares of common stock valued at
$30,000 for services rendered.
Liquidated Damages
- ------------------
Under the terms an agreement with [Brookstreet Securities Corporation the
Company's private placement agent]which was sold during June 2007 the Company
was required to file a registration statement to register the shares. According
to the agreement, the registration statement had to be filed within 60 days
following the closing of the private placement. Following the 60 day period, the
Company became subject to a weekly payment equal to 1% of the shares purchased,
up to a maximum payment of 10% of the shares purchased, as liquidated damages
for failure to timely file the registration statement. The Company filed a
registration statement on Form SB-2 to register the purchased shares on November
14, 2007, and the delay in filing the registration statement resulted in the
Company becoming subject to the maximum penalty of 10% of the purchased shares
as liquidated damages. The SB-2 registration statement has since been withdrawn.
In 2007, the Company recorded an accrued cost of issuance of these liquidated
damages shares in the amount of $564,950. The Company discharged its obligation
to pay liquidated damages under the private placement agreement by issuing
approximately 6,250 shares of Common Stock in June and approximately 2,612,276
shares of Common Stock in August and September of 2008.
15
Preferred Stock
- ---------------
The Company is authorized to issue 5,000,000 shares of preferred stock. On July
3, 2007, the Company issued 1,000,000 shares of its Series A Convertible
Preferred Stock for $8.00 per share to an affiliate, York Capital Management
(York). The Series A Convertible Preferred Stock is convertible into 20,000,000
shares of common stock, based upon a conversion price of $0.40 per share and has
a liquidation preference of $8.00 per share. The holders of the Series A
Convertible Preferred Stock are entitled to receive a cumulative quarterly
dividend at a rate of 15% of the stated liquidation preference amount per annum
in preference to any distributions on common stock. The dividends are payable in
additional shares of Series A and Series B Convertible Preferred Stock.
In addition, the Company issued the following warrants to purchase:
Series A-1 500,000 shares of Series A Convertible Preferred stock at $8.00 per
share, immediately exercisable and expiring on July 3, 2010. These
warrant were exercised on October 22, 2007.
Series A-2 375,000 shares of Series A Convertible Preferred stock at $8.00 per
share, immediately exercisable and expiring on July 3, 2014.
These warrants were exercised on October 22 2007.
Series B:375,000 shares of Series B Convertible Preferred Stock, exercisable
into shares of Series B Convertible Preferred Stock at an exercise price equal
to 33% of the volume weighted average closing price of the Company's common
stock for the 30 days prior to exercise, immediately exercisable and expiring on
July 3, 2014. These warrants were exercised on November 2, 2007.
These warrants were exercised during the third quarter of 2007 for a total
exercise price of $8,334,000
Warrants:
At September 30, 2008, the common share purchase warrants outstanding were as
follows:
WEIGHTED AVERAGE
NUMBER OF WARRANTS EXERCISE PRICE
-----------------------------------
Outstanding at December 31, 2007 19,870,476 $ 0.40
===================================
Granted - -
Forfeited - -
Exercised - -
-----------------------------------
Outstanding at September 30, 2008 19,870,476 $ 0.40
===================================
EXPIRY EXERCISE PRICE NUMBER OF WARRANTS
- --------------------------------------------------------------------------------
December 31, 2010 $ .25 4,200,000
December 31, 2010 $ .40 13,200,000
December 31, 2010 $ .52 400,000
December 31, 2010 $ .65 1,480,000
December 31, 2010 $ .84 400,000
December 31, 2010 $ 1.05 190,476
--------------
19,870,476
==============
The fair value of the share purchase warrants for the period ended
September 30, 2008, was in the amount of $0, which was determined using the
Black-Scholes option value model with the following assumptions:
Expected Dividend Yield 0.00%
Risk Free Interest Rate 3.00%
Expected Volatility 66.00%
Expected Option Life (in years average) 2.21
16
In October and November 2007, York exercised its warrants acquiring 1,250,000
shares of Series A and Series B Convertible Preferred Stock in the amount of
$8,333,624 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 a
warrant to purchase 1,600,000 common shares, until July 3, 2010, at a purchase
price of $0.40 per share.
NOTE 9 - ACQUISITION OF 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. Targa is a cheese processor and
distributor of imported cheeses into Mexico. Its office and distribution center
is located in Tijuana, Mexico. The Company paid $3,550,000 at the closing to the
former Targa shareholders and fees of $200,000. The Company also deposited
$250,000 in an escrow account, which has subsequently been released to the
former Targa shareholders.
The $4,000,000 purchase price was allocated as follows:
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
On July 10, 2007, pursuant to a Stock Purchase Agreement, the Company acquired
Grupo Sur, an in store merchandising company. Subsequent to the closing of such
acquisition, Nascent believed that Grupo Sur began taking actions that were
contrary to the Stock Purchase Agreement and related employment agreements. Our
attorneys are pursuing through available channels the return of $1.3million of
loans See Note 15 below. As a result of these disputes, in June 2008, the
Company determined to reclassify the Grupo Sur assets and related liabilities as
assets and related liabilities held for sale, and the operations of Grupo Sur as
discontinued operations, and recognized in the quarter ended June 30, 2008 an
impairment loss on certain intangible assets and goodwill. See Note 5 above.
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 ("Eco"). 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 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 principal of the
Note has 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 (for inventory sold) within 180 days of the
Settlement Date. In addition, Pasani was obligated to pay Nascent on or before
September 30, 2008, $92,259.13 for products delivered to Pasani during July
2008. the Company determined in June2008 to reclassify the Pasani and Eco assets
and related liabilities as assets and related liabilities held for sale, and the
operations of Pasani and Eco as discontinued operations, and recognized in the
quarter ended September 30, 2008 an impairment loss on certain intangible assets
and goodwill. See Note 5 above.
17
On June 30 , 2008, the Company sold all of the outstanding capital stock of
Palermo to AIP, Inc., a company founded by the Company's former President who
was also a Director. The consideration consisted of AIP's assumption of an
accounts payable note not to exceed $800,000 and a secured bank loan in the
aggregate principal of $249.999.00, a note in favor of the Company in the amount
of $1,000,000.00 due and payable on June 30, 2009, and fifteen percent (15%) of
the outstanding equity of AIP. The value of the equity interest in AIP is fully
reserved against at September 30, 2008. As a result of the sale of Palermo, the
assets and related liabilities of Palermo were reclassified as held for sale at
December 31, 2007, and the operations of Palermo are reported as discontinued
operations for the three and nine months ended September 30, 2007 and the nine
months ended September 30, 2008.
The revenues and income (loss) from operations from discontinued operations for
the three and nine months ended September 30, 2008 and 2007 are as follows:
Three Months Ended Nine Months Ended
----------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
----------------------------- --------------------------
Revenues - Palermo $ - $ 3,243,175 $ 3,394,000 $ 8,769,430
Revenues - Pasani - 1,106,941 3,461,000 2,562,792
Revenues - Eco - - - -
Revenues - Grupo sur 6,034,132 5,696,000 6,034,132
----------------------------- --------------------------
$ - $ 10,384,248 $ 12,551,000 $17,366,354
Income (loss) from operations of discontinued operations- Palermo - (619,158) (871,485) (861,549)
Income (loss) from operations of discontinued Operations -Pasani (a) 2,143,632 165,572 (d) (1,903,205) 221,212
Income (loss) from operations of discontinued Operations -Eco (b) 219,714 - (e) 338,814 -
Income (loss) from operations of discontinued Operations -Grupo (c) (1,301,718) 611,841 (f) (2,961,336) 611,841
Impairment of Acquisition note - Eco/Pasani 3,500,000
Impairment of Acquisition note - Grupo 4,500,000
Impairment of notes receivable - Grupo and other i/c receivables (1,985,445)
----------------------------- --------------------------
$ 1,061,628 $ 158,255 $ 617,343 $ (28,496)
(a) Reversal of Goodwill Impairment $ 2,187,233
Write off of other comprehensive income (differences in exchange rate) (43,601)
------------
$ 2,143,632
(b) Includes reversal of Goodwill Impairment $ 219,714
(c) Reversal of write off of notes payable to Nascent $(1,300,000)
Write off of other comprehensive income (differences in exchange rate) (1,718)
------------
$(1,301,718)
(d) Includes impairment of intangibles $(2,039,878)
(e) Includes impairment of intangibles -
(f) Impairment of intangibles $(1,821,160)
18
Assets and related liabilities held for sale at September 30, 2008 consisted of
the following:
GRUPO SUR
----------
Cash $ 106,840
Accounts receivable 2,673,534
Inventory
Prepaid and other current assets 371,237
Property, plant and equipment, net 370,632
Investment in AIP
Amortizable intangibles assets, net
Goodwill
Other noncurrent assets
Cancellation of acquisition note
----------
Assets held for sale $3,522,243
==========
Accounts payable $ 528,694
Accrued expenses 642,147
Accrued interest
Line of credit
Notes payable 1,300,000
Shareholder loans
----------
Liabilities related to assets held for sale $2,470,841
==========
NET ASSETS $1,051,402
==========
The Company is planning to finalize the disposition of Grupo Sur's net assets.
However, there can be no assurance that the disposition of these net assets will
result in a gain for the Company.
The following table shows the effect of reclassifying Grupo Sur, Pasani and Eco
as discontinued operations for the three and nine months ended September 30,
2007:
PRO FORMA FOR
As Reported Discontinued Operations FOR THE THREE
-------------------------------------------- MONTHS ENDED
Palermo Pasani Grupo Sur SEPTEMBER 30, 2007
------------ ------------ ------------ ------------ ------------
REVENUE $ 12,490,061 (3,243,175) (1,106,941) (6,034,132) $ 2,105,813
GROSS PROFIT 2,158,905 (61,765) (820,401) (1,101,934) 174,805
INCOME (LOSS) FROM OPERATIONS (651,273) 583,037 (170,120) (609,851) (848,207)
OTHER INCOME (EXPENSE) (1,924,226) 36,121 4,548 (1,990) (1,885,547)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - (619,158) 165,572 611,841 158,255
------------ ------------ ------------ ------------ ------------
NET GAIN (LOSS) $ (2,575,499) $ 619,158 $ (165,572) $ (611,841) $ (2,575,499)
============ ============ ============ ============ ============
PRO FORMA FOR
As Reported Discontinued Operations FOR THE NINE
-------------------------------------------- MONTHS ENDED
Palermo Pasani Grupo Sur SEPTEMBER 30, 2007
------------ ------------ ------------ ------------ ------------
REVENUE $ 25,415,739 (8,769,430) (2,562,792) (6,034,132) 8,049,385
GROSS PROFIT 4,341,716 (927,816) (1,072,805) (1,101,934) 1,239,161
INCOME (LOSS) FROM OPERATIONS (3,506,867) 805,704 (229,775) (609,851) (3,540,789)
OTHER INCOME (EXPENSE) (2,898,238) 56,845 8,563 (1,990) (2,834,820)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (861,549) 221,212 611,841 (28,496)
------------ ------------ ------------ ------------ ------------
NET GAIN (LOSS) $ (6,405,105) $ 862,549 $ (221,212) $ (611,841) (6,404,105)
============ ============ ============ ============ ============
19
NOTE 11 - SALE OF CERTAIN SUBSIDIARIES
As discussed in Note 10 above, effective, June 30, 2008, the Company sold
Palermo to a company founded by the Company's former President who was also a
Director. 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 109,000
----------
Gain on Sale of Palermo $1,549,000
On November 3, 2008 , the Company assigned the rights to receive the $1,000,000
proceeds from the Palermo note to Genesis capital as collateral for Genesis
extending the due date of the note payable (see Note 8 above). As discussed in
Note 10 above, the Company entered into a settlement agreement with the former
owners of Pasani and Eco whereby the Pasani Common Stock was returned to such
owners. The following table summarizes the calculation of the additional gain on
the sale of Pasani and Eco recorded in the third quarter of 2008:
Consideration:
Cash $ 70,000
-----------
Total Consideration 70,000
Net Assets sold (1,591,000)
-----------
Loss on Sale of Eco $ 1,521,000
ECO:
Consideration:
Cash $ --
-----------
Total Consideration --
Net Assets sold (3,166,000)
-----------
Loss on Sale of Pasani $ 3,166,000
NOTE 12 - SEGMENT INFORMATION
The Company operates in one reportable business segment. The Company conducts
its business through its subsidiaries in Mexico. The Company discloses
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 September 30, 2008 $(4,725,019) $ (301,894)
Net income (loss) for the nine months ended September 30, 2008 $(8,457,015) $(2,105,001)
Net income (loss) for the three months ended September 30, 2007 $(2,440,908) $ (291,747)
Net income (loss) for the nine months ended September 30, 2007 $(5,568,191) $ (807,418)
Long lived assets (net) at September 30, 2008 $ 88,094 $ 620,618
Long lived assets (net) at September 30, 2007 $ 70,589 $ 341,494
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has unsecured loans from stockholders totaling $862,500 at September
30, 2008. The loans have various due dates and contain interest rates ranging
from 10% to 18%. All loans are due on demand.
In July 2008, the Company through its subsidiary Best Beer Distributing SA DA CV
( Best Beer), started importing and providing certain products to Deli Express
S.A., ("Deli"), a Cafe company with locations in Mexico. The Director General of
Best Beer is an equity partner in the Deli and the father of the CEO. As of
September 30, 2008 there was approximately $63,000 due to the company of which
approximately $20,000 was past due.
See Notes 10 and 11 regarding the sale of Palermo to the Company's former
President who was also a Director.
20
NOTE 14 FOREIGN EXCHANGE
The total impact of foreign currency items on the Consolidated Statements of
Operations for the nine and three months ended September 30, 2008 were gains of
approximately $324,000 and $249,364, respectively.
NOTE 15 -COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company maintains its corporate offices including warehouse space in San
Diego, California. 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 leased trucks.
The total rent paid on real and personal property operating leases was
approximately $572,000 and $307,000 for the nine months ended September 30, 2008
and September 30, 2007 respectively. Future payments on the operating leases are
as follows:
2009 $ 788,002
2010 $ 710,003
2011 $ 650,003
2012 $ 360,000
--------------
$ 2,508,008
==============
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, are entitled to receive a cumulative quarterly dividend at a rate of
fifteen percent of the stated liquidation preference amount per annum in
preference to any distributions on common stock. 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.
Liquidated Damages
- ------------------
Under the terms of a Private Placement with Brook street Capital as the
Placement Agent dated June 2007], the Company was required to file a
registration statement to register the shares. According to the agreement, the
registration statement had to be filed within 60 days following the closing of
the private placement. Following the 60 day period, the Company became subject
to a weekly payment shares? equal to 1% of the shares purchased, up to a maximum
payment of 10% of the shares purchased, as liquidated damages for failure to
timely file the registration statement. The Company filed a registration
statement on Form SB-2 to register the purchased shares on November 14, 2007,
and the delay in filing the registration statement resulted in the Company
becoming subject to the maximum penalty of 10% of the purchased shares as
liquidated damages. The SB-2 registration statement has since been withdrawn. In
2007, the Company recorded an accrued cost of issuance of these liquidated
damages shares in the amount of $564,950. The Company discharged its obligation
to pay liquidated damages under the private placement agreement by issuing
approximately 6,250 shares of Common Stock in June and approximately 2,612,276
shares of Common Stock in August and September of 2008.
Concentration of Sales
- ----------------------
For the three and nine months ended September 30, 2008, no individual customer
represented 10% or more of net revenues.
21
LEGAL PROCEEDING
Grupo Sur Litigation
- --------------------
On July 10, 2007, the Company entered into a Stock Purchase Agreement for the
acquisition of Grupo Sur. As part of this transaction, the Company agreed to
retain Grupo Sur's three former owners/managers (the "Employees"), all of whom
executed employment agreements with the Company.
After the purchase of Grupo Sur closed, the Company determined that the
Employees were in breach of the Stock Purchase Agreement and their employment
agreements. The Employees responded that the Company's purchase of Grupo Sur
never closed and that the Company failed to pay a portion of the purchase price
due under the Stock Purchase Agreement. The Employees asserted that they were
terminating the Stock Purchase Agreement or, alternatively, repudiating the
Stock Purchase Agreement. The Employees, have withheld and refused to refund
monies that the Company has paid.
The Company filed a lawsuit on August 13, 2008, against the Employees, 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: breach of contract, breach of the implied covenant of good faith
and fair dealing, breach of fiduciary duty, and unjust enrichment and
conversion. The complaint has not yet been served, and the parties continue to
discuss resolution.
In addition, from time to time, the Company is involved with legal proceedings,
claims and litigation arising in the ordinary course of business.
NOTE 16 - SUBSEQUENT EVENTS
On November 3, 2008, the Company entered into a Collateral Assignment of
Contracts agreement with Genesis, modifying the terms of the original agreement.
See Note 15 above.
On October 14, 2008, the Company extended the term of a loan with Cyril. See
Note 15 above.
22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and analysis provides information, which our management
believes is relevant to an assessment and understanding of our financial
condition and results of operations. The discussion should be read in
conjunction with the Consolidated Financial Statements contained herein and the
notes thereto. Certain statements contained in this Form 10-Q, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", "projections", and words of similar import are forward
looking as that term is defined by: (i) the Private Securities Litigation Reform
Act of 1995 (the "1995 Act") and (ii) releases issued by the Securities and
Exchange Commission ("SEC"). These statements are being made pursuant to the
provisions of the 1995 Act and with the intention of obtaining the benefits of
the "Safe Harbor" provisions of the 1995 Act. We caution that any forward
looking statements made herein are not guarantees of future performance and that
actual results may differ materially from those in such forward looking
statements as a result of various factors, including, but not limited to, any
risks detailed herein or detailed from time to time in our other filings with
the SEC including our most recent report on Form 10-K. We are not undertaking
any obligation to update publicly any forward-looking statements. Readers should
not place undue reliance on these forward-looking statements.
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 Annual Report on Form 10-KSB for the year
ended December 31, 2007.
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.
Our Company 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 2,300 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.
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 seeking to
acquire 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. According to U.S
Department of Agriculture, the foodservice industry in Mexico is a $46 billion
industry and is fragmented. 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 range between 10-15%.
23
RECENT EVENTS
Our sales for the nine months ended September 30, 2008 have increased by 46%
from the prior year period. 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, we signed an agreement to distribute Rockstar
Energy drinks in Mexico.
During the second quarter of 2008, we announced a plan to review our growth
strategy and effective June 30, 2008, we sold Palermo Italian Foods, LLC to a
group of investors headed by Palermo's President, Victor Petrone, who was also
President and a director of Nascent. Mr. Petrone subsequently resigned as
President and from the Board of Directors, As of July 31, 2008. We completed the
unwinding of our purchase of Pasani pursuant to a Settlement Agreement.
Inflation/Energy
We believe that the significant increase in energy prices during the first nine
months of 2008 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.
The Mexican Peso has recently devalued against the U.S. Dollar. On July 31,
2008, the exchange rate was 10.3P to $1.00, and on October 31, 2008, the
exchange rate was 12.8P to $1.00. The devaluation of the Peso has affected us in
the following ways: (1) our collection of accounts receivable has slowed and
customers that have purchased product at 10.5P dollar equivalent are now having
to pay the receivable at a 12.5P equivalent; and (2) we believe our customers
are slowing their ordering of products in anticipation of a monetary correction
and/or stabilization of the exchange rate.
RESULTS OF OPERATIONS
(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.
Note: 2007 financial results have been reclassified to conform to the current
presentation of Palermo, Pasani, Eco and Grupo Sur as discontinued operations.
The Pro forma reconciliation is included elsewhere herein.
THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE SAME PERIOD IN 2007.
REVENUE for the three months ended September 30, 2008 was approximately $4.1
million, an increase of $2.0 million from the same period in the prior year. The
increase reflects approximately $2.0 million of Targa revenue contribution which
was purchased in the forth quarter of 2007. Sales of Best Beer and IFS were flat
as compared to 2007.
COST OF SALES for the quarter ended September 30, 2008 was approximately $3.2
million, an increase of $1.3 million for the same period in the prior year. The
increase for the most part is attributable to Cost of Sales associated with
Targa revenue which was purchased in the fourth quarter of 2007.
GROSS PROFIT for the quarter ended September 30, 2008 was approximately
$900 thousand or 22% of sales, an increase of approximately $700 thousand from
the same period last year. Targa's gross profit for the quarter ended September
30, 2008 was approximately $500 thousand or 26% of sales. Targa was purchased in
the fourth quarter of 2007.
24
OPERATING EXPENSES of approximately $2.2 million or 53% of sales included
Distribution expense of $600 thousand, Sales and Marketing of $100 thousand,
General and Administrative of $1.1 million and Depreciation and Amortization of
$300 thousand for the quarter ended 2008. Operating expenses increased $1.1
million from $1.1 million in the same period in 2007. Targa contributed
approximately $1.0 million of the increase.
OTHER EXPENSE was approximately $1.4 million for the quarter ended September 30,
2008, a decrease of $400 thousand for the same period in 2007. The $1.4 million
of other expense reflects a $2.7 million valuation reserve against the 15%
ownership AIP, Inc., the Company which purchased Palermo. Other expense for the
2008 period, reflects $400 thousand of warrant interest recapture compared to
warrant recapture loss of $1.5 million for the prior year period.
NET LOSS of approximately of $4.6 million reflects a loss from continuing
operations of approximately $2.6 million and loss from discontinued operations
of $1.9 million for the quarter ended September 30, 2008, an increased loss of
approximately $2.0 million compared to the $2.6 million net loss for the same
period in 2007. The increase for the most part is the loss from discontinued
operations.
For the Three Months Ended
September 30, 2008
--------------------------------------- Inc/Dec
(unaudited) Of 2008 over
(in thousands)
% of % of % of
2008 Revenue 2007 Revenue 2007 Revenue
-------- -------- ------- -------- ------- -------
REVENUE $ 4,095 100.0 $ 2,106 100 $ 1,989 48.6
COST OF REVENUE 3,189 77.9 1,931 91.7 1,258 30.7
------------------ ------------------ -----------------
GROSS PROFIT 906 22.1 175 8.3 731 17.9
OPERATING EXPENSES:
Distribution 610 14.9 110 5.2 500 12.2
Sales and Marketing 117 2.9 114 5.4 3 0.1
General and Administrative 1,136 27.7 458 21.7 678 16.6
Depreciation 38 0.9 -- 38 0.9
Amortization 258 6.3 341 16.2 (83) (2.0)
Intangible Impairments - 0.0 - 0.0 - 0.0
------------------ ------------------ -----------------
TOTAL OPERATING EXPENSES 2,159 52.7 1,023 48.6 1,136 27.7
LOSS FROM OPERATIONS (1,252) (30.6) (848) (40.3) (404) (9.9)
OTHER INCOME (EXPENSE)
Interest Income 24 0.6 3 0.1 21 0.5
Interest Expense (123) (3.0) (428) (20.3) (305) 7.5
Warrants interest recapture 442 10.8 (1,460) (69.3) (1,018) (24.9)
Other Income (Expense), net (1,787) (43.6) - 0.0 (1,787) (43.6)
------------------ ------------------ -----------------
TOTAL INCOME (EXPENSE) (1,443) (35.2) (1,885) (89.5) (3,089) 75.4
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (2,696) (65.8) (2,733) (129.8) (37) 0.9
PROVISION FOR INCOME TAX 1 0.0 - 0.0 (1) 0.0
------------------ ------------------ -----------------
LOSS FROM CONTINUING OPERATIONS (2,697) (65.8) (2,733) (129.8) (36) 0.9
Income(loss)from Discontinued Operations (3,625) (88.5) 158 7.5 (3,783) (92.4)
------------------ ------------------ -----------------
NET (LOSS) $(6,322) (154.4) $(2,575) (122.3) $(3,747) (91.5)
================== ================== =================
25
(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.
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE SAME PERIOD IN 2007.
REVENUE for the nine months ended September 30, 2008 was approximately $14
million, an increase of $6.8 million from the same period in the prior year. The
increase reflects approximately $6.6 million of Targa revenue contribution which
was purchased in the forth quarter of 2007. Sales of Best Beer and were flat as
compared to 2007.
COST OF SALES for the nine months ended September 30, 2008 was approximately
$13.2 million, an increase of $6.3 million for the same period in the prior
year. The increase for the most part is attributable to Costs of Sales
associated with Targa revenue which was purchased in the fourth quarter of 2007.
GROSS PROFIT for the nine months ended September 30, 2008 was approximately $1.7
million or 7% of sales, an increase of approximately $500 thousand from the same
period last year. Targa's gross profit for the quarter ended September 30, 2008
was approximately $1.0 million or 16% of sales. Targa was purchased in the
fourth quarter of 2007.
OPERATING EXPENSES of approximately $12.0 million or 81% of sales included
Distribution expense of $1.5 million, Sales and Marketing of $600 thousand,
General and Administrative of $5.5 million and Depreciation and Amortization of
$1.0 million and impairment of PGI's goodwill and intangible assets of
approximately $ 5.4 million. Operating expenses for the nine months ended
September 30, 2008 increased $7.0 million from $5.0 million in the same period
in 2007. Targa contributed about $1.0 million of the increase.
OTHER EXPENSE was approximately $700 thousand million for the nine months ended
September 30, 2008, a decrease of $2.0 million for the same period in 2007. The
$700 thousand expense reflects a $2.7 million valuation reserve against the 15%
ownership AIP, Inc. the Company which purchased Palermo. Other expense for the
2008 period reflects $1.3 million of warrant interest recapture compared to
warrant recapture loss of $1.5 million for the prior year period, and a
reduction of $800 of interest expense compared to the prior year period.
26
NET LOSS of approximately of $11.8 million reflects a loss from continuing
operations of approximately $11.0 million and loss from discontinued operations
of $800 thousand for the nine months ended September 30, 2008, an increased loss
of approximately $5.4 million compared to the $6.4 million in net loss for the
same period in 2007. The increase for the most part is the $5.4 million
attributable to impairment of goodwill and intangibles.
For the Nine Ended September 30, 2008
------------------------------------------- Increase/Decrease
(unaudited) 2008 over
2008 2007 2007
------------------- ---------------------- ------------------
REVENUE $ 14,823 100.0 $ 8,049 100 $ 6,774 45.7
COST OF REVENUE 13,110 88.4 6,810 45.9 6,300 42.5
------------------- ---------------------- ------------------
GROSS PROFIT 1,714 11.6 1,239 8.4 (475) 3.2
OPERATING EXPENSES:
Distribution 1,533 10.3 410 2.8 1,123 7.6
Sales and Marketing 567 3.8 452 3.0 115 0.8
General and Administrative 3,506 23.6 3,188 21.5 318 2.1
Depreciation 109 0.7 -- 109 0.7
Amortization 942 6.4 730 4.9 212 1.4
Intangible Impairments 5,341 36.0 -- 5,341 36.0
------------------- ---------------------- ------------------
TOTAL OPERATING EXPENSES 11,997 80.9 4,780 32.2 7,217 48.7
LOSS FROM OPERATIONS (10,283) (69.4) (3,541) (23.9) (6,742) (45.5)
OTHER INCOME (EXPENSE)
Interest Income 30 0.2 9 0.1 21 0.1
Interest Expense (450) (3.0) (1,384) (9.3) (934) 6.3
Warrants interest recapture 1,326 8.9 (1,460) (69.3) (134) 0.9
Other Income (Expense), net (1,625) (11.0) -- -- (1,625) (11.0)
------------------- ---------------------- ------------------
TOTAL INCOME (EXPENSE) (719) (4.8) (2,835) (19.1) (2,116) 14.3
LOSS FROM CONTINUING OPERATIONS (11,002) (74.2) (6,376) 43.0 (4,626) (31.2)
BEFORE PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAX 1 0.0 1 0.01
------------------- ---------------------- ------------------
LOSS FROM CONTINUING OPERATIONS (11,003) (74.2) (6,376) 43.0 (17,379) (117.2)
Income(loss)from Discontinued Operations(2,520) (17.0) (28) (0.2) (2,549) (17.2)
------------------- ---------------------- ------------------
NET (LOSS) $(13,523) (91.2) $ (6,404) 43.2 $ (19,927) (134.4)
=================== ====================== ==================
27
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2008, the Company
had cash of $715,000 and working capital of $4,811,000. The Company had net
losses from continuing operations of $2,697,000 and $11,004,000 for the three
and nine months ended September 30, 2008, and $2,734,000 and $6,676,000 for the
three and nine months ended September 30, 2007, respectively.
CASH FLOW
LIQUIDITY AND CAPITAL RESOURCES
For the Nine Months Ended,
Cash Flow As of September 30, 2008
2008 2007
------------------ --------------
Net Cash (Used for) for Operations $ (2,540,294) $ (7,601,239)
Net Cash (Used for) for Investing 207,699 (2,839,239)
Net Cash Providing by Financing 1,869,991 11,926,728
Effect of Exchange Rates 12,224 (56,890)
------------------ --------------
Net Increase Cash $ (450,380) $ 1,429,360
================== ==============
WORKING CAPITAL ANALYSIS
(in thousands)
September 30, December 31,
2008 2007 Increase/Decrease
---------------- ------------- ------------------
Current Assets:
Cash $ 715 $ 961 $ (246)
Accounts Receivable 2,609 3,879 (1,269)
Notes Receivable 1,544 4,727 (3,182)
Inventory 2,194 2,693 (499)
Prepaid 1,380 694 686
Asset held for Sale 3,522 15,559 (12,037)
---------------- ------------- ------------------
Total Current Assets 11,965 28,513 (16,547)
---------------- ------------- ------------------
Current Liabilities:
Accounts Payable $ 3,213 $ 2,620 $ 593
Accrued Liabilities 458 1,149 (691)
Accrued Interest 195 279 (84)
Line credit 49 0 49
Notes Payable 1,662 73 1,588
Shareholders Loans 863 630 233
Acquisition Loans 8,000 (8,000)
Liabilities related to assets held for
Sale 2,471 4,143 (1,672)
---------------- ------------- ------------------
Total Current Liabilities 8,911 16,895 (7,984)
---------------- ------------- ------------------
Working Capital (Deficit) $ 3,055 $ 11,618 $ (8,563)
================ ============= ==================
28
RECONCILIATION
In non-GAAP financial measure of pro forma revenues, gross profit and EBITDA
below, we have excluded unaudited prior year results of Palermo, Pasani/Eco-Pac
and Grupo Sur. This information is provided to present the results for three
months ended and nine months ended September 30, 2008 and 2007, respectively.
The financial data for these subsidiaries was internally prepared and unaudited,
and have not been reviewed by our independent accountants.
<s>
EBITDA
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Loss from operations $ (1,252,452) $ (848,207) $(10,283,350) $ (3,540,789)
------------ ------------ ------------ ------------
Adjustments
Add:
Depreciation 37,258 15,058 107,923 42,017
Amortization 259,081 325,834 942,619 687,293
------------ ------------ ------------ ------------
296,339 340,892 1,050,542 729,310
------------ ------------ ------------ ------------
EBITDA - (deficit) (956,113) (507,315) (9,232,808) (2,811,479)
============ ============ ============ ============
Working Capital of $4.8 million as of September 30 2008, reflects an increase of
$1.3 million giving effect to the reclassifications to assets held for sale as
of September 30, 2008 and December 31, 2007 discussed in Note 10 to the
Consolidated Financial Statements. Current assets increased $ $4.8 million to
$13.7 million. The increase in current assets reflects an increase of assets
held for sale of $4.6 million. Accounts receivable decreased approximately $1.3
million, principally as a result of increased collection efforts combined with a
short fall in sales due in part to a dislocation in physical inventory.
Inventory decreased approximately $500 thousand.
Current liabilities increased approximately $3.5 million to $8.9 million. The
$3.5 million increase resulted from an increase in liabilities relating to
assets held for sale of $1.8 million and notes payable of $1.6 million.
On March 31, 2008, the Company sold a $1,000,000 Senior Secured Promissory Note
(the "Note") to Genesis Merchant Partners, LP, a Delaware limited partnership
("Genesis"). Interest accrues on the amount of the Note at a rate of 14% per
annum and is payable monthly to Genesis. The Note is secured by all assets of
the Company, and had an original maturity date of September 30, 2008. The
Company elected to extend the term of the loan to March 31, 2009 for a fee of
$20,000. On November 3, 2008, in connection with the extension of the Note, the
Company entered into a Collateral Assignment of Contracts agreement (the
"Assignment"). Pursuant to the Assignment, the Company assigned to Genesis, as
additional security for the obligations under the Note, the Company's rights to
receive payments under (i) the promissory note in the amount of $1,000,000 made
by AIP, Inc., and (ii) the settlement agreement with Pasani.
On July 10, 2007, pursuant to a Stock Purchase Agreement, the Company acquired
Grupo Sur, an in store merchandising company. Subsequent to the closing of such
acquisition, disputes arose among the Company, and the three former Grupo Sur
shareholders who became employed by the Company in connection with the Grupo Sur
acquisition. As a result of these disputes, in June 2008, the Company determined
to reclassify the Grupo Sur assets and related liabilities as assets and related
liabilities held for sale, and the operations of Grupo Sur as discontinued
operations, and recognized in the quarter ended June 30, 2008 an impairment loss
on certain intangible assets and goodwill.
29
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 ("Eco"). 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 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 principal of the
Note has 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 (for inventory sold) within 180 days of the
Settlement Date. In addition, Pasani was obligated to pay Nascent on or before
September 30, 2008, $92,259.13 for products delivered to Pasani during July
2008. Such amount was paid in August, 2008. As a result of this settlement, the
Company determined in August 2008 to reclassify the Pasani and Eco assets and
related liabilities as assets and related liabilities held for sale, and the
operations of Pasani and Eco as discontinued operations, and recognized in the
quarter ended June 30, 2008 an impairment loss on certain intangible assets and
goodwill.
Alejandro Pederzini and Leticia Gutierrez Pederzini the Shareholders made the
initial payment at closing, however, subsequently failed to make the September
30, 2008, payment of $92,259.13. We are currently reviewing our options in order
to insure that Alejandro Pederzini and Leticia Gutierrez Pederzini comply with
the terms of the agreement.
On June 30 , 2008, the Company sold all of the outstanding capital stock of
Palermo to AIP, Inc., a company founded by the Company's former President who
was also a Director. The consideration consisted of AIP's assumption of an
accounts payable note not to exceed $800,000 and a secured bank loan in the
aggregate principal of $249,999.00, a note in favor of the Company in the amount
of $1,000,000.00 due and payable on June 30, 2009, and fifteen percent (15%) of
the outstanding equity of AIP. The value of the equity interest in AIP is fully
reserved against at September 30, 2008. As a result of the sale of Palermo, the
assets and related liabilities of Palermo were reclassified as held for sale at
December 31, 2007, and the operations of Palermo are reported as discontinued
operations for the three and nine months ended September 30, 2007 and the nine
months ended September 30, 2008.
On February 13, 2008, the Company entered into a loan agreement with Cyril
Capital, LLC ("Cyril") in which Cyril lent the Company $500,000. The loan was
due and payable on August 14, 2008. The primary security for the loan was the
Company's inventory and accounts receivable. The secondary security was the
personal guarantee of Sandro Piancone, the Company's Chief Executive Officer. In
the event that the loan, including interest at 8% per annum, was not repaid on
August 14, 2008, a penalty of 10% would apply. However, the Company opted to
extend the term of the loan by 60 days to October 14, 2008 for a fee of $20,000.
On October 14, 2008, the Company extended the term of the loan again by 60 days
for a fee of $20,000. During the extension period, the loan is not in default
and the penalty will not apply. Interest at the base rate of 8% per annum will
continue to accrue.
The Company is currently in discussions with several lending institutions for a
working capital credit facility and additional financing. Management believes
that the existing working capital resources and cash forecasted by management to
be generated by operations, together with planned short-term and long-term
borrowings, lines of credit and/or capital raised through the sale of equity or
equity-based securities will be sufficient to fund operations through at least
the next twelve months. However, there is no assurance that external funding
will be available on terms and conditions acceptable to the Company, or at all,
or that we will be successful with our operating plans. If events and
circumstances occur such that the Company does not meet its current operating
plans and raise sufficient external financing, the Company may be required to
further reduce expenses or take other steps which could have a material adverse
effect on its future performance, including but not limited to, the premature
sale of some or all of its assets or product lines on undesirable terms, merger
with or acquisition by another company on unsatisfactory terms, or the cessation
of operations.
Item 3. QUANTITATIVE AND QUALITATIVE 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.
30
Foreign Currency Translation
- -----------------------------
Our functional currency is the U.S. dollar. The functional currency of our
foreign operations, generally, is the respective local currency for each foreign
subsidiary. Assets and liabilities of foreign operations denominated in local
currencies are translated at the spot rate in effect at the applicable reporting
date. Our consolidated statements of operations are translated at the weighted
average rate of exchange during the applicable period. The resulting unrealized
cumulative translation adjustment, net of applicable income taxes, is recorded
as a component of accumulated other comprehensive income (loss) in stockholders'
equity. Realized and unrealized transaction gains and losses generated by
transactions denominated in a currency different from the functional currency of
the applicable entity are recorded in other income (loss) in the period in which
they occur. The total impact of foreign currency items on the Consolidated
Statements of Operations for the three and nine months ended September 30, 2008
were gains of approximately $249,000 and $324,000, respectively.
Item 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation 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, as
of the end of the period covered by this report.
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. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were not effective as of September 30, 2008.
The Company has identified material weaknesses with our Mexican subsidiaries
which we identified in our Annual Report on Form 10-KSB for the year ended
December 31, 2007. As a result of these material weaknesses, we determined that
our disclosure controls and procedures were not effective at September 30, 2008.
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.
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.
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.
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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.
Changes in Internal Control Over Financial Reporting
Except as set forth above, there were no changes in our internal control over
financial reporting during the fiscal quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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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, the Company entered into a Stock Purchase Agreement for the
acquisition of Grupo Sur. As part of this transaction, the Company agreed to
retain Grupo Sur's three former owners/managers (the "Employees"), all of whom
executed employment agreements with the Company.
After the purchase of Grupo Sur closed, the Company determined that the
Employees were in breach of the Stock Purchase Agreement and their employment
agreements. The Employees responded that the Company's purchase of Grupo Sur
never closed and that the Company failed to pay a portion of the purchase price
due under the Stock Purchase Agreement. The Employees asserted that they were
terminating the Stock Purchase Agreement or, alternatively, repudiating the
Stock Purchase Agreement. The Employees, have withheld and refused to refund
monies that the Company has paid.
The Company filed a lawsuit on August 13, 2008, against the Employees, 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: breach of contract, breach of the implied covenant of good faith
and fair dealing, breach of fiduciary duty, and unjust enrichment and
conversion. The complaint has not yet been served, and the parties continue to
discuss resolution. Nascent has agreed to mediate the dispute in November.
Item 1A. RISK FACTORS
N/A
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company issued 2,612,276 shares of Common Stock Par Value $0.001
in the quarter ended September 30, 2008 in satisfaction of liquidated
damages accrued under a private placement agreement discussed elsewhere
herein.
Item 3 DEFAULTS ON SENIOR SECURITIES
NONE
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Item 5 OTHER INFORMATION
NONE
Item 6.
(a) Exhibits
The following Exhibits are incorporated herein by reference or are filed with
this report as indicated below.
Exhibit No. Description
- ----------- -----------
10.1 Loan Agreement with Cyril Capital, LLC dated February 13,
2008(incorporated by reference from exhibit 99.1 in Form 8-K filed
on October 20, 2008)
10.2 Senior Secured Promissory Note sold to Genesis Merchant Partners,
LP dated March 31, 2008 (incorporated by reference from exhibit
99.1 in Form 8-K filed on November 7, 2008)
10.3 Collateral Assignment of Contracts to Genesis Merchant Partners,
LP dated as of October 31, 2008 (incorporated by reference from
exhibit 99.2 in Form 8-K filed on November 7, 2008)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
33
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: November 14, 2008 By: /s/ Sandro Piancone
------------------------------
Sandro Piancone
Chief Executive Officer
Dated: November 14, 2008 By: /s/ Peter V. White
-------------------------------
Chief Financial Officer and Treasurer
Peter V. White
(Principal Financial Officer)
34