SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
Commission File #333-44188
NANNACO, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
74-2891747
(IRS Employer Identification Number)
9739 Cobb Street, #1 San Antonio, Texas 78217
(Address of principal executive offices)(Zip Code)
(210) 545-3570
(Registrant's telephone no., including area code)
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 []
The number of shares of the Company's common stock outstanding on December 31,
2003: 185,335,342
NANNACO, INC.
FORM 10-QSB
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 - Controls and Procedures
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Filed herewith are our following unaudited financial statements:
Balance Sheet at December 31, 2003
Statements of Operations for the three months ended December 31, 2003 and 2002
Statements of Changes in Stockholders' Deficiency for the three months ended
December 31, 2003
Statements of Cash Flows for the three months ended December 31, 2003 and 2002
Notes to Financial Statements
1
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(Unaudited)
DECEMBER 31, 2003
ASSETS
- --------------------------------------------------------------------------------
December 31,
2003
--------
CURRENT ASSETS
Cash and cash equivalents $ --
Accounts receivable 1,171
--------
TOTAL CURRENT ASSETS $ 1,171
========
LIABILITIES
CURRENT LIABILITIES
Convertible debentures $175,000
Bank loans 59,336
Bank overdrafts 2,866
Accounts payable - trade 103,624
Accrued compensation, related party 25,092
Accrued interest 42,613
Other current liabilities 26,500
Accrued debenture liquidated damages 31,500
Payroll taxes payable 240,337
Sales taxes payable 40,801
Judgment payable 49,937
Loan payable - related party 42,700
--------
TOTAL CURRENT LIABILITIES $840,306
========
The accompanying notes are an integral part of the financial statements
2
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(Unaudited)
DECEMBER 31, 2003
STOCKHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
DECEMBER 31,
2003
------------
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIENCY
Common stock, $1.00 par value, 1,000 shares authorized:
Issued - none issued and outstanding at Dec. 31, 2003 --
Common stock, $0.001 par value, 200,000,000 shares
authorized: Issued - 185,335,342 issued and
outstanding at Dec. 31, 20 185,335
Preferred stock, $0.001 par value, 10,000,000
shares authorized Issued - none issued and
outstanding at Dec. 31, 2003 --
Additional paid in capital 6,695,393
Accumulated deficit (5,048,764)
Deficit accumulated during development stage (694,940)
-----------
1,137,024
Less: Deferred compensation (1,628,858)
Less: Deferred consulting (347,301)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (839,135)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICENCY $ 1,171
===========
The accompanying notes are an integral part of the financial statements
3
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
PERIOD FROM
OCTOBER 1, 2003
Three Months Ended (Incepton) To
December 31, December 31,
2003 2002 2003
--------- --------- ---------
REVENUES $ 15,577 $ 3,322 $ 15,577
COST OF REVENUES 13,133 8,534 13,133
--------- --------- ---------
GROSS PROFIT 2,444 (5,212) 2,444
OPERATING EXPENSES:
Selling, general and administrative 17,210 9,956 17,210
Compensation 346,365 12,500 346,365
Consulting 88,499 -- 88,499
Penalties -- 1,062 --
Legal and professional 215,300 2,000 215,300
Debenture liquidated damages 21,000 -- 21,000
Rent 1,495 717 1,495
Travel and entertainment 1,281 15 1,281
Depreciation -- 7,800 --
--------- --------- ---------
TOTAL OPERATING EXPENSES 691,150 34,050 691,150
--------- --------- ---------
LOSS FROM OPERATIONS (688,706) (39,262) (688,706)
OTHER EXPENSE:
Interest expense (6,234) (2,268) (6,234)
--------- --------- ---------
TOTAL OTHER EXPENSE (6,234) (2,268) (6,234)
--------- --------- ---------
NET LOSS $(694,940) $ (41,530) $(694,940)
========= ========= =========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.00) $ (0.01)
========= ========= =========
The accompanying notes are an integral part of the financial statements
4
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(Unaudited)
THREE MONTHS ENDED DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock
Common Stock Issuable Additional
----------------------------------------------------- Paid-In
Shares Amount Shares Amount Capital
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 33,057,600 $ 33,058 75,000,000 $ 75,000 $ 5,603,128
Issuable at 9/30/03 75,000,000 75,000 (75,000,000) (75,000) --
Issued for compensation-11/9/03-$0.01 per share 15,000,000 15,000 -- -- 135,000
Issued for legal/consulting services
-11/9/03-$0.01 per share 50,500,000 50,500 -- -- 454,500
Issuable for legal/consulting
services-12/10/03-$0.012 per share 11,400,000 11,400 -- -- 125,400
Reclassed from redeemable stock-12/11/03 377,742 378 -- -- 377,365
Amortization of deferred compensation -- -- -- -- --
Amortization of deferred consulting -- -- -- -- --
Net loss, three months ended December 31, 2003 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 185,335,342 $ 185,335 -- $ -- $ 6,695,393
===============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
During Total
Deferred Deferred Accumulated Development Stockholders'
Compensation Consulting Deficit Stage Deficiency
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $(1,766,304) $ -- $(5,048,764) $ -- $(1,103,882)
Issuable at 9/30/03 -- -- -- -- --
Issued for compensation-11/9/03-$0.01 per share (150,000) -- -- -- --
Issued for legal/consulting services
-11/9/03-$0.01 per share -- (405,000) -- -- 100,000
Issuable for legal/consulting
services-12/10/03-$0.012 per share -- -- -- -- 136,800
Reclassed from redeemable stock-12/11/03 -- -- -- -- 377,742
Amortization of deferred compensation 287,446 -- -- 287,446
Amortization of deferred consulting -- 57,699 -- 57,699
Net loss, three months ended December 31, 2003 -- -- -- (694,940) (694,940)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $(1,628,858) $ (347,301) $(5,048,764) $ (694,940) $ (839,135)
==================================================================================================================================
The accompanying notes are an integral part of the financial statements
5
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Period From
October 1, 2003
(Incepton) To
Three Months Ended December 31,
2003 2002 2003
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net loss $(694,940) $ (41,530) $(694,940)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation -- 7,800 --
Accrued debenture liquidated damages 21,000 21,000
Stock issued for legal services 212,800 -- 212,800
Stock issued for consulting services 24,000 -- 24,000
Amortization of deferred compensation 287,446 -- 287,446
Amortization of deferred consulting 57,699 -- 57,699
Changes in operating assets and liabilities: --
Increase in accounts receivable - trade (548) -- (548)
Increase (decrease) in bank overdrafts 890 (3,286) 890
Decrease in accounts payable - trade -- (9,000) --
Increase in accrued compensation
- related party 12,500 0 0
Increase in accrued interest 5,176 2,597 5,176
Increase in other current liabilities 26,500 -- 26,500
Increase (decrease) in payroll taxes payable 58,919 (5,000) 58,919
Increase in judgment payable 1,058 1,120 1,058
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 0 $ (34,799) $ 0
========= ========= =========
CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash advances from (to) stockholders, and accrued interest $ -- $ 44,505 $ --
Purchase of property and equipment -- (3,575) --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -- 40,930 --
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES -- -- --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -- --
NET INCREASE IN CASH -- 6,131 --
CASH AT BEGINNING OF PERIOD -- -- --
--------- --------- ---------
CASH AT END OF PERIOD $ -- $ 6,131 $ --
========= ========= =========
CASH INTEREST PAID $ -- $ -- $ --
--------- --------- ---------
The accompanying notes are an integral part of the financial statements
6
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
1. HISTORY AND NATURE OF BUSINESS
Nannaco, Inc. ("Nannaco", "the Company", "we", "us") is a publicly traded
company that previously provided surface cleaning, surface protection, surface
restoration, and other services to commercial and industrial businesses, as well
as to owners of historical buildings. The Company has operated under the trade
name Surface Pro in order to relate to its previous principal business activity,
since the Nannaco name did not indicate the type of business. The Company was
incorporated under the laws of the State of Texas on October 20, 1998, and
immediately began operations.
Until September 30, 2003, Nannaco focused on surface cleaning, surface
protection and restoration. However, sales from these products were not
sufficient to enable the company to continue operations and the Company changed
its strategy due to poor operating conditions and their operating results
coupled with difficulties in raising capital through debt and equity sources.
The Company adopted a new strategy that committed to the disposal of its current
business and to seek a merger/acquisition transaction with a company having
better financial resources and/or act as a holding company for newly developed
businesses. As of September 30, 2003, the Company ceased all operating
activities under the surface cleaning, surface protection and restoration
business and disposed of most of its assets while formulating a plan to improve
it financial position.
In December 2003 and January 2004, the Company issued several announcements
related to the change in business. The Company has moved to a new line of
business as a consultant and advisor to customers and continues to seek a
merger/acquisition candidate. The Company will be treated as a development stage
company, effective October 1, 2003. Activities during the new development stage
include restructuring the Company and entering into contracts to provide
consulting services to customers.
In January 2004, the Company formed a new wholly owned subsidiary named American
Qualified Financial Services, Inc. ("AQFS"). AQFS is a Texas Corporation and
will be utilized by the Company to market the reinsurance of debt securities
primarily to qualified benefit plans.
2. GOING CONCERN
We have incurred net losses in prior years and this has resulted in a
significant accumulated deficit and stockholders' deficiency at December 31,
2003. In addition, we are in default under our convertible debenture agreements.
We had net losses of $694,940 for the three months ended December 31, 2003 and
$41,530 for the three months ended December 31, 2002. At December 31, 2003, our
current liabilities exceeded our current assets by $839,135, our stockholders'
deficiency was $839,135, we had an accumulated deficit of $5,048,764 from
previous business operations and we had a deficit accumulated during the
development stage for our new business operations of $694,940.
The time required for us to become profitable is highly uncertain, and we cannot
assure you that we will achieve or sustain profitability or generate sufficient
cash flow from operations to meet our planned capital expenditures, working
capital and debt service requirements. If required, our ability to obtain
additional financing from other sources also depends on many factors beyond our
control, including the state of the capital markets and the prospects for our
business. The necessary additional financing may not be available to us or may
be available only on terms that would result in further dilution to the current
owners of our common stock.
We have substantial current obligations. As of December 31, 2003, we had
$840,306 of liabilities as compared to $726,763 as of September 30, 2003. Of the
$840,306 outstanding at December 31, 2003, $240,337 is for unpaid federal
payroll taxes and penalties. The Company has received correspondence from the
Internal Revenue Service ("IRS") detailing the obligation and remedies that the
IRS may pursue if not paid. The remaining current obligations (which are all
past due) include accounts payable of $103,624, judgment payable of $49,937,
sales tax payable of $40,801, bank loans of $59,336, loan payable-related party
of $42,700 and convertible debentures of $175,000. The Company does not have
sufficient cash resources to pay these obligations.
7
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
Our substantial debt obligations pose risks to our business and stockholders by:
o making it more difficult for us to satisfy our obligations;
o requiring us to dedicate a substantial portion of our cash flow to
principal and interest payments on our debt obligations, thereby
reducing the availability of our cash flow to fund working capital,
capital expenditures and other corporate requirements;
o impeding us from obtaining additional financing in the future for
working capital, capital expenditures and general corporate
purposes; and
o making us more vulnerable to a downturn in our business and limit
our flexibility to plan for, or react to, changes in our business.
We cannot assure you that we will generate sufficient cash flow from operations
or obtain additional financing to meet scheduled debt payments and financial
covenants. If we fail to make any required payment under the agreements and
related documents governing our indebtedness or fail to comply with the
financial and operating covenants contained in them, we would be in default. The
financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or the amounts and
classification of liabilities which may result from the inability of the Company
to continue as a going concern.
The Company has taken steps to curtail the operating losses for future periods.
These steps include the reduction of employees and all categories of operating
expenses, where possible. Additionally, as mentioned previously, the Company has
adopted a new strategy during the fourth quarter of 2003 that committed to the
disposal of its current business and to seek a merger/acquisition transaction
with a Company having better financial resources. As of September of 2003, the
Company ceased all operating activities under the surface cleaning, surface
protection and restoration business and disposed of most of its assets while
formulating a plan to improve its financial position. The Company has moved to a
new line of business as a consultant and advisor to customers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange
Commission for interim financial information. Accordingly, they do not include
all of the information and footnotes required for a comprehensive presentation
of financial position and results of operations. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included.
The results of operations for the three months ended December 31, 2003 are not
necessarily indicative of the results to be expected for the year ending
September 30, 2004. These Financial Statements should be read in conjunction
with the Financial Statements of Nannaco, Inc., DBA Surface Pro, for the years
ended September 30, 2003 and 2002 included in Form 10-KSB
ACCOUNTING ESTIMATES
When preparing financial statements in conformity with U.S. GAAP, our management
must make estimates based on future events which affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates in the accompanying financial statements include the valuation of
non-cash issuances of common stock and the valuation allowance for deferred tax
assets.
8
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with a maturity
date of three months or less when purchased.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2003 resulted from the sale of the Company's
previous business strategy products that were phased out in the fourth quarter
and is reported at anticipated realizable value. The Company estimates its
allowance for doubtful accounts based on a specific identification basis and
additional allowances as needed based upon historical collections experience.
Payment is due upon completion of the work, unless other arrangements are made.
Management reviews the customer accounts on a routine basis to determine if an
account should be charged off. At December 31, 2003, all accounts receivable are
deemed to be collectible in full.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
We account for the impairment of long-lived assets in accordance with Financial
Accounting Standards, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. Recoverability of the asset is
measured by comparison of its carrying amount to the undiscounted cash flow that
the asset or asset group is expected to generate. If such assets or asset groups
are considered to be impaired, the loss recognized is the amount by which the
carrying amount of the property, if any, exceeds its fair market value. The
Company has no long-lived assets at December 31, 2003.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We define the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of accounts receivable, accounts payable and accrued
liabilities approximates fair value because of the short maturity of those
instruments. The estimated fair value of our other obligations is estimated
based on the current rates offered to us for similar maturities. Based on
prevailing interest rates and the short-term maturity of all of our
indebtedness, management believes that the fair value of our obligations
approximates book value at December 31, 2003.
ENVIRONMENTAL MATTERS
Our operations are subject to evolving federal, state and local environmental
laws and regulations related to the discharge of materials into the environment.
Our process is not expected to produce harmful levels of emissions or waste
by-products. However, these laws and regulations would require us to remove or
mitigate the environmental effects of the disposal or release of substances at
our site should they occur. Compliance with such laws and regulations can be
costly. Additionally, governmental authorities may enforce the laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties and remediation requirements. We are not aware of any area of
non-compliance with federal, state or local environmental laws and regulations.
REVENUE RECOGNITION
The surface services business are recognized when services are completed and
collection of the fixed or determinable selling price is reasonably assured.
The Company recognizes revenues in accordance with the guidance in the
Securities and Exchange Commission Staff Accounting Bulletin 101. Revenue from
consulting services will be recognized when services are completed and
collectibility is assured, generally upon receipt of payment.
9
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
INCOME TAXES
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS
109")." Under SFAS 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
LOSS PER COMMON SHARE
Basic earnings per share is computed only on the weighted average number of
common shares outstanding during the respective periods. There were no
additional items to adjust the numerator or denominator in the EPS computations.
The following table summarizes the numerator and denominator elements of the
basic EPS computations.
THREE MONTHS ENDED DECEMBER 31,
2003 2002
------------- -------------
Net loss available to common $ 694,940 $ 41,530
============= =============
Shares (Denominator) 148,049,073 14,957,600
------------- -------------
Loss Per Share ($ .01) ($ .00)
============= =============
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of the date of these Financial Statements, we had no components of other
comprehensive income as defined by Statement of Financial Accounting Standards
No. 130.
NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application encouraged. The adoption of
SFAS No. 144 as of January 1, 2002 did not have a significant impact on our
financial position and results of operations.
In April, 2002, the Financial Accounting Standards Board issued SFAS No. 145
(SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, related to accounting for debt
extinguishments, leases, and intangible assets of motor carriers. The provisions
of SFAS 145 are effective for fiscal years beginning after May 15, 2002 with
earlier adoption encouraged. The adoption of SFAS No. 145 did not have a
significant impact on our financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which established additional
accounting and disclosure requirements when an enterprise guarantees the
indebtedness of others. The enterprise providing the guarantee is required to
recognize a liability for the fair value of the guarantee and disclose the
information in its interim and annual financial statements. The adoption of FIN
45 did not have a significant impact on our financial position and results of
operations.
10
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
which as an interpretation, defines when and who consolidates a "variable
interest entity," or "VIE." This new consolidation model applies to entities (i)
where the equity investors (if any) do not have a controlling financial
interest, or (ii) whose equity investment at risk is insufficient to finance
that entity's activities without receiving additional subordinated financial
support from other parties and requires additional disclosures for all
enterprises involved with the VIE. FIN 46 is effective during 2003 depending on
when the VIE is created. We do not believe that the adoption of FIN 46 will have
a significant impact on our financial position and results of operations.
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends FASB No. 123
(FAS 123), "Accounting for Stock-Based Compensation." FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of FAS 123 to require disclosures in both the annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and disclosure provisions of FAS 148 were effective for the
Company's financial statements issued for the first quarter of 2003. The
adoption of FAS 148 did not have a material impact on our financial position and
results of operations.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 (SFAS
150), "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." It establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This standard is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of FAS 150 did not have a significant impact on our financial position
and results of operations.
4. SHORT-TERM DEBT
Our short-term debt at December 31 consisted of the following:
BANK LOANS
$35,000 bank installment loan, dated Feb. 19, 2000, bearing interest at 10% per
annum, 60 monthly payments of principal and interest ........................ $25,350
$35,000 bank line of credit, bearing interest at prime plus 1.25% per annum,
interest payable monthly and line of credit due July 15, 2002 ............... 33,986
-------
$59,336
=======
On February 19, 2000, we obtained a bank installment loan in the amount of
$35,000, of which $25,350 is outstanding at December 31, 2003. The interest
rate is 10% per annum and sixty monthly payments of principal and interest in
the amount of $745 are required. This note is secured by the personal guaranty
of the Company's President.
At December 31, 2003, we had a bank line of credit, which provides for
borrowings of up to $35,000, of which $33,986 was outstanding. The interest rate
is Prime plus 1.25% per annum and monthly interest payments were required. The
line of credit matured on July 15, 2002 but the bank has not exercised its
rights of default and the facility was on a month to month basis. The line of
credit is secured by a personal guaranty of the Company's President.
11
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
LOAN PAYABLE - RELATED PARTY
Loan payable, dated January through July of 2001, bearing interest at 10% per
annum and due in July of 2002 ............................................. $42,700
=======
Beginning in January of 2001 and through July of 2001, Mark Triesch, a former
director of the Company, loaned $43,700 to the Company in the form of a
promissory note. The note bears interest at ten percent (10%) per annum and the
principal and accrued interest was due one year from each of the investments. As
of July 2002, the entire amount was due and payable. In April 2003, the Company
repaid $1,000 of principal resulting in the current balance due of $42,700. At
December 31, 2003, $12,097 has been accrued as interest in the accompanying
balance sheet
CONVERTIBLE DEBENTURES
$175,000 Convertible Debentures, dated March and April of 2003, bearing
interest at 6% per annum and due in March and April of 2006 ......... $175,000
========
Pursuant to Securities Purchase Agreements, Convertible Debentures and related
contracts, in March of 2003, the Company issued $155,000 of six percent (6%)
convertible debentures due in March of 2006 and in April issued another $20,000
of the debentures due in April 2006. The Company received $122,100 of cash
proceeds, net of $52,900 of cash offering costs. The debenture holder has the
option of converting the principal and accrued interest into the Company's
common stock at a conversion price equal to seventy-five percent (75%) of the
lowest closing bid price per share for the twenty (20) trading days immediately
preceding the conversion. The Company has the option to redeem all or part of
the debentures prior to the maturity date at a price equal to one hundred thirty
percent (130%) of the principal amount plus accrued interest.
In March and April of 2003, the Company recognized an immediate $58,333 interest
expense and paid-in capital relating to a beneficial conversion feature inherent
in the debentures since the debentures were immediately convertible. In
connection with the offering, in addition to cash offering costs of $52,900, the
Company issued 500,000 of its common shares to the investment bankers. The
shares were valued on the grant date at the trading price of $0.03 per share or
$12,500. The total offering costs of $65,400 were initially deferred to be
amortized over the term of the debentures, however due to a default provision
which changed the debentures maturity to due on demand (see below); the $65,400
was fully expensed as of September 30, 2003.
Under a related Registration Rights Agreement, the Company is subject to a 2%
monthly liquidated damages penalty for not filing a registration statement with
the Securities and Exchange Commission, within a stipulated timeframe, to
register the common shares underlying the convertible debentures and another 2%
monthly liquidated damages penalty relating to that registration statement not
becoming effective within a stipulated timeframe. The liquidated damages penalty
started accruing at 2% or $3,500 per month at June 1, 2003 and at another 2% or
$3,500 per month starting September 1, 2003. The penalties for June and July
2003 were satisfied with the issuance of 350,000 of the Company's common shares
to the debenture investors and remaining accrued liquidated damages were $10,500
at September 30, 2003. The Company recognized a $1,750 gain on the settlement of
$7,000 of accrued liquidated damages in June and July 2003 based on the $0.015
trading price of the common stock on the settlement date. For the three month
period ended December 31, 2003, the Company recorded an additional $21,000 of
liquidated damages expense and at December 31, 2003, the accrued balance is
$31,500 in the accompanying balance sheet.
Due to the default under the Registration Rights Agreement, the debentures went
into default as of June 1, 2003. Accordingly, the debentures became due on
demand at that date and are presented as current liabilities at December 31,
2003.
12
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
5. STOCKHOLDERS' EQUITY
CAPITAL STRUCTURE
We are authorized to issue up to 200,000,000 shares of our common stock, $0.001
par value per share, of which 185,335,342 were issued and outstanding at
December 31, 2003. We are also authorized to issue up to 10,000,000 shares of
preferred stock, $0.001 par value per share, of which none was issued and
outstanding at December 31, 2003.
ISSUANCES OF COMMON STOCK:
On September 30, 2003, the Company granted 75,000,000 shares to the President as
discussed below under deferred compensation. The transfer agent did not issue
the shares until October 15, 2003 and accordingly; such shares were classified
as common stock issuable in the balance sheet at September 30, 2003. On October
15, 2003, the transfer agent issued these shares and they have been reclassified
as common stock at December 31, 2003.
In November 2003, the Company issued 65,500,000 shares of common stock.
15,000,000 of the shares were issued as an annual bonus for the President of the
Company and were valued at $0.01 per share, the closing price on the grant date
of November 9, 2003 and are being amortized over the remaining life of the
employment agreement from October 1, 2003 through June 1, 2005 - see Deferred
Compensation below. 40,500,000 of the shares were issued for consulting services
provided to the Company and were valued at $0.01 per share, the closing share
price on the grant date of November 9, 2003 and are being amortized over the one
year term of the agreements - see Deferred Compensation below. The remaining
10,000,000 shares were issued for legal services provided to the Company and
were valued at $0.01 per share, the closing price on the grant date of November
9, 2003. The agreement for services did not specify a term and can be terminated
by either party on a monthly basis. Accordingly, the Company has expensed the
entire amount and recorded $100,000 of legal expense in the accompanying
Statements of Operations for the three month period ending December 31, 2003.
In connection with 3,000,000 of the 40,500,000 common shares issued for
consulting services as discussed above, the Company on November 17, 2003
committed to issue two year warrants to purchase 3,000,000 of the Company's
common shares at an exercise price of $0.02 per share and two year warrants to
purchase 3,000,000 of the Company's common shares at an exercise price of $0.03
per share. As of December 31, 2003, the warrants have not been issued to the
consultant. The agreement contains a provision however that the holders of such
warrants shall not individually own more than 4.9% of the total shares of the
Company's outstanding shares.
13
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
In December 2003, the Company issued 11,400,000 shares of common stock.
9,400,000 of the shares were issued for legal services provided to the Company
and were valued at $0.012 per share, the closing share price on the grant date
of December 10, 2003. The resulting $112,800 was expensed as legal and
professional in the accompanying Statement of Operations at December 31, 2003.
The remaining 2,000,000 shares were issued for consulting services provided to
the Company and were valued at $0.012 per share, the closing price on the grant
date of December 10, 2003. The resulting $24,000 was expensed as consulting in
the accompanying Statements of Operations for the three month period ending
December 31, 2003.
In December 2000, the Company received $345,500 of proceeds from the issuance of
ten percent (10%) convertible promissory notes to investors. The note holders
had the option of converting the principal and accrued interest into the
Company's common stock at a conversion price equal to the market price on date
of conversion and the promissory notes were due in September of 2001. On
November 15, 2001, the Company and the note holders agreed to the conversion of
the principal and accrued interest into the Company's common stock at a value of
$1 per share, resulting in the issuance of 377,742 shares of common stock.
The promissory notes were issued to non-qualified investors and as such, the
investors had a right to redeem the purchase price plus accrued interest for a
period of three years from the original promissory note date, or through
December of 2003 and the Company had classified the transaction as Redeemable
Common Stock. As of December 31, 2003, the note holders did not elect to redeem
and the Company has reclassified this amount to permanent equity as common stock
and additional paid in capital in the Stockholders' Equity section of the
balance sheet.
DEFERRED COMPENSATION
On September 30, 2003, the Company authorized the issuance of 75,000,000 shares
as compensation for the President in accordance with an amendment to the
employment agreement. However, the transfer agent did not issue the shares until
October 15, 2003 and accordingly; such shares were classified as common stock
issuable in the balance sheet at September 30, 2003. On October 15, 2003, the
transfer agent issued these shares and they have been reclassified as common
stock at December 31, 2003. Of the 75,000,000 shares, 4,347,826 were issued to
settle $50,000 of accrued and unpaid salary for the President through September
30, 2003. In accordance with the amended employment agreement, these shares were
valued based upon a thirty percent (30%) discount to the average stock price for
the month of September or $0.012 per share. There was no loss on settlement
recorded since this was a related party transaction. The remaining 70,652,174
shares were valued based upon the closing price on September 30, 2003, or $0.025
per share and the resulting $1,766,304 balance was recorded as Deferred
Compensation in the balance sheet at September 30, 2003. The deferred
compensation balance is being amortized over the remaining life of the
employment agreement from October 1, 2003 through June 1, 2005. For the three
months ended December 31, 2003, $264,946 was amortized and recorded as
compensation in the accompanying Statements of Operations.
On November 9, 2003, the Company authorized the issuance of 15,000,000 shares as
compensation for the President in accordance with an amendment to the employment
agreement. The shares were valued based upon the closing price on the grant date
of November 9, 2003, or $0.01 per share and the resulting $150,000 was recorded
as Deferred Compensation. The deferred compensation balance is being amortized
over the remaining life of the employment agreement from November 9, 2003
through June 1, 2005. For the three months ended December 31, 2003, $22,500 was
amortized and recorded as compensation in the accompanying Statements of
Operations.
14
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
DEFERRED CONSULTING
On November 9, 2003, the Company authorized the issuance of 40,500,000 shares
for consulting services provided to the Company and was valued at $0.01 per
share, the closing share price on the grant date of November 9, 2003 and the
resulting $405,000 was recorded as Deferred Compensation. The deferred
compensation balance is being amortized over the one year term of the agreements
through November 9, 2004 and for the three months ended December 31, 2003;
$57,699 was amortized and recorded as consulting expense in the accompanying
Statements of Operations.
STOCK BASED COMPENSATION PLANS
On September 29, 2003, the Company adopted a stock based compensation plan for
5,000,000 shares of common stock for which stock options, restricted stock and
common stock may be granted from time to time to employees and consultants of
the Company in lieu of cash. Under this plan, the Company issued 2,000,000
shares of common stock into escrow for a pending merger. The merger was
terminated and the shares were subsequently cancelled. On October 3, 2003, the
Company adopted a stock based compensation plan for 10,000,000 shares of common
stock for which stock options, restricted stock and common stock may be granted
from time to time to employees and consultants of the Company in lieu of cash.
Under this plan, the Company issued 9,400,000 shares of common stock into escrow
for a pending merger. The merger was terminated and the shares were subsequently
cancelled.
OPTIONS
In April 2000, the Company adopted the Nannaco 2000 Stock Option Plan (the "2000
Plan"). The purpose of the 2000 Plan is to advance the business and development
of the Company and its shareholders by affording to the employees, directors and
officers of the Company the opportunity to acquire a proprietary interest in the
Company by the grant of Options to such persons under the 2000 Plan's terms. The
2000 Plan reserved 5,000,000 shares for grant or issuance upon the exercise of
options granted under the plan. Stock Options under the Plan may be granted by
the Board of Directors or a Compensation Committee of the Board of Directors.
The exercise prices for Options granted will be at the fair market value of the
common stock at the time of the grant if a public market develops for the common
stock or not less than the most recent price at which the Company had sold its
common stock.
The following table summarizes activity related to options:
NUMBER OF SHARES WEIGHTED AVERAGE
---------------- ----------------
Balance at September 30, 2003 ................ 40,000 $ 1.00
Granted .................................... 0 0
Exercised .................................. 0 0
Forfeited .................................. 0 0
------ ------
Balance at December 31, 2003 ................. 40,000 $ 1.00
====== ======
All options to purchase our common stock have been issued with exercise prices
equal to or greater than fair market value on the date of issuance.
15
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
The terms of options to purchase our common stock are summarized below:
- ----------------------------OPTIONS OUTSTANDING------------------------------- -------OPTIONS EXERCISABLE------
- -------------------------------------------------------------------------------------------------------------------
Weighted
Number Average Number Weighted
Outstanding at Remaining Weighted Exercisable at Average
December 31, Contractual Average December 31, Exercise
Range of Exercise Prices 2003 Life Exercise Price 2003 Price
- ------------------------- ----------------- ---------------- ----------------- ----------------- --------------
$1.00 40,000 1.58 Years 1.00 40,000 $1.00
COMPENSATION EXPENSE FOR OPTIONS GRANTED TO EMPLOYEES, OFFICERS AND DIRECTORS
Had compensation cost for our stock options not been determined consistent with
SFAS 123, the Company's net loss per share would not have changed.
6. INCOME TAXES
There was no income tax for the three months ended December 31, 2003 and 2002
due to the Company's net loss. The Company's tax expense differs from the
"expected" tax expense for the period ended December 31, (computed by applying
the Federal Corporate tax rate of 34% to loss before taxes), as follows:
2003
---------
Computed "expected" tax expense (benefit) $(236,280)
Stock based expenses 189,701
Change in valuation allowance 46,579
---------
$ --
=========
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at December 31, 2003 are as follows:
Deferred tax assets
Net operating loss .................................... $ 909,189
Total deferred tax assets ............................. 909,189
---------
Valuation allowance ................................... (909,189)
---------
Net deferred tax asset ................................ $ --
=========
In assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The valuation allowance has been increased by $46,579
during the three months ended December 31, 2003 as a result of increased net
operating losses. Net operating loss carry-forwards aggregate approximately
$2,674,000 and expire in the years through 2023.
As discussed in History and Nature of Business Note 1, the Company has changed
its strategy and is moving into a new line of business as of September 30, 2003.
As a result of this change, under IRS rules, the net operating loss
carry-forwards discussed above will not be allowable.
16
NANNACO, INC.
D.B.A. SURFACE PRO
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
7. LEASE COMMITMENTS
On July 1, 2002, the Company relocated its facility and has a single month to
month operating lease agreement for our business office. There is no restriction
on our activities concerning dividends, additional debt or further leasing.
Rental expense charged to continuing operations under operating leases for the
three months ended December 31, 2003 and 2002 was $1,495 and $717, respectively.
8. COMMITMENTS AND CONTINGENCIES
From time to time we may become subject to proceedings, lawsuits and other
claims in the ordinary course of business including proceedings related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance.
The Company is in litigation with Wyndham Hotel Corporation ("Wyndham") for
unpaid charges. On June 14, 2002, Wyndham obtained a summary judgment against
Nannaco in the amount of $42,308, representing $32,045 of unpaid charges plus
$10,263 of legal fees. The Company does not have sufficient resources to pay the
judgment and interest accrued at a rate of ten percent (10%) until paid in full.
At December 31, 2003, the total amount due is $49,937 (including $7,629 of
accrued interest) and is included under the caption Judgment Payable in the
accompanying balance sheet.
The Company has not remitted payments under an executed installment agreement
with the IRS. As a result of the lack of payments, the IRS could attach a lien
against the Company's assets and bank accounts to protect their claim.
9. RELATED PARTY TRANSACTIONS
Beginning in January of 2001 and through July of 2001, a director of the
Company, loaned $43,700 to the Company in the form of a promissory note. The
note bears interest at ten percent (10%) per annum and the principal and accrued
interest was due one year from each of the investments. In April 2003, the
Company repaid $1,000 of principal resulting in the current balance due of
$42,700. At December 31, 2003, $12,097 has been accrued as interest in the
accompanying balance sheet. On November 9, 2003, this director resigned their
position.
At September 30, 2003, the same director discussed above was owed $25,092 in
accrued compensation related to legal services provided to the Company.
From October through December of 2003, the father of the Company's President
advanced $26,500 of funds to the Company and this has been classified as other
current liabilities in the accompanying balance sheet at December 31, 2003.
10. SUBSEQUENT EVENTS
On January 12, 2004, the Company issued 45,000,000 shares of common stock.
35,000,000 of the shares were issued for consulting services provided to the
Company and will be valued at $0.026 per share, the closing share price on the
grant date of January 12, 2004 and will be amortized over the one year term of
the agreements. The remaining 10,000,000 shares were issued for legal services
provided to the Company and will be valued at $0.026 per share, the closing
price on the grant date of January 12, 2004. The agreement for services did not
specify a term and can be terminated by either party on a monthly basis.
Accordingly, the Company will expense the entire amount
On January 28, 2004, the Company's Board of Directors approved and recommended
shareholder approval to amend the Articles of Incorporation increasing the
number of shares of common stock and preferred stock to 500,000,000 and
100,000,000 respectively, and creating a new class of stock entitled "blank
check preferred stock".
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following is a discussion of our financial condition, results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with our audited financial statements and the notes thereto included elsewhere
in this Form 10-QSB and with our annual report on Form 10-KSB for the year ended
September 30, 2003.
Some of the statements under "Description of Business," "Risk Factors,"
"Management's Discussion and Analysis or Plan of Operation," and elsewhere in
this Report and in the Company's periodic filings with the Securities and
Exchange Commission constitute forward-looking statements. These statements
involve known and unknown risks, significant uncertainties and other factors
what may cause actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward- looking
statements. Such factors include, among other things, those listed under "Risk
Factors" and elsewhere in this Report.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "intends," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will obtain or have access to adequate
financing for each successive phase of its growth, that there will be no
material adverse competitive or technological change in condition of the
Company's business, that the Company's President and other significant employees
will remain employed as such by the Company, and that there will be no material
adverse change in the Company's operations, business or governmental regulation
affecting the Company. The foregoing assumptions are based on judgments with
respect to, among other things, further economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, management cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
management nor any other persons assumes responsibility for the accuracy and
completeness of such statements.
GENERAL
Nannaco, Inc. ("Nannaco" or the "Company") is a reporting company under the
federal securities laws and its shares of common stock are publicly traded on
the Over The Counter Electronic Bulletin Board ("OTCBB") under the symbol
"NNCO". The Company was incorporated under the laws of the State of Texas on
October 20, 1998, and immediately thereafter began operations. The Company's
shares began trading on September 5, 2002 on the OTCBB. The Company provided
surface cleaning, surface protection, surface restoration, and other services to
commercial businesses, as well to the owners of historical buildings. The
Company has operated under the trade name of Surface Pro in order to relate to
the principal business activity, since the Nannaco name does not indicate the
type of business.
Until September 30, 2003, Nannaco focused on surface cleaning, surface
protection and restoration. However, sales from these products were not
sufficient to enable the company to continue operations and the Company changed
its strategy due to poor operating conditions and their operating results
coupled with difficulties in raising capital through debt and equity sources.
The Company adopted a new strategy during the fourth quarter of 2003 that
committed to the disposal of its current business and to seek a
merger/acquisition transaction with a Company having better financial resources.
As of September 30, 2003, the Company ceased all operating activities under the
surface cleaning, surface protection and restoration business and disposed of
most of its assets while formulating a plan to improve it financial position. In
December 2003 and January 2004, the Company issued several announcements related
to the change in business. The Company has moved to a new line of business as a
consultant and advisor to customers. Revenue will be recognized when
collectibility is assured, generally upon receipt of payment and the Company
will be treated as a development stage company, effective October 1, 2003.
18
OVERVIEW OF COMPANY.
Since its inception, the Company has suffered recurring losses from
operations and has been dependent on existing stockholders and new investors to
provide the cash resources to sustain its operations. During the three months
ended December 31, 2003 and 2002, the Company reported net losses of $694,940
and $41,530 respectively.
The Company's long-term viability as a going concern is dependent on certain key
factors, as follows:
- The Company's ability to continue to obtain sources of outside
financing to support near term operations and to allow the Company
to continue to make investments
- The Company's ability to increase profitability and sustain a cash
flow level that will ensure support for continuing operations.
RECENT DEVELOPMENTS
In January 2004, the Company formed a new wholly owned subsidiary named American
Qualified Financial Services, Inc. ("AQFS"). AQFS is a Texas Corporation and
will be utilized by the Company to market the reinsurance of debt securities
primarily to qualified benefit plans.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The methods, estimates and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The Securities and Exchange Commission has defined the
most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based upon this definition,
our most critical estimates include going concern, the valuation of non-cash
issuances of common stock and the valuation allowance for deferred tax assets.
We also have other key accounting estimates and policies, but we believe that
these other policies either do not generally require us to make estimates and
judgments that are as difficult or as subjective, or it is less likely that they
would have a material impact on our reported results of operations for a given
period. For additional information see Note 3 "Summary of Significant Accounting
Policies" in the notes to our unaudited financial statements contained in our
quarterly report on Form 10-QSB for the three months ended December 31, 2003.
Although we believe that our estimates and assumptions are reasonable, they are
based upon information presently available. Actual results may differ
significantly from these estimates.
GOING CONCERN
The independent auditors' reports to our financial statements for the year ended
September 30, 2003 and September 30, 2002, include an emphasis paragraph in
addition to their audit opinion stating that our recurring losses from
operations, working capital deficiency and default on our convertible debentures
raise substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or the amounts and
classification of liabilities that may result from our inability to continue as
a going concern.
VALUATION OF NON-CASH ISSUANCES OF COMMON STOCK
The Company issued common stock to several parties in non-cash transactions
during the three months ended December 31, 2003. For these issuances, valuation
was determined based upon the stock closing price on the date of grant.
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
In assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The valuation allowance has been increased by $46,579
during the three months ended December 31, 2003 as a result of increased net
operating losses. Net operating loss carry-forwards aggregate approximately
$2,674,000 and expire in the years through 2023.
As discussed previously, the Company has changed its strategy and is moving into
a new line of business. As a result of this change, and IRS rules, the net
operating loss carry-forwards discussed above will not be allowable.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2002
Three Months Ended
December 31,
2003 2002
--------- ---------
REVENUES $ 15,577 $ 3,322
COST OF REVENUES 13,133 8,534
--------- ---------
GROSS PROFIT 2,444 (5,212)
OPERATING EXPENSES:
Selling, general and administrative 17,210 9,956
Compensation 346,365 12,500
Consulting 88,499 --
Penalties -- 1,062
Legal and professional 215,300 2,000
Debenture liquidated damages 21,000 --
Rent 1,495 717
Travel and entertainment 1,281 15
Depreciation -- 7,800
--------- ---------
TOTAL OPERATING EXPENSES 691,150 34,050
--------- ---------
LOSS FROM OPERATIONS (688,706) (39,262)
OTHER EXPENSE:
Interest expense (6,234) (2,268)
--------- ---------
TOTAL OTHER EXPENSE (6,234) (2,268)
--------- ---------
NET LOSS $(694,940) $ (41,530)
========= =========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ --
========= =========
Revenue:
Operating revenue increased $12,255, or 369%, to $15,577 for the three months
ended December 31, 2003 from $3,322 for the three months ended December 31,
2002. Even though there was an increase, the total amount of revenue is
insignificant as a result of the Company making the decision to exit the current
line of business and to focus on being a consultant and advisor to customers.
Cost of Sales:
Cost of sales decreased $4,599, or 54%, to $13,133 for the three months ended
December 31, 2003 from $8,534 for the three months ended December 31, 2002. Even
though there was an increase, the total amount of revenue is insignificant as a
result of the Company making the decision to exit the current line of business
and to focus on being a consultant and advisor to customers.
20
Operating Expenses:
Operating expenses increased $657,100, or 1,930%, to $691,150 for the three
months ended December 31, 2003 from $34,050 for the three months ended December
31, 2002. The increase was primarily the result of a $333,865 increase in
compensation, a $88,499 increase in consulting, and a $213,300 increase in legal
and professional. The increase in compensation, consulting and legal and
professional was primarily the result of the issuance of stock for compensation
and services.
Other Expense:
Other expense increased $3,966, or 175% to $6,234 for the three months ended
December 31, 2003 from $2,268 for the three months ended December 31, 2002. The
increase was primarily due to accrued interest for indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $0 at December 31, 2003 as compared to $0 at
September 30, 2003, and working capital deficit was $839,135 at December 31,
2003 as compared to $726,139 at September 30, 2002. The increase in the working
capital deficit is primarily due to the fact of increases in accrued interest,
other current liabilities, accrued debenture liquidated damages, payroll taxes
payable and judgment payable.
Operating Activities: Net cash provided by operating activities was $0 for the
three months ended December 31, 2003 while cash that was used in operating
activities was $34,799 for the three months ended December 31, 2002. The
increase in cash provided by operations resulted primarily due to the fact of
increases in accrued interest, other current liabilities, accrued debenture
liquidated damages, payroll taxes payable and judgment payable.
Investing Activities: There were no investing cash flow activities for the three
months ended December 31, 2003 while cash that was provided by investing
activities was $40,930 for the three months ended December 31, 2002. The
decrease in cash provided from investing activities resulted primarily from a
decrease of $44,505 in cash advances to shareholders.
Financing Activities: There were no financing cash flow activities for the three
months ended December 31, 2003 and 2002.
SHORT-TERM DEBT
We are highly leveraged. At December 31, 2003, our current liabilities exceeded
our current assets by $839,135, our stockholders' deficiency was $839,135 we had
an accumulated deficit of $5,048,764 from previous business operations and we
had a deficit accumulated during the development stage for our new business
operations of $694,940. The following table is a summary of our short-term debt
as of December 31, 2003:
BALANCE AT
DECEMBER 31, 2003
Bank Loans
$35,000 bank installment loan, dated Feb. 19, 2000, bearing interest at 10% per annum, 60
monthly payments of principal and interest ............................................ $25,350
$35,000 bank line of credit, bearing interest at prime plus 1.25% per annum, interest
payable monthly and line of credit due July 15, 2002 .................................. 33,986
-------
$59,336
=======
On February 19, 2000, we obtained a bank installment loan in the amount of
$35,000, of which $25,350 is outstanding at December 31, 2003. The interest
rate is 10% per annum and sixty monthly payments of principal and interest in
the amount of $745 are required. This note is secured by the personal guaranty
of the Company's President.
21
At December 31, 2003, we had a bank line of credit, which provides for
borrowings of up to $35,000, of which $33,986 was outstanding. The interest rate
is Prime plus 1.25% per annum and monthly interest payments were required. The
line of credit matured on July 15, 2002 but the bank has not exercised its
rights of default and the facility was on a month to month basis. The line of
credit is secured by a personal guaranty of the Company's President.
Loan Payable - Related Party
Loan payable, dated January through July of 2001, bearing interest at 10% per annum and
due in July of 2002 ................................................................. $42,700
========
Beginning in January of 2001 and through July of 2001, Mark Triesch, a former
director Of the Company, loaned $43,700 to the Company in the form of a
promissory note. The note bears interest at ten percent (10%) per annum and the
principal and accrued interest was due one year from each of the investments. As
of July 2002, the entire amount was due and payable. In April 2003, the Company
repaid $1,000 of principal resulting in the current balance due of $42,700. At
December 31, 2003, $12,097 has been accrued as interest in the accompanying
balance sheet
Convertible Debentures
$175,000 Convertible Debentures, dated March and April of 2003, bearing interest at 6%
per annum and due in March and April of 2006 ....................................... $175,000
========
TOTAL SHORT-TERM DEBT $277,036
========
Pursuant to Securities Purchase Agreements, Convertible Debentures and related
contracts, in March of 2003, the Company issued $155,000 of six percent (6%)
convertible debentures due in March of 2006 and in April issued another $20,000
of the debentures due in April 2006. The Company received $122,100 of cash
proceeds, net of $52,900 of cash offering costs. The debenture holder has the
option of converting the principal and accrued interest into the Company's
common stock at a conversion price equal to seventy-five percent (75%) of the
lowest closing bid price per share for the twenty (20) trading days immediately
preceding the conversion. The Company has the option to redeem all or part of
the debentures prior to the maturity date at a price equal to one hundred thirty
percent (130%) of the principal amount plus accrued interest.
In March and April of 2003, the Company recognized an immediate $58,333 interest
expense and paid-in capital relating to a beneficial conversion feature inherent
in the debentures since the debentures were immediately convertible. In
connection with the offering, in addition to cash offering costs of $52,900, the
Company issued 500,000 of its common shares to the investment bankers. The
shares were valued on the issuance date at the trading price of $0.03 per share
or $12,500. The total offering costs of $65,400 were initially deferred to be
amortized over the term of the debentures, however due to a default provision
which changed the debentures maturity to due on demand (see below), the $65,400
was fully expensed as of September 30, 2003.
22
Under a related Registration Rights Agreement, the Company is subject to a 2%
monthly liquidated damages penalty for not filing a registration statement with
the Securities and Exchange Commission, within a stipulated timeframe, to
register the common shares underlying the convertible debentures and another 2%
monthly liquidated damages penalty relating to that registration statement not
becoming effective within a stipulated timeframe. The liquidated damages penalty
started accruing at 2% or $3,500 per month at June 1, 2003 and at another 2% or
$3,500 per month starting September 1, 2003. The penalties for June and July
2003 were satisfied with the issuance of 350,000 of the Company's common shares
to the debenture investors and remaining accrued liquidated damages were $10,500
at September 30, 2003. The Company recognized a $1,750 gain on the settlement of
$7,000 of accrued liquidated damages in June and July 2003 based on the $0.015
trading price of the common stock on the settlement date. For the three month
period ended December 31, 2003, the Company recorded an additional $21,000 of
liquidated damages expense and at December 31, 2003, the accrued balance is
$31,500.
Due to the default under the Registration Rights Agreement, the debentures went
into default as of June 1, 2003. Accordingly, the debentures became due on
demand at that date and are presented as current liabilities at December 31,
2003.
EQUITY FINANCING
None
LIQUIDITY
To continue with our business plan, we will require additional short-term
working capital and we have not had generating sufficient cash from operations
to fund our operating activities through the end of fiscal 2004. Presently, we
have no source of revenues and have moved into a new business concept as a
consultant and advisor to customers. We cannot assure you that the new business
concept will provide sufficient proceeds, if any, and borrowings under any
interim financing we are able to secure will be sufficient to meet our projected
cash flow needs.
Our ability to obtain additional financing depends on many factors beyond our
control, including the state of the capital markets, the market price of our
common stock, the prospects for our business and the approval by our
stockholders of an amendment to our certificate of incorporation increasing the
number of shares of common stock we are authorized to issue. The necessary
additional financing may not be available to us or may be available only on
terms that would result in further dilution to the current owners of our common
stock. Failure to obtain commitments for financing would have a material adverse
effect on our business, results of operations and financial condition. If the
financing we require to sustain our working capital needs is unavailable or
insufficient or we do not receive the necessary financing, we may be unable to
continue as a going concern.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table highlights, as of December 31, 2003, our contractual
obligations and commitments by type and period:
PAYMENTS DUE BY PERIOD
LESS THAN 1
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------- ----- ----------- --------- --------- -------------
Short-Term Debt: -- -- --
Bank Loans ................... 59,336 59,336 -- -- --
Loan Payable-Related Party ... 42,700 42,700 -- -- --
Convertible Debentures ....... 175,000 175,000 -- -- --
-------- -------- -------- -------- --------
Total Short-Term Debt ........ $277,036 $277,036 $ -- -- --
======== ======== ======== ======== ========
23
RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application encouraged. The adoption of
SFAS No. 144 as of January 1, 2002 did not have a significant impact on our
financial position and results of operations.
In April, 2002, the Financial Accounting Standards Board issued SFAS No. 145
(SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, related to accounting for debt
extinguishments, leases, and intangible assets of motor carriers. The provisions
of SFAS 145 are effective for fiscal years beginning after May 15, 2002 with
earlier adoption encouraged. The adoption of SFAS No. 145 did not have a
significant impact on our financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which established additional
accounting and disclosure requirements when an enterprise guarantees the
indebtedness of others. The enterprise providing the guarantee is required to
recognize a liability for the fair value of the guarantee and disclose the
information in its interim and annual financial statements. The adoption of FIN
45 did not have a significant impact on our financial position and results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
which as an interpretation defines when and who consolidates a "variable
interest entity," or "VIE." This new consolidation model applies to entities (i)
where the equity investors (if any) do not have a controlling financial
interest, or (ii) whose equity investment at risk is insufficient to finance
that entity's activities without receiving additional subordinated financial
support from other parties and requires additional disclosures for all
enterprises involved with the VIE. FIN 46 is effective during 2003 depending on
when the VIE is created. We do not believe that the adoption of FIN 46 will have
a significant impact on our financial position and results of operations.
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends FASB No. 123
(FAS 123), "Accounting for Stock-Based Compensation." FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of FAS 123 to require disclosures in both the annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and disclosure provisions of FAS 148 were effective for the
Company's financial statements issued for the first quarter of 2003. The
adoption of FAS 148 did not have a material impact on our financial position and
results of operations.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 (SFAS
150), "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." It establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This standard is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of FAS 150 did not have a significant impact on our financial position
and results of operations.
24
2004 OUTLOOK
The ability to invest further will be heavily dependent on securing additional
capital from investors or debt. There is no assurance that additional equity or
debt financing will be available on terms acceptable to Management.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Andrew DeVries, III, our President and Chief Executive Officer and Chief
Financial Officer, has concluded that our disclosure controls and procedures are
appropriate and effective. He has evaluated these controls and procedures as of
a date within 90 days of the filing date of this report on Form 10-QSB. There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II
ITEM 1. LEGAL PROCEEDINGS
On or around December 27, 2001, Wyndham Hotel Corporation ("Wyndham") filed a
complaint, cause # 2001CI14150, against the Company in the 407th District Court
for Bexar County, Texas, for unpaid charges in connection with meals and lodging
during a convention sponsorship. On June 14, 2002, Wyndham obtained a summary
judgment against Nannaco in the amount of $42,308, representing $32,045 of
unpaid charges plus $10,263 of legal fees. The Company does not have sufficient
resources to pay the judgment and interest accrued at a rate of ten percent
(10%) until paid in full. At December 31, 2003, the total amount due is $49,937
(including $7,629 of accrued interest) and is included under the caption
Judgment Payable in the accompanying balance sheet.
ITEM 2. CHANGES IN SECURITIES
The following securities were issued pursuant to Section 4(2) of the Securities
Act of 1933 for the period ended December 31, 2003:
On September 30, 2003, the Company granted 75,000,000 shares to the President.
The transfer agent did not issue the shares until October 15, 2003 and
accordingly; such shares were classified as common stock issuable in the balance
sheet at September 30, 2003. On October 15, 2003, the transfer agent issued
these shares and they have been reclassified as common stock at December 31,
2003.
In November 2003, the Company issued 65,500,000 shares of common stock.
15,000,000 of the shares were issued as an annual bonus for the President of the
Company and were valued at $0.01 per share, the closing price on the grant date
of November 9, 2003 and are being amortized over the remaining life of the
employment agreement from October 1, 2003 through June 1, 2005.
The Company on November 17, 2003 committed to issue two year warrants to
purchase 3,000,000 of the Company's common shares at an exercise price of $0.02
per share and two year warrants to purchase 3,000,000 of the Company's common
shares at an exercise price of $0.03 per share. As of December 31, 2003, the
warrants have not been issued to the consultant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the months of March and April 2003, certain investors purchased $175,000
worth of convertible debentures from the Company (the "Debentures").
25
Pursuant to section 2(a)(i) of the Registration Rights Agreements (The
Registration Rights Agreement is Exhibit B to the Securities Purchase Agreement,
the definitive document outlining the terms and conditions of the parties in
connection with the purchase of a Convertible Debenture. The Debenture is
Exhibit A to the Securities Purchase Agreement.) executed by the Debenture
Holders and the Company, the Company is required to file a registration
statement no later than ten (10) days following the "Final Closing Date" (the
"Registration Statement"), for purposes of registering the shares of common
stock into which the Debentures convert (the "Debenture Shares"). Pursuant to
section 2(b)(iii) of the Registration Rights Agreements, in the event the
Company is in default of the provisions of section 2(b)(i) (requiring filing of
a registration statement by the "Required Filing Date" set forth in section
2(a)(i)) ("Default"), the Company must pay the Debenture Holders (a) a cash
amount equal to Two Percent (2%) per month of the outstanding principal amount
of the Debentures, and (b) another Two Percent (2%) per month of the outstanding
principal amount of the Debentures for each subsequent month after a Default
until section 2(b)(i) is complied with.
In lieu of making cash payments to the Debenture Holders as a result of the
Default, the Company has offered to issue 1,750,000 shares of its common stock
to the Debenture Holders (the "Penalty Shares"). The Company is awaiting a
response from the Debenture Holders as to whether they will accept the offer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- ------------------------------------- ----------------------------------- -----------------------------------
Exhibit Title Location
- ------------------------------------- ----------------------------------- -----------------------------------
3 Articles of Incorporation Incorporated by Reference to the SB-2
registration statement filed on
August 21, 2000.
- ------------------------------------- ----------------------------------- -----------------------------------
3.1 Bylaws Incorporated by Reference to the
SB-2 registration statement
filed on August 21, 2000.
- ------------------------------------- ----------------------------------- -----------------------------------
3.2 Certificate of Amendment to Incorporated by Reference to the
Articles of Incorporation SB-2 registration statement filed
on August 21, 2000.
- ------------------------------------- ----------------------------------- -----------------------------------
3.3 Certificate of Amendment to Incorporated by Reference to the
Articles of Incorporation SB-2 registration statement filed
on August 21, 2000.
- ------------------------------------- ----------------------------------- -----------------------------------
31.1 Certification by Principal Attached
Executive Officer
- ------------------------------------- ----------------------------------- -----------------------------------
31.2 Certification of Principal Attached
Financial Officer
- ------------------------------------- ----------------------------------- -----------------------------------
32 Certifications of Principal Attached
Executive and Financial Officer
Pursuant to 906
- ------------------------------------- ----------------------------------- -----------------------------------
(b) Reports on Form 8-K.
During the period ended December 31, 2003, the Company filed the following
reports on Form 8-K:
- ------------------------------------------- ------------------------------------
Date of Event Reported Items Reported
- ------------------------------------------- ------------------------------------
11.18.03 Items 1, 2 and 7
- ------------------------------------------- ------------------------------------
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of NANNACO, Inc.,
in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
February 23, 2004
Principal Executive Officer,
Principal Financial Officer,
/s/ Andrew DeVries Sole Director
- ---------------------------------
Andrew DeVries
28