UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 2008.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period to .
----------- -----------
Commission File Number 333-153473
RADUGA INC.
(Exact name of small business issuer as specified in its charter)
Nevada 26-3267343
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
575 Anton Blvd., Suite 300
Costa Mesa, California 92626
---------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(714) 432-6520
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
None
-----------------------------------------------------
(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
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
<page>
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the Registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of December 15, 2008, there were
8,500,000 shares of common stock, par value $0.001, issued and outstanding.
<page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO INTERIM FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
Interim Financial Statements-
Balance Sheets as of October 31, 2008, and July 31, 2008..................F-2
Statements of Operations for the Three Months Ended October 31, 2008,
Period Ended October 31, 2007, and Cumulative from Inception............F-3
Statements of Cash Flows for the Three Months Ended October 31, 2008,
Period Ended October 31, 2007, and Cumulative from Inception............F-4
Notes to Financial Statements October 31, 2008, and 2007..................F-5
F-1
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS (NOTE 2)
AS OF OCTOBER 31, 2008, AND JULY 31, 2008
(Unaudited)
<table>
<caption>
ASSETS
------
October 31, July 31,
2008 2008
--------------- -------------
<s> <c> <c>
Current Assets:
Cash and cash equivalent $ 17,824 $ 36,635
--------------- -------------
Total current assets 17,824 36,635
--------------- -------------
Other Assets:
Deposit 200 200
--------------- -------------
Total other assets 200 200
--------------- -------------
Total Assets $ 18,024 $ 36,835
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable - Trade $ 2,500 $ -
Accrued liabilities 1,696 3,086
Accrued compensation - Directors and stockholders 3,000 1,000
Due to related party - Director and stockholder 2,190 4,596
Note payable - Director and stockholder 7,000 7,000
--------------- -------------
Total current liabilities 16,386 15,682
--------------- -------------
Total liabilities 16,386 15,682
--------------- -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $0.001 per share, 75,000,000 shares
authorized; 8,500,000 shares issued and outstanding 8,500 8,500
Additional paid-in capital 27,000 27,000
(Deficit) accumulated during the development stage (33,862) (14,347)
--------------- -------------
Total stockholders' equity 1,638 21,153
--------------- -------------
Total Liabilities and Stockholders' Equity $ 18,024 $ 36,835
=============== =============
</table>
The accompanying notes to the financial statements are
an integral part of these balance sheets.
F-2
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (NOTE 2)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2008,
PERIOD ENDED OCTOBER 31, 2007, AND CUMULATIVE FROM
INCEPTION (AUGUST 17, 2007) THROUGH OCTOBER 31, 2008
(Unaudited)
<table>
<caption>
Three Months Period Cumulative
Ended October 31, Ended October 31, From
2008 2007 Inception
--------------- --------------- --------------
<s> <c> <c> <c>
Revenues $ 16,525 $ - $ 18,550
--------------- --------------- ---------------
Cost of Goods Sold 9,540 - 10,265
--------------- --------------- ---------------
Gross Profit 6,985 - 8,285
--------------- --------------- ---------------
Expenses:
General and administrative -
Accounting and audit fees 3,850 - 6,850
Consulting fees 5,000 - 5,000
Filing fees 1,211 - 1,211
General and administrative - Other 569 - 976
Incorporation costs - 775 775
Legal fees 5,800 - 5,800
Officer's compensation 2,000 250 4,500
Rent 876 - 1,745
Transfer agent fees 500 - 500
Travel and promotion 6,584 - 14,594
--------------- --------------- ---------------
Total general and administrative expenses 26,390 1,025 41,951
--------------- --------------- ---------------
(Loss) from Operations (19,405) (1,025) (33,666)
Other Income (Expense) (110) - (196)
Provision for Income Taxes - - -
--------------- --------------- ---------------
Net (Loss) $ (19,515) $ (1,025) $ (33,862)
=============== =============== ===============
(Loss) Per Common Share:
(Loss) per common share - Basic and Diluted $ (0.00) $ -
=============== ===============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 8,500,000 -
=============== ===============
</table>
The accompanying notes to financial statements are
an integral part of these statements.
F-3
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (NOTE 2)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2008,
PERIOD ENDED OCTOBER 31, 2007, AND CUMULATIVE FROM
INCEPTION (AUGUST 17, 2007) THROUGH OCTOBER 31, 2008
(Unaudited)
<table>
<caption>
Three Months Period Cumulative
Ended October 31, Ended October 31, From
2008 2007 Inception
------------- ------------- -------------
<s> <c> <c> <c>
Operating Activities:
Net (loss) $ (19,515) $ (1,025) $ (33,862)
Adjustments to reconcile net (loss) to net cash ------------- ------------- -------------
(used in) operating activities:
Changes in net assets and liabilities:
Deposit - - (200)
Accounts payable - Trade 2,500 775 2,500
Accrued liabilities 610 250 4,696
------------- ------------- -------------
Net Cash (Used in) Operating Activities (16,405) - (26,866)
------------- ------------- -------------
Investing Activities: - - -
------------- ------------- -------------
Net Cash Provided by Investing Activities - - -
------------- ------------- -------------
Financing Activities:
Proceeds from issuance of common stock - - 35,500
Related party loan - Director and stockholder (2,406) - 2,190
Note payable - Director and stockholder - - 7,000
------------- ------------- -------------
Net Cash (Used in) Provided by Financing Activities (2,406) - 44,690
------------- ------------- -------------
Net Increase (Decrease) in Cash (18,811) - 17,824
Cash and Cash Equivalent - Beginning of Period 36,635 - -
------------- ------------- -------------
Cash and Cash Equivalent - End of Period $ 17,824 $ - $ 17,824
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ - $ -
============= ============= =============
Income taxes $ - $ - $ -
============= ============= =============
</table>
The accompanying notes to the financial statements are
an integral part of these statements.
F-4
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
(1) Summary of Significant Accounting Policies
Basis of Presentation and Organization
--------------------------------------
Raduga Inc. (the "Company" or "Raduga") is a Nevada corporation in the
development stage and has minimal operations. The Company was incorporated under
the laws of the State of Nevada on August 17, 2007. The business plan of the
Company is to sell and distribute eyewear. The accompanying financial statements
of Raduga were prepared from the accounts of the Company under the accrual basis
of accounting.
In May 2008, the Company commenced a capital formation activity through a
Private Placement Offering ("PPO"), exempt from registration under the
Securities Act of 1933, to raise up to $30,000 through the issuance of 3,000,000
shares of its common stock, par value $0.001 per share, at an offering price of
$0.01 per share. As of July 31, 2008, the Company had received $30,000 in
proceeds from 30 foreign investors under the PPO. On September 12, 2008, Raduga
filed a Registration Statement on Form S-1 with the SEC to register 3,000,000
shares of its outstanding common stock on behalf of the selling stockholders.
The Registration Statement on Form S-1 became effective with the SEC on
September 30, 2008. Raduga will not receive any of the proceeds of this
registration activity once the shares of common stock are sold.
Unaudited Interim Financial Statements
---------------------------------------
The accompanying interim financial statements of Raduga have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information, and the instructions for Form 10-Q
under Regulation S-X. They do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Therefore, these financial statements should be read in conjunction
with Raduga's audited financial statements and notes thereto for the year ended
July 31, 2008, included in Raduga's Registration Statement on Form S-1 filed on
September 12, 2008, with the SEC.
The accompanying interim financial statements included herein are unaudited.
However, they contain all normal recurring accruals and adjustments that, in the
opinion of management, are necessary to present fairly the Company's financial
position as of October 31, 2008, and the results of its operations and cash
flows for the three months ended October 31, 2008, the period ended October 31,
2007, and cumulative from inception. The results of operations for the three
months ended October 31, 2008, are not necessarily indicative of the results to
be expected for future quarters or the year ending July 31, 2009.
Cash and Cash Equivalents
-------------------------
For purposes of reporting within the statement of cash flows, the Company
considers all cash on hand, cash accounts not subject to withdrawal restrictions
or penalties, and all highly liquid debt instruments purchased with a maturity
of three months or less to be cash and cash equivalents.
F-5
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
Revenue Recognition
-------------------
Raduga is in the development stage and has yet to realize significant revenues
from operations. Once the Company has commenced full operations, it will
recognize revenues when the sale and/or distribution of eyewear is complete,
risk of loss and title to the eyewear have transferred to the customer, there is
persuasive evidence of an agreement, acceptance has been approved by its
customer, the fee is fixed or determinable based on the completion of stated
terms and conditions, and collection of any related receivable is probable. Net
sales will be comprised of gross revenues less expected returns, trade
discounts, and customer allowances that will include costs associated with
off-invoice markdowns and other price reductions, as well as trade promotions
and coupons. These incentive costs will be recognized at the later of the date
on which the Company recognized the related revenue or the date on which the
Company offers the incentive.
Loss per Common Share
---------------------
Basic loss per share is computed by dividing the net loss attributable to the
common stockholders by the weighted average number of shares of common stock
outstanding during the periods. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. There were no dilutive financial instruments issued or outstanding for
the three months ended October 31, 2008 and period ended October 31, 2007.
Income Taxes
------------
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between the bases of
certain assets and liabilities for income tax and financial reporting purposes.
The deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating the
differences.
The Company maintains a valuation allowance with respect to deferred tax assets.
Raduga establishes a valuation allowance based upon the potential likelihood of
realizing the deferred tax asset and taking into consideration the Company's
financial position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of sufficient
taxable income within the carryforward period under the Federal tax laws.
Changes in circumstances, such as the Company generating taxable income, could
cause a change in judgment about the realizability of the related deferred tax
asset. Any change in the valuation allowance will be included in income in the
year of the change in estimate.
F-6
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
Fair Value of Financial Instruments
-----------------------------------
The Company estimates the fair value of financial instruments using the
available market information and valuation methods. Considerable judgment is
required in estimating fair value. Accordingly, the estimates of fair value may
not be indicative of the amounts Raduga could realize in a current market
exchange. As of October 31, 2008, and July 31, 2008, the carrying value of the
Company's financial instruments approximated fair value due to the short-term
nature and maturity of these instruments.
Deferred Offering Costs
-----------------------
The Company defers as other assets the direct incremental costs of raising
capital until such time as the offering is completed. At the time of the
completion of the offering, the costs are charged against the capital raised.
Should the offering be terminated, deferred offering costs are charged to
operations during the period in which the offering is terminated.
Property and Equipment
----------------------
Property and equipment is stated at cost. Expenditures that materially increase
useful lives are capitalized, while ordinary maintenance and repairs are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets.
Impairment of Long-lived Assets
-------------------------------
Capital assets are reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment of Disposal of Long-lived Assets," which was
adopted effective January 1, 2002. Under SFAS No. 144, these assets are tested
for recoverability whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable. An impairment charge is
recognized for the amount, if any, when the carrying value of the asset exceeds
the fair value. For the three months ended October 31, 2008, and period ended
October 31, 2007, there were no events or circumstances occurred for which an
evaluation of the recoverability of long-lived assets was required.
Advertising and Promotion
-------------------------
The Company expenses all advertising and promotion costs as incurred. Raduga did
not incur any advertising and promotion costs for the three months ended October
31, 2008, or the period ended October 31, 2007.
Concentration of Risk
---------------------
As of October 31, 2008, and July 31, 2008, the Company maintained its cash
accounts at one commercial bank. The balances in the accounts are subject to
FDIC coverage.
F-7
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
Common Stock Registration Expenses
----------------------------------
The Company considers incremental costs and expenses related to the registration
of equity securities with the SEC, whether by contractual arrangement as of a
certain date or by demand, to be unrelated to original issuance transactions. As
such, subsequent registration costs and expenses are reflected in the
accompanying financial statements as general and administrative expenses, and
are expensed as incurred.
Lease Obligations
-----------------
All noncancellable leases with an initial term greater than one year are
categorized as either capital or operating leases. Assets recorded under capital
leases are amortized according to the methods employed for property and
equipment or over the term of the related lease, if shorter.
Estimates
---------
The financial statements are prepared on the basis of accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of October 31, 2008, and July 31, 2008, and expenses
for the three months ended October 31, 2008, and period ended October 31, 2007,
and cumulative from inception. Actual results could differ from those estimates
made by management.
(2) Development Stage Activities and Going Concern
The Company is currently in the development stage, and has minimal operations.
The business plan of Raduga is to expand its operations in sales and
distribution of eyewear.
During the period from inception (August 17, 2007) through October 31, 2008, the
Company was incorporated, received initial working capital through loans from a
Director and stockholder, and completed a capital formation activity to raise up
to $30,000 from the sale of 3,000,000 shares of its common stock through a PPO
to various foreign stockholders. As of July 31, 2008, the Company had raised
$30,000 in proceeds from 30 foreign investors related to the PPO. On September
12, 2008, Raduga filed a Registration Statement on Form S-1 with the SEC to
register 3,000,000 shares of its common stock for selling stockholders. The
Registration Statement on Form S-1 became effective with the SEC on September
30, 2008. The Company will not receive any proceeds from the sale of common
stock by selling stockholders.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. As of October 31,
2008, the Company had working capital of $1,438 and an accumulated deficit since
inception of $33,862. The Company has not established any source of significant
revenue to cover its operating costs, and as such, has incurred an operating
loss since inception. The ability of the Company to continue as a going concern
F-8
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
is dependent upon the generation of profitable operations in the future and/or
the completion of the necessary financing to meet the Company's obligations and
repay its liabilities arising from normal business operations when they come
due. These and other factors raise substantial doubt about Raduga's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Company to
continue as a going concern. Management plans to continue to provide for its
capital needs by the issuance of common stock and related party advances.
(3) Loans from Officers and Directors
As of October 31, 2008, a loan from an individual who is a Director and
Secretary of the Company amounted to $2,190. The loan was provided for working
capital purposes, and is unsecured, non-interest bearing, and has no terms for
repayment.
As of October 31, 2008, a loan, evidenced by a promissory note issued to the
Director, Chief Financial Officer, and Treasurer of the Company, amounted to
$7,000. The loan is unsecured, bears interest at 6.25% per annum, and as of
October 31, 2008, consisted of $7,000 of principal due on May 20, 2009, and $196
of accrued interest.
(4) Common Stock
The Company is authorized to issue 75,000,000 shares of its common stock with a
par value of $0.001 per share. No other classes of stock are authorized. As of
October 31, 2008, the Company had not granted any stock options and had not
recorded any stock-based compensation.
In May 2008, the Company issued to a Director who is the Chief Executive Officer
3,500,000 shares of its common stock at par value. This transaction was valued
at $3,500.
In May 2008, the Company issued to a Director who is the Chief Financial Officer
1,000,000 shares of its common stock at par value. This transaction was valued
at $1,000. The Company also issued to a Director who is the Corporate Secretary
1,000,000 shares of its common stock at par value. This transaction was valued
at $1,000.
In May 2008, the Board of Directors of the Company approved a PPO, exempt from
registration under the Securities Act of 1933, to raise up to $30,000 through
the issuance of 3,000,000 shares of its common stock, par value $0.001 per
share, at an offering price of $0.01 per share. The PPO had an offering period
of 180 days. As of July 31, 2008, the Company had fully subscribed the PPO to 30
foreign investors, and raised $30,000 in proceeds with the issuance of 3,000,000
shares of its common stock.
On September 12, 2008, Raduga filed a Registration Statement on Form S-1 with
the SEC to register 3,000,000 shares of its common stock for selling
F-9
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
stockholders. The Registration Statement on Form S-1 became effective with the
SEC on September 30, 2008. The Company will not receive any proceeds from the
sale of common stock by selling stockholders.
(5) Income Taxes
The provision (benefit) for income taxes for the three months ended October 31,
2008, and period ended October 31, 2007, was as follows (assuming a 15%
effective income tax rate):
Three Months
Ended Period Ended
October 31, October 31,
2008 2007
----------------- -----------------
Current Tax Provision:
Federal-
Taxable income $ - $ -
----------------- -----------------
Total current tax provision $ - $ -
================= =================
Deferred Tax Provision:
Federal-
Loss carryforwards $ 2,927 $ 154
Change in valuation allowance (2,927) (154)
----------------- -----------------
Total deferred tax provision $ - $ -
================= =================
Raduga had deferred income tax assets as of October 31, 2008, and July 31, 2008,
as follows:
As of As of
October 31, July 31,
2008 2008
----------------- -----------------
Loss carryforwards $ 5,079 $ 2,152
Less - Valuation allowance (5,079) (2,152)
----------------- -----------------
Total net deferred tax assets $ - $ -
================= =================
The Company provided a valuation allowance equal to the deferred income tax
assets for the three months ended October 31, 2008, and period ended October 31,
2007, because it is not presently known whether future taxable income will be
sufficient to utilize the loss carryforwards.
As of October 31, 2008, the Company had approximately $33,862 (July 31, 2008 -
$14,347) in tax loss carryforwards that can be utilized in future periods to
reduce taxable income, and begin to expire in the year 2027.
F-10
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
(6) Related Party Transactions
As described in Note 3, as of October 31, 2008, Raduga owed $2,190 to an
individual who is a Director, Secretary, and a stockholder of the Company.
As described in Note 3, as of October 31, 2008, a loan, evidenced by a
promissory note issued to the Director, Chief Financial Officer, and Treasurer
of the Company, amounted to $7,000. The loan is unsecured, bears interest at
6.25% per annum, and as of October 31, 2008, consisted of $7,000 of principal
due on May 20, 2009, and $196 of accrued interest.
As described in Note 4, the Company issued 3,500,000 shares of its common stock
to its Director, President, and Chief Executive Officer at par value. The
transaction was valued at $3,500. In addition, the Company issued to a Director
who is the Chief Financial Officer 1,000,000 shares of its common stock at par
value. This transaction was valued at $1,000. The Company also issued to a
Director who is the Corporate Secretary 1,000,000 shares of its common stock at
par value. This transaction was valued at $1,000.
During the three months ended October 31, 2008, the Director, President, Chief
Executive Officer, and shareholder provided management services to the Company
valued at $1,000. As of October 31, 2008, the amount owed to this individual was
$2,000.
During the three months ended October 31, 2008, the Director, Secretary, and
shareholder of the Company provided management services valued at $1,000. As of
October 31, 2008, the amount owed to this individual was $1,000.
(7) Commitments
On May 5, 2008, Raduga entered into an agreement with a distributor located in
the Ukraine whereby the distributor was granted the non-exclusive and
non-assignable right to market, sell, and distribute products supplied by Raduga
in the geographic region of Kiev and Odessa, Ukraine. The distribution agreement
may be terminated on 30-days notice by either party.
On May 6, 2008, the Company entered into a written agreement with a third party
to lease office space in Costa Mesa, California for operations. The monthly
lease amount is $200, and the term of the lease arrangement is 12 months. The
Company will also be charged for miscellaneous office expenses such as copying,
printing, telephone, and facsimile charges. For the three months ended October
31, 2008, the Company paid $876 in lease rental expenses.
(8) Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"), which permits entities to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. An entity would report
F-11
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities.
SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year, provided the entity also elects to apply the
provisions of SFAS No. 157, "Fair Value Measurements." Upon implementation, an
entity shall report the effect of the first re-measurement to fair value as a
cumulative-effect adjustment to the opening balance of retained earnings. Since
the provisions of SFAS No. 159 are applied prospectively, any potential impact
will depend on the instruments selected for fair value measurement at the time
of implementation. The management of Raduga does not believe that this new
pronouncement will have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations -
Revised 2007" ("SFAS No. 141R"), which replaces FASB Statement No. 141,
"Business Combinations." SFAS No. 141R establishes principles and requirements
intending to improve the relevance, representational faithfulness, and
comparability of information that a reporting entity provides in its financial
statements about a business combination and its effects. This is accomplished
through requiring the acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date,
measured at their acquisition-date fair values. This includes contractual
contingencies only if it is more likely than not that they meet the definition
of an asset of a liability in FASB Concepts Statement No. 6, "Elements of
Financial Statements - a replacement of FASB Concepts Statement No. 3." This
statement also requires the acquirer to recognize goodwill as of the acquisition
date, measured as a residual. However, this statement improves the way in which
an acquirer's obligations to make payments conditioned on the outcome of future
events are recognized and measured, which in turn improves the measure of
goodwill. This statement also defines a bargain purchase as a business
combination in which the total acquisition-date fair value of the consideration
transferred plus any noncontrolling interest in the acquiree, and it requires
the acquirer to recognize that excess in earnings as a gain attributable to the
acquirer. This, therefore, improves the representational faithfulness and
completeness of the information provided about both the acquirer's earnings
during the period in which it makes a bargain purchase and the measures of the
assets acquired in the bargain purchase. The management of Raduga does not
expect the adoption of this pronouncement to have a material impact on its
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS No.
160"), which establishes accounting and reporting standards to improve the
relevance, comparability, and transparency of financial information in its
consolidated financial statements. This is accomplished by requiring all
F-12
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
entities, except not-for-profit organizations, that prepare consolidated
financial statements to (a) clearly identify, label, and present ownership
interests in subsidiaries held by parties other than the parent in the
consolidated statement of financial position within equity, but separate from
the parent's equity; (b) clearly identify and present both the parent's and the
noncontrolling interest's attributable consolidated net income on the face of
the consolidated statement of income; (c) consistently account for changes in
the parent's ownership interest while the parent retains its controlling
financial interest in the subsidiary and for all transactions that are
economically similar to be accounted for similarly; (d) measure of any gain,
loss, or retained noncontrolling equity at fair value after a subsidiary is
deconsolidated; and (e) provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This Statement also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
No. 160 is effective for fiscal years and interim periods beginning on or after
December 15, 2008. The management of Raduga does not expect the adoption of this
pronouncement to have a material impact on its financial statements.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
133" ("SFAS No. 161"). SFAS No. 161 enhances required disclosures regarding
derivatives and hedging activities,including enhanced disclosures regarding how:
(a) an entity uses derivative instruments; (b) derivative instruments and
related hedged items are accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"; and (c) derivative instruments
and related hedged items affect an entity's financial position, financial
performance, and cash flows. Specifically, SFAS No. 161 requires:
- Disclosure of the objectives for using derivative instruments be disclosed
in terms of underlying risk and accounting designation;
- Disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format;
- Disclosure of information about credit-risk-related contingent features; and
- Cross-reference from the derivative footnote to other footnotes in which
derivative-related information is disclosed.
SFAS No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. Earlier application is encouraged. The management of Raduga
does not expect the adoption of this pronouncement to have a material impact on
its financial statements.
In May 2008, the FASB issued FASB Statement No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles in the
United States of America. The sources of accounting principles that are
generally accepted are categorized in descending order as follows:
F-13
<page>
RADUGA INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008, AND 2007
(Unaudited)
a) FASB Statements of Financial Accounting Standards and Interpretations,
FASB Statement 133 Implementation Issues, FASB Staff Positions, and
American Institute of Certified Public Accountants (AICPA) Accounting
Research Bulletins and Accounting Principles Board Opinions that are
not superseded by actions of the FASB.
b) FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry
Audit and Accounting Guides and Statements of Position.
c) AICPA Accounting Standards Executive Committee Practice Bulletins that
have been cleared by the FASB, consensus positions of the FASB Emerging
Issues Task Force (EITF), and the Topics discussed in Appendix D of
EITF Abstracts (EITF D-Topics).
d) Implementation guides (Q&As) published by the FASB staff, AICPA
Accounting Interpretations, AICPA Industry Audit and Accounting Guides
and Statements of Position not cleared by the FASB, and practices that
are widely recognized and prevalent either generally or in the
industry.
On May 26, 2008, the FASB issued FASB Statement No.163,"Accounting for Financial
Guarantee Insurance Contracts" ("SFAS No. 163"). SFAS No. 163 clarifies how FASB
Statement No. 60, "Accounting and Reporting by Insurance Enterprises" ("SFAS
No.60"), applies to financial guarantee insurance contracts issued by insurance
enterprises, including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about financial
guarantee insurance contracts.
The accounting and disclosure requirements of SFAS No. 163 are intended to
improve the comparability and quality of information provided to users of
financial statements by creating consistency. Diversity exists in practice in
accounting for financial guarantee insurance contracts by insurance enterprises
under SFAS No. 60, "Accounting and Reporting by Insurance Enterprises." That
diversity results in inconsistencies in the recognition and measurement of claim
liabilities because of differing views about when a loss has been incurred under
FASB Statement No. 5, "Accounting for Contingencies" ("SFAS No. 5"). SFAS No.
163 requires that an insurance enterprise recognize a claim liability prior to
an event of default when there is evidence that credit deterioration has
occurred in an insured financial obligation. It also requires disclosure about
(a) the risk-management activities used by an insurance enterprise to evaluate
credit deterioration in its insured financial obligations and (b) the insurance
enterprise's surveillance or watch list.
SFAS No. 163 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years, except for disclosures about the insurance enterprise's risk-management
activities. Disclosures about the insurance enterprise's risk-management
activities are effective the first period beginning after issuance of SFAS No.
163. Except for those disclosures, earlier application is not permitted. The
management of Raduga does not expect the adoption of this pronouncement to have
material impact on its financial statements.
F-14
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
- --------------------------
This Quarterly Report contains forward-looking statements. Forward-looking
statements are projections of events, revenues, income, future economic
performance or management's plans and objectives for our future operations. In
some cases, you can identify forward-looking statements by terminology such as
"may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors" and the risks set out below, any of which may
cause our or our industry's 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 these
forward-looking statements. These risks include, by way of example and not in
limitation:
- - the uncertainty of profitability based upon our history of losses;
- - risks related to failure to obtain adequate financing on a timely basis and on
acceptable terms to continue as going concern;
- - risks related to our international operations and currency exchange
fluctuations;
- - risks related to product liability claims;
- - other risks and uncertainties related to our business plan and business
strategy.
This list is not an exhaustive list of the factors that may affect any of our
forward-looking statements. These and other factors should be considered
carefully and readers should not place undue reliance on our forward-looking
statements. Forward-looking statements are made based on management's beliefs,
estimates and opinions on the date the statements are made and we undertake no
obligation to update forward-looking statements if these beliefs, estimates and
opinions or other circumstances should change. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, evels of activity, performance,or achievements.
Except as required by applicable law,including the securities laws of the United
States of America, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
Our financial statements are stated in United States dollars (US$) and are
prepared in accordance with accounting principles generally accepted in the
United States of America.
In this Quarterly Report, unless otherwise specified, all dollar amounts are
expressed in United States dollars and all references to "common stock" refer
to the common shares in our capital stock.
As used in this Quarterly Report, the terms "we," "us," "our," the
"Company," and "Raduga" mean Raduga Inc., unless otherwise indicated.
<page>
Our Current Business
- --------------------
We were formed on August 17, 2007. Raduga Inc. is a development stage company
that markets and distributes prescription eyeglass frames and fashion sunglasses
from independent North American manufacturers and designers to the Ukrainian
market. Our goal is to uniquely position ourselves as a wholesaler and
distributor of less known American eyewear brands and manufacturers in
medium-priced category that generally are not available in the Eastern European
market. We plan to specialize in sales and distribution of several eyewear
categories consisting of: (i) Prescription frames; (ii) Sunglasses (some sunwear
glasses styles are Rx-able); (iii) Ready to wear reading glasses; and (iv)
Specialty sunglasses and goggles for sport markets, including surfing,
skateboarding, snowboarding, and skiing. We have entered into an agreement with
Optex, a distributor located in Ukraine, whereby Optex was granted the
non-exclusive and non-assignable right to re-sell, market, and distribute
products supplied by Raduga Inc.
We will focus our marketing and sales efforts on youth lifestyle markets, and
specifically, persons ranging in age from 18 to 45 years. We are particularly
focused on ensuring that the product designs we will sell are keyed to current
trends in the fashion industry, incorporate the most advanced technologies to
enhance performance, and provide value to our target market. Our target market
is the rapidly emerging Ukrainian middle class of fashion minded urban
consumers. Geographically, we plan that our points of entry will be the capital
of Ukraine, Kiev, and then other major Ukrainian cities such as Odessa,
Dnepropetrovsk, Kharkov, and Sevastopol.
RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operation for the
three-month period ended October 31, 2008, and the factors that could affect our
future financial condition. This discussion and analysis should be read in
conjunction with our unaudited financial statements and the notes thereto
included elsewhere in this Quarterly Report. Our financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America. All references to dollar amounts in this section are
in United States dollars unless expressly stated otherwise.
Financial Data Summary
- ----------------------
Three Months August 17, 2007
Ended (Inception) Through
October 31, October 31,
2008 2007
----------- -------------
Revenue $ 16,525 $ -
General and Administrative Expenses 26,390 1,025
----------- -------------
Net Loss $ 19,515 $ 1,025
=========== =============
<page>
Revenue
- -------
Three Months August 17, 2007
Ended (Inception) Through
October 31, October 31,
2008 2007
----------- -------------
Sales $ 16,525 $ -
Cost of sales 9,540 -
----------- -------------
Gross profit $ 6,985 $ -
=========== =============
Our gross revenue from the sale of eyewear for the three-month period ended
October 31, 2008, was $16,525, compared to $Nil for the period ended October 31,
2007. The cost of sales was $9,540 resulting in gross profit of $6,985.
Operating Costs and Expenses
- ------------------------------
The major components of our expenses for the three-month period ended October
31, 2008, and for the period ended October 31, 2007, are outlined in the table
below:
Three Months August 17, 2007
Ended (Inception) Through
October 31, October 31,
2008 2007
------------ -------------
Accounting and audit fees $ 3,850 $ -
Consulting fees 5,000 -
Filing fees 1,211 -
General and administrative - other 569 -
Incorporation costs - 775
Legal fees 5,800 -
Officer's compensation 2,000 250
Rent 876 -
Transfer agent fees 500 -
Travel and promotion 6,584 -
------------ --------------
$ 26,390 $ 1,025
============ ==============
Operating Expenses
The increase in our operating costs during the three months ended October 31,
2008, compared to the period ended October 31, 2007, was due to the increase in
general and administrative costs, officer's compensation, rent, transfer agent
expenses, travel and promotion and the increase in professional fees associated
with our reporting obligations under the Securities Exchange Act of 1934. These
changes are associated with the increase in our sales and corporate activities
and expenditures related to the implementation of our business plan.
<page>
Liquidity and Capital Resources
- -------------------------------
Working Capital
- ---------------
Three Months
Ended Year Ended
October 31, July 31,
2008 2008
----------- -------------
Current Assets $ 17,824 $ 36,635
Current Liabilities 16,386 15,682
----------- -------------
Working Capital $ 1,438 $ 20,953
=========== =============
Cash Flows
- ----------
Three Months August 17, 2007
Ended (Inception) Through
October 31, October 31,
2008 2007
----------- -------------
Cash used in Operating Activities $ 16,405 $ -
Cash used in Investing Activities - -
Cash used in Financing Activities 2,406 -
----------- -------------
Net Decrease in Cash $ 18,811 $ -
=========== =============
As of October 31, 2008, our current assets consisted of cash of $17,824 (July
31, 2008; $36,635). Our accounts payable, accrued liabilities and current
portion of amounts due to related parties were $16,386 (July 31, 2008: $15,682).
As a result, we had working capital of $1,438 as of October 31, 2008, (July 31,
2008: $20,953).
We expect to spend approximately $20,000 on samples and small quantities of
chosen eyewear from vendors throughout the United States of America and shipping
them to our distributor Optex for testing on the local market. As well, we
anticipate spending an additional $16,000 on professional fees, general
administrative costs, and expenditures associated with complying with reporting
obligations. Total expenditures over the next 12 months are therefore expected
to be approximately $36,000. Accordingly, we will need to obtain additional
financing in order to complete our business plan, and sustain our operations.
Cash Used In Operating Activities
- ---------------------------------
During the three-month period ended October 31, 2008, we used cash in operating
activities in the amount of $16,405 and $Nil during the period ended October 31,
2007. Cash used in operating activities was from proceeds from the issuance of
common stock totaling $35,500 and a loan from the Company's director in the
<page>
amount of $7,000. These funds were received during the year ended July 31, 2008.
Cash from Investing Activities
- ------------------------------
No cash was used or provided in investing activities during the three-month
period ended October 31, 2008. Cash from Financing Activities During the period
from inception (August 17, 2007) through October 31, 2008, we have funded our
initial operations through the issuance of 8,500,000 shares of capital stock for
proceeds of $35,500 and through the loans and cash advances from our directors
totaling $9,190. In addition, we have utilized in our operations cash received
from the sale of the eyewear in the most recent fiscal quarter.
Due to the "development stage" nature of our business, we expect to incur
losses as it expands. To date, our cash flow requirements have been primarily
met by equity financings and advances from our Directors. Management expects to
keep operating costs to a minimum until cash is available through financing or
operating activities. Management plans to continue to seek other sources of
financing on favorable terms; however, there are no assurances that any such
financing can be obtained on favorable terms, if at all. If we are unable to
generate sufficient profits or unable to obtain additional funds for our working
capital needs, we may need to cease or curtail operations. Furthermore, there is
no assurance the net proceeds from any successful financing arrangement will be
sufficient to cover cash requirements during the initial stages of the Company's
operations. For these reasons, our auditors believe that there is substantial
doubt that we will be able to continue as a going concern.
Going Concern
- -------------
The audited financial statements for the year ended July 31, 2008, included in
our Registration Statement on Form S-1 filed with Securities and Exchange
Commission, have been prepared on a going concern basis, which implies that our
Company will continue to realize its assets and discharge its liabilities and
commitments in the normal course of business. Our Company has generated $18,550
in revenues since inception and has never paid any dividends and is unlikely to
pay dividends or generate substantial earnings in the immediate or foreseeable
future. The continuation of our Company as a going concern is dependent upon the
continued financial support from our Directors and stockholders, the ability of
our Company to obtain necessary equity financing to achieve our operating
objectives, and the attainment of profitable operations. As of October 31, 2008,
our Company had accumulated losses since inception of $33,862. As we do not have
sufficient funds for our planned operations, we will be required to raise
additional funds for operations.
Due to the uncertainty of our ability to meet our current operating expenses and
the capital expenses noted above, in their report on the annual financial
statements for the year ended July 31, 2008, our registered independent auditors
included an explanatory paragraph regarding concerns about our ability to
continue as a going concern. Our financial statements and related notes for the
period ended October 31, 2008, contain additional note disclosures describing
the circumstances that lead to this disclosure by our registered independent
auditors.
<page>
The continuation of our business is dependent upon us raising additional
financial support. The issuance of additional equity securities by us could
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash commitments.
Future Financings
- -----------------
We anticipate that additional funding will be required in the form of equity
financing from the sale of our common stock. However, we cannot provide
investors with any assurance that we will be able to raise sufficient funding
from the sale of our common stock to fund our marketing plan and operations. At
this time, we cannot provide investors with any assurance that we will be able
to raise sufficient funding from the sale of our common stock or through a loan
from our Directors to meet our obligations over the next twelve months. We do
not have any arrangements in place for any future equity financing.
On September 30, 2008, the Company's Registration Statement on Form S-1 became
effective. The Company will not receive any of the proceeds of this registration
activity once the shares of common stock are sold.
Off-Balance Sheet Arrangements
- ------------------------------
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to stockholders.
Risks and Uncertainties
INDUSTRY RISK FACTORS
- ---------------------
We may not be able to compete effectively in the eyewear industry.
- ------------------------------------------------------------------
The markets for prescription eyeglass frames and sunwear are intensely
competitive. There are thousands of frame styles, including thousands with brand
names, many of which have global recognition. At retail, we will compete with
styles that do and do not have brand names, styles in the same price range, and
styles with similar design concepts. To obtain space at an optical retailer, we
will compete against many companies, both foreign and domestic, including
biggest eyewear manufacturers/distributors, such as Luxottica Group S.p.A,
Safilo Group S.p.A., and Marchon Eyewear, Inc. Our largest competitors have
significantly greater financial, technical, sales, manufacturing, and other
resources than us. They also employ extensive direct sales forces that have
existed longer. At the major retail optical chains, we compete not only against
other eyewear suppliers, but also against the chains themselves, as these chains
have increasingly designed, manufactured, and sold their own lower-priced
private label brands. Luxottica Group, the largest eyewear company in the world,
is vertically integrated, in that it manufactures frames, distributes them
through a direct sales force throughout the world, and owns LensCrafters,
Sunglass Hut, Pearle Vision, and Cole Vision, which combined is the largest
worldwide retail optical chain.
The action sports and youth lifestyle markets in which we also intent to compete
are intensely competitive. We will compete with sunglass and goggle brands in
<page>
various niches of the action sports market including Von Zipper, Electric
Visual, Arnette, Oakley, Scott, and Smith Optics. We will also compete with
broader youth lifestyle brands that offer eyewear products, such as Quicksilver,
and in the broader fashion sunglass sector of the eyewear market, which is
fragmented and highly competitive. We will compete primarily on the basis of
fashion trends, design, performance, value, quality, brand recognition,
marketing, and distribution channels.
The purchasing decisions of consumers are highly subjective and can be
influenced by many factors, such as marketing programs, product design, and
brand image. Our competitors enjoy substantial competitive advantages, including
greater brand recognition, a longer operating history, more comprehensive lines
of products and greater financial resources for competitive activities, such as
sales and marketing, research and development, and strategic acquisitions. Our
competitors may enter into business combinations or alliances that strengthen
their competitive positions or prevent us from taking advantage of such
combinations or alliances. They also may be able to respond more quickly and
effectively than we can to new or changing opportunities, technologies,
standards, or consumer preferences.
Fluctuations in foreign currency exchange rates could harm our results of
- --------------------------------------------------------------------------------
operations.
- -----------
We intend to sell a majority of our products in transactions denominated in
local Ukrainian currency; however, we will purchase our products from our
manufacturers in transactions denominated in United States dollars. As a result,
we are exposed to gains and losses resulting from the effect of fluctuations in
foreign currency exchange rates.
We may be unable to keep up with constantly changing fashion trends.
- --------------------------------------------------------------------
Our success depends, in large part, upon our ability to gauge the evolving
fashion tastes of our consumers and to provide merchandise that satisfies such
fashion tastes in a timely manner. The worldwide eyewear fashion industry
fluctuates according to changing fashion tastes and seasons. The merchandise
usually must be ordered well in advance of the season, frequently before
consumer fashion tastes are evidenced by consumer purchases. In addition, the
cyclical nature of the worldwide eyewear fashion retailing industry also
requires us to secure significant level of inventory, especially prior to peak
selling seasons such as summer season for sunwear glasses when all fashion
retailers build up their inventory levels. As a result, if we fail to properly
gauge the fashion tastes of consumers, or to respond in a timely manner, this
failure could adversely affect consumer acceptance of merchandise we re-sell and
leave us with inventory deficiency or inventory surplus which would negatively
impact financial results.
The results of our wholesale businesses will be affected by the buying plans of
our customers, which will mostly include smaller retailers and boutique stores.
Our customers may not inform us of changes in their buying plans until it is too
late for us to make the necessary adjustments to our product lines and marketing
strategies. While we believe that purchasing decisions in many cases are made
independently by individual stores or store chains, we are exposed to decisions
by the controlling owner of a store, to decrease the quantity of merchandise
purchased from us. In addition, the retail industry periodically experiences
consolidation. We face a risk that our customers may consolidate or restructure
and that could decrease the number of stores or the amount of shelf space for
our merchandise.
<page>
The worldwide eyewear retailing industry is heavily influenced by general
- --------------------------------------------------------------------------------
economic cycles.
- ----------------
Eyewear retailing is a cyclical industry that is heavily dependent upon the
overall level of consumer spending. Any substantial deterioration in general
economic conditions could adversely affect our sales and results of operations.
Downturns or the expectation of a downturn, in general economic conditions could
adversely affect consumer spending patterns, our sales, and our results of
operations. Declines in consumer spending patterns will have a negative effect
on eyewear retailers. Therefore, we may not be profitable, if there is a decline
in consumer spending patterns.
Our international operations are subject to political and economic risks.
- -------------------------------------------------------------------------
We expect that most of our sales will be generated outside the United States of
America. We will be accordingly subject to a number of risks relating to doing
business internationally, any of which could significantly harm our business,
including:
o political and economic instability;
o inflation;
o exchange controls and currency exchange rates;
o foreign tax treaties and policies; and
o restrictions on the transfer of funds to and from foreign countries.
Our financial performance on a United States dollar denominated basis is also
subject to fluctuations in currency exchange rates. These fluctuations could
cause our results of operations to vary materially.
COMPANY RISK FACTORS
- --------------------
We lack an operating history and have losses which we expect to continue into
- --------------------------------------------------------------------------------
the future. There is no assurance our future operations will result in
- --------------------------------------------------------------------------------
profitable revenues. If we cannot generate sufficient revenues to operate
- --------------------------------------------------------------------------------
profitably, our business will fail.
- -----------------------------------
We were incorporated on August 17, 2007, and we have generated only minimal
revenues. We have very little operating history upon which an evaluation of our
future success or failure can be made. Our net loss since inception on August
17, 2007, through October 31, 2008, is $33,862. Based upon current plans, we
expect to incur operating losses in future periods because we will be incurring
expenses and not generating revenues. We cannot guarantee that we will be
successful in generating revenues in the future. Failure to generate revenues
will cause us to go out of business.
There is substantial uncertainty as to whether we will continue operations. If
- --------------------------------------------------------------------------------
we discontinue operations, you could lose your investment.
- ---------------------------------------------------------------
Our registered independent auditors have discussed their uncertainty regarding
our business operations in their audit report dated August 29, 2008. This means
that there is substantial doubt that we can continue as an ongoing business
for the next 12 months. The financial statements do not include any adjustments
that might result from the uncertainty about our ability to continue in
business. As such,we may have to cease operations and you could lose your entire
investment.
<page>
We may be unable to create a portfolio of innovative and stylish product lines
- --------------------------------------------------------------------------------
and brands and as a result will have no demand for our products.
- ----------------------------------------------------------------
The eyewear market is a subject to constantly changing consumer preferences
based on fashion and performance trends. Our success depends largely on the
strength of our chosen brands and our ability to introduce innovative and
stylish products that are accepted by consumers in our target markets. We must
anticipate the rapidly changing preferences of consumers and provide products
that appeal to their preferences in a timely manner. Achieving market acceptance
for new products may also require substantial marketing and product development
efforts and expenditures to create consumer demand. Decisions regarding ordering
new product designs must be made several months in advance of the time when
consumer acceptance can be measured. If we will not be able to develop a
portfolio of innovative and stylish brands that provide greater performance and
design attributes than the products of our competitors and that are accepted by
our targeted consumers, we may not be competitive for perspective customers
loyalty, which could result in a decline in our sales and market share.
We rely on third parties to manufacture and distribute the products we re-sell.
- -------------------------------------------------------------------------------
We will depend on the independent North American eyewear brand suppliers to
manufacture and supply the merchandise that we will be re-selling. If these
brand manufacturers are unable to secure sufficient supplies of raw materials,
or maintain adequate manufacturing and shipping capacity, they may be unable to
provide us with timely delivery of products of acceptable quality. In addition,
if the prices charged by these brand manufacturers increase for reasons such as
increases in the price of raw materials, increases in labor costs or currency
fluctuations, our cost of inventory would increase, adversely affecting our
results of operations. We will depend on third parties to transport and deliver
of merchandise. Due to the fact that we do not have any independent
transportation or delivery capabilities of our own, if these third parties are
unable to transport or deliver our merchandise for any reason, or if they
increase the price of their services, including as a result of increases in the
cost of fuel, our operations and financial performance may be adversely
affected.
We currently do not have long-term agreements with any of our potential brand
manufacturers, and any of these manufacturers may unilaterally terminate their
relationship with us at any time in the future. There is also substantial
competition among wholesalers for quality brand manufacturers. To the extent, we
are unable to secure or maintain relationships with quality brand manufacturers,
our business could be harmed.
If our marketing efforts are not effective, our products may not achieve the
- --------------------------------------------------------------------------------
broad recognition necessary to our success in the target territories.
- ---------------------------------------------------------------------
We may not be able to build successfully recognition and favorable perception of
our brands and styles in a manner that will enable us to expand our business in
a cost-effective or timely manner. If our products will not be received
favorably by consumers, our reputation could be damaged. The lack of market
acceptance of our new products will not allow us to generate satisfactory net
sales and could harm our business.
Our business could be harmed if we fail to maintain proper inventory levels.
- ----------------------------------------------------------------------------
We place orders with our manufacturers for some of our products prior to the
time we receive orders for these products from our customers. We do this to
minimize purchasing costs, the time necessary to fill customer orders and the
risk of non-delivery. We also maintain an inventory of selected products that we
<page>
anticipate will be in high demand. We may be unable to sell the products we have
ordered in advance from manufacturers or that we have in our inventory.
Inventory levels in excess of customer demand may result in inventory
write-downs, and the sale of excess inventory at discounted prices could
significantly impair our image and harm our operating results and financial
condition. Conversely, if we underestimate consumer demand for the products we
sell or if our manufacturers fail to supply the quality products that we require
at the time we need them, we may experience inventory shortages. Inventory
shortages might delay shipments to customers, negatively impact retailer and
distributor relationships and diminish brand loyalty, thereby harming our
business.
Any failure to maintain ongoing sales through our independent sales
- --------------------------------------------------------------------------------
representatives or maintain our international distributor relationships could
- --------------------------------------------------------------------------------
harm our business.
- ------------------
We intend to sell our products to retail locations in Ukraine that are serviced
by local direct sales teams and a network of independent sales representatives
and distributors. We will rely on these independent sales representatives and
distributors to provide customer contacts and market our products directly to
our customer base. Our independent sales representatives will not be obligated
to continue selling our products, and they may terminate their arrangements with
us at any time with limited notice. We do not have long-term agreements with any
of the local distributors. Our ability to sell will depend in large part on our
success in developing and maintaining relationships with our independent sales
representatives and our local distributors. It is possible that we may not be
able to maintain or expand these relationships successfully or secure agreements
with additional sales representatives or distributors on commercially reasonable
terms, or at all. Any failure to develop and maintain our relationships with our
independent sales representatives or our international distributors, and any
failure of our independent sales representatives or international distributors
to effectively market our products, could harm our sales and our business.
Our eyewear products and business may subject us to product liability claims or
- --------------------------------------------------------------------------------
other litigation, which are expensive to defend, distracting to our management
- --------------------------------------------------------------------------------
and may require us to pay damages.
- ----------------------------------
Due to the nature of our products and the activities in which our products may
be used, we may be subject to product liability claims or other litigation,
including claims for serious personal injury, breach of contract, shareholder
litigation, or other litigation. Successful assertion against us of one or a
series of large claims could harm our business by causing us to incur legal
fees, distracting our management, or causing us to pay damage awards.
We depend on key personnel.
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Our future success will depend in part on the continued service of key
personnel, particularly Olena Denyavska, our President and Chief Executive
Officer, and Katerina Yatsuk, our Director and Chief Financial Officer. Our
future success will also depend on our ability to attract and retain key
managers, sales people, and others. We face intense competition for these
individuals from well established multinational, national, and regional
wholesale and retail companies. We may not be able to attract qualified new
employees or retain existing employees, which may have a material adverse effect
on our results of operations and financial condition.
Because our management has limited prior experience in wholesale business our
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business has a higher risk of failure.
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<page>
Our Directors have no or limited experience in eyewear wholesale industry.
As a result, we may not be able to recognize and take advantage of
opportunities without the aid of qualified marketing, sales, and business
development consultants. Our Directors' decisions and choices may not be well
thought out and our operations, earnings, and ultimate financial success may
suffer irreparable harm as a result.
Because our Directors own 64.71% of our outstanding common stock they could make
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and control corporate decisions that may be disadvantageous to other minority
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stockholders.
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Our Directors, as a group, own 64.71% of the outstanding shares of our common
stock as of the date of this Quarterly Report. Accordingly, they have
a significant influence in determining the outcome of all corporate transactions
or other matters, including mergers, consolidations, and the sale of all or
substantially all of our assets. They also have the power to prevent or cause a
change in control. The interests of our Directors may differ from the interests
of the other stockholders and thus result in corporate decisions that are
disadvantageous to other stockholders.
Failure to achieve and maintain effective internal controls in accordance with
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section 404 of the Sarbanes-Oxley Act could have a material adverse effect on
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our business and operating results.
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It may be time consuming, difficult, and costly for us to develop and implement
the additional internal controls, processes, and reporting procedures required
by the Sarbanes-Oxley Act. We may need to hire additional financial reporting,
internal auditing, and other finance staff in order to develop and implement
appropriate additional internal controls, processes, and reporting procedures.
If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we
may not be able to obtain the registered independent accountant certifications
that the Sarbanes-Oxley Act requires of publicly traded companies.
If we fail to comply in a timely manner with the requirements of Section 404 of
the Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations,
beginning with our annual report on Form 10-K for our fiscal period ending July
31, 2008, we will be required to prepare assessments regarding internal controls
over financial reporting and beginning with our Annual Report on Form 10-K for
our fiscal period ending July 31, 2008, furnish a report by our management on
our internal control over financial reporting. We have begun the process of
documenting and testing our internal control procedures in order to satisfy
these requirements, which is likely to result in increased general and
administrative expenses and may shift management time and attention from
revenue-generating activities to compliance activities. While our management is
expending significant resources in an effort to complete this important project,
there can be no assurance that we will be able to achieve our objective on a
timely basis. There also can be no assurance that our auditors will be able to
issue an unqualified opinion on management's assessment of the effectiveness of
our internal control over financial reporting. Failure to achieve and maintain
an effective internal control environment or complete our Section 404
certifications could have a material adverse effect on our stock price.
<page>
In addition, in connection with our on-going assessment of the effectiveness of
our internal control over financial reporting, we may discover "material
weaknesses" in our internal controls as defined in standards established by the
Public Company Accounting Oversight Board, or the PCAOB. A material weakness is
a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
The PCAOB defines "significant deficiency" as a deficiency that results in more
than a remote likelihood that a misstatement of the financial statements that is
more than inconsequential will not be prevented or detected.
In the event that a material weakness is identified, we will employ qualified
personnel and adopt and implement policies and procedures to address any
material weaknesses that we identify. However, the process of designing and
implementing effective internal controls is a continuous effort that requires us
to anticipate and react to changes in our business and the economic and
regulatory environments and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future. Any failure to complete our assessment of our internal control over
financial reporting, to remediate any material weaknesses that we may identify
or to implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet our
reporting obligations, or result in material misstatements in our financial
statements. Any such failure could also adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could
also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our common stock.
We will incur increased costs as a result of being a public company, which could
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affect our profitability and operating results.
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The Sarbanes-Oxley Act of 2002 and the new rules subsequently implemented by the
Securities and Exchange Commissions, the NASDAQ National Market and the Public
Company Accounting Oversight Board have imposed various new requirements on
public companies, including requiring changes in corporate governance practices.
We expect these rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming and costly.
These costs could affect profitability and our results of operations.
RISK FACTORS RELATING TO OUR COMMON STOCK
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Our stock is a penny stock. Trading of our stock may be restricted by the SEC's
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penny stock regulations and the FINRA's sales practice requirements, which may
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limit a stockholder's ability to buy and sell the stock.
- ----------------------------------------------------------
Our stock is a penny stock. The Securities and Exchange Commission has
adopted Rule 15g-9 which generally defines "penny stock" to be any equity
security that has a market
<page>
price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by
the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors." The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC, which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in, and limit the marketability of, our common stock.
In addition to the "penny stock" rules promulgated by the Securities and
Exchange Commission, the Financial Industry Regulatory Authority has adopted
rules that require that in recommending an investment to a customer, a broker-
dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer's financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the National Association of Securities Dealers believes that
there is a high probability that speculative low-priced securities will not be
suitable for at least some customers. The National Association of Securities
Dealers' requirements make it more difficult for broker-dealers to recommend
that their customers buy our common stock, which may limit your ability to buy
and sell our stock.
Volatility in our common share price may subject us to securities litigation,
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thereby diverting our resources that may have a material effect on our
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profitability and results of operations.
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We expect the market for our common shares to be characterized by significant
price volatility when compared to seasoned issuers, and we expect that our share
price will continue to be more volatile than a seasoned issuer is for the
indefinite future. In the past, plaintiffs have often initiated securities class
action litigation against a company following periods of volatility in the
market price of its securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and
liabilities and could divert management's attention and resources.
You could be diluted from our future issuance of capital stock and derivative
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securities.
- -----------
As of October 31, 2008, we had 8,500,000 shares of common stock outstanding and
no shares of preferred stock outstanding. We are authorized to issue up to
<page>
75,000,000 shares of common stock and no shares of preferred stock. To the
extent of such authorization, our Board of Directors will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
or preferred stock in the future for such consideration as the Board of
Directors may consider sufficient. The issuance of additional common stock or
preferred stock in the future may reduce your proportionate ownership and voting
power.
We do not intend to pay dividends and there will be less ways in which you can
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make a gain on any investment in Raduga Inc.
- --------------------------------------------
We have never paid any cash dividends and currently do not intend to pay any
dividends for the foreseeable future. To the extent that we require additional
funding currently not provided for in our financing plan, our funding sources
may likely prohibit the payment of a dividend. Because we do not intend to
declare dividends, any gain on an investment in Raduga will need to come through
appreciation of the stock's price.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4T. Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures at October 31, 2008, which is the end of the period covered by this
Quarterly Report. This evaluation was carried out by our principal executive
officer and our principal financial officer. Based on this evaluation, our
principal executive officer and our principal financial officer have concluded
that the design and operation of our disclosure controls and procedures are
effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting during
the fiscal period ended October 31, 2008, that have materially affected or are
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by our
Company 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. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by our Company in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
<page>
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
Exhibit
Number Title of Document
- ------- -----------------
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Sales Representative/Distributor Agreement*
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Incorporated by reference to similarly numbered exhibits filed with the
Company's Registration Statement on Form S-1 on September 12, 2008.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<page>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Raduga Inc.
SIGNATURES TITLE DATE
- ---------------------- ------------------------------- ------------------
/s/ Olena Denyavska President, CEO, and Director December 15, 2008
- ---------------------- ------------------------------- ------------------
Olena Denyavska
Treasurer, CFO, Principal
Accounting Officer, Principal
/s/ Katerina Yatsuk Financial Officer, and Director December 15, 2008
- ---------------------- ------------------------------- ------------------
Katerina Yatsuk
/s/ Victoria Nem Secretary and Director December 15, 2008
- ---------------------- ------------------------------- ------------------
Victoria Nem