-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qz1FBAApfFRH9CD1V6Kxf7+0f5JbcVoWtRJS1fpDtOw2PDhT7jGl0BKpSerJJtBq jZGqouiaptMr1FDUQ/0qWg== 0001019687-08-005064.txt : 20081114 0001019687-08-005064.hdr.sgml : 20081114 20081114171335 ACCESSION NUMBER: 0001019687-08-005064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081114 DATE AS OF CHANGE: 20081114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nascent Wine Company, Inc. CENTRAL INDEX KEY: 0001310213 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-BEER, WINE & DISTILLED ALCOHOLIC BEVERAGES [5180] IRS NUMBER: 820576512 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-120949 FILM NUMBER: 081192916 BUSINESS ADDRESS: STREET 1: 2355-A PASEO DE LAS AMERICAS CITY: SAN DIEGO STATE: CA ZIP: 92154 BUSINESS PHONE: (619) 661-0458 MAIL ADDRESS: STREET 1: 2355-A PASEO DE LAS AMERICAS CITY: SAN DIEGO STATE: CA ZIP: 92154 10-Q 1 nascent_10q-093008.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2008 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number: 333-120949 NASCENT WINE COMPANY, INC. -------------------------- (Exact name of registrant as specified in its charter) Nevada 82-0576512 ------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2355 B Paseo de las Americas San Diego, Ca. 92154 -------------- ----- (Address of principal executive offices) (Zip Code) (619) 661 0458 -------------- (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.* Yes [x] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [_] (Do not check if a smaller reporting company) Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes [ ] No [X] As of November 10 2008, there were 87,552,190 shares of common stock outstanding. * Excludes filings on Form 8-K as provided in Rule 144(c)(1) under the Securities Act of 1933, as amended. NASCENT WINE COMPANY, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Unaudited Financial Statements 3 Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosure About Market Risk 30 Item 4T. Controls and Procedures 31 PART II - Other Information Item 1. Legal Proceedings 33 Item 1A. Risk Factors 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33 Item 3. Defaults Upon Senior Securities 33 Item 4. Submission of Matters to a Vote of Security Holders 33 Item 5. Other Information 33 Item 6. Exhibits 33 FORWARD LOOKING STATEMENTS This report contains information that may constitute "forward-looking statements." Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future -- including statements relating to volume growth, availability of future financing, and statements expressing general views about future operating results -- are forward-looking statements. Management believes that these forward-looking statements are reasonable as of the time when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date made. Our company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2007, and those described from time to time in our future reports filed with the Securities and Exchange Commission. 2 Item 1. PART I - FINANCIAL INFORMATION NASCENT WINE COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) SEPTEMBER 30, DECEMBER 31, 2008 2007 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 715,434 $ 961,243 Accounts receivable (net of allowance of $916,745 at September 30, 2008 and $ 547,290 December 31, 2007) 2,609,464 3,878,522 Inventory (net of reserve of $78,770 at September 30, 2008 2,193,886 2,693,029 and 0 at December 31, 2007) Prepaid and other current assets 1,380,201 694,145 Notes Receivable 1,544,066 4,726,545 Assets held for sale 3,522,243 15,559,121 ------------ ------------ TOTAL CURRENT ASSETS 11,965,294 28,512,605 Property and equipment,net 708,713 736,635 Amortizable intangible assets, net 11,796,222 13,166,621 Goodwill 2,567,307 7,480,565 Other noncurrent assets 76,503 6,500 ------------ ------------ TOTAL ASSETS $ 27,114,039 $ 49,902,926 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 49,036 $ -- Accounts payable 3,213,393 2,620,420 Accrued expenses 458,101 1,149,148 Accrued interest 195,203 279,351 Notes payable 1,661,588 73,133 Shareholder loans -- 8,000,000 Acquisition loans 862,500 630,000 Liabilities related to assets held for sale 2,470,841 4,142,782 ------------ ------------ TOTAL CURRENT LIABILITIES 8,910,662 16,894,834 Contingencies and Commitments $ -- $ -- STOCKHOLDERS' EQUITY Preferred stock, 5,000,000 authorized: Series A convertible preferred stock, $.001 par value, 1,875,000 shares issued and outstanding at September 30, 2008 and December 31, 2007 1,875 1,875 Series B convertible preferred stock, $.001 par value, 375,000 shares issued and outstanding at September 30, 2008 and December 31, 2007 375 375 Common stock, $0.001 par value: 195,000,000 shares 87,362 84,426 authorized, 87,362,245 shares issued and outstanding at September 30, 2008 and 84,425,538 at December 31, 2007, respectively. Additional paid-in capital 43,055,456 44,351,978 Accumulated other comprehensive income 44,671 32,447 Accumulated Deficit (24,986,362) (11,463,009) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 18,203,377 33,008,092 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,114,039 $ 49,902,926 ============ ============ See accompanying notes to Consolidated Financial Statements 3 NASCENT WINE COMPANY, INC. AND SUBSIDIARIES Consolidated Statement of Operations (Unaudited) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------- ------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ NET REVENUES $ 4,095,127 $ 2,105,813 $ 14,823,165 $ 8,049,385 COST OF REVENUE 3,188,857 1,931,008 13,109,618 6,810,224 ------------ ------------ ------------ ------------ GROSS PROFIT 906,270 174,805 1,713,547 1,239,161 OPERATING EXPENSES Distribution 609,808 109,596 1,532,636 409,615 Sales and Marketing 116,769 113,645 567,103 452,429 General and Administrative 1,135,806 458,879 3,505,580 3,188,596 Depreciation 37,258 15,058 107,923 42,017 Amortization 259,081 325,834 942,619 687,293 Intangible Impairments -- -- 5,341,036 -- ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 2,158,722 1,023,012 11,996,897 4,779,950 LOSS FROM OPERATIONS (1,252,452) (848,207) (10,283,350) (3,540,789) OTHER INCOME (EXPENSE) Interest Income 24,037 2,961 30,058 9,014 Interest Expense (122,526) (428,208) (450,326) (1,383,534) Warrant Interest Recapture 442,068 (1,460,300) 1,326,204 (1,460,300) Other income (expense),net (1,786,663) -- (1,624,577) -- ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (1,443,084) (1,885,547) (718,641) (2,834,820) LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES (2,695,536) (2,733,754) (11,001,991) (6,375,609) PROVISION FOR INCOME TAXES 1,100 -- 1,100 -- ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (2,696,636) (2,733,754) (11,003,091) (6,375,609) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,624,916) 158,255 (2,520,261) (28,496) ------------ ------------ ------------ ------------ NET LOSS $ (6,321,552) $ (2,575,499) $(13,523,352) $ (6,404,105) ============ ============ ============ ============ BASIC EARNING PER SHARE Continuing Operations $ (0.03) $ (0.08) $ (0.13) $ (0.10) ============ ============ ============ ============ Discontinued Operations $ (0.04) $ 0.00 $ (0.03) $ (0.00) ============ ============ ============ ============ Weighted-average Shares Outstanding 84,664,970 35,000,000 84,664,970 63,266,449 DILUTED EARNINGS PER SHARE Continuing Operations $ (0.03) $ (0.08) $ (0.13) $ (0.10) ============ ============ ============ ============ Discontinued Operations $ (0.04) $ 0.00 $ (0.03) $ (0.00) ============ ============ ============ ============ Weighted-average Shares Outstanding 84,664,970 35,000,000 84,664,970 63,266,449 See accompanying notes to Consolidated Financial Statements 4 NASCENT WINE COMPANY, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity TOTAL PREFERRED SHARES COMMON SHARES STOCKHOLDERS' ------------------ --------------------- ADDITIONAL COMPREN- ACCUMULATED Par Value Par Value PAID-IN SUBSCRIBED HENSIVE INCOME EQUITY Shares $0.001 Shares $0.001 CAPITAL STOCK INCOME (DEFICIT) (DEFICIT) ------------------ -------------------------------- ----------- -------- ------------ ------------- Balance December 31, 2006 52,050,000 $ 52,050 $16,314,477 $ 2,334,727 $ (15) $ (2,056,904) $ 16,644,335 - Preferred shares issued for 2,250,000 2,250 - - 15,142,027 - - - 15,144,277 stock for cash Shares issued for service - - 316,023 316 162,055 - - - 162,371 Shares issued for loans - - 3,002,545 3,003 1,265,899 - - - 1,268,902 Shares issued for trucks - - 77,170 77 30,791 - - - 30,868 Shares issued for cash - - 28,484,900 28,485 9,585,424 (2,334,727) - - 7,279,182 Shares issued for acquisitions - - 244,900 245 119,755 - - - 120,000 Warrants issued - - - - 1,616,800 - - - 1,616,800 Shares issued for finders fee - - 250,000 250 114,750 - - - 115,000 Net loss - - - - - - - (9,406,105) (9,406,105) Translation loss - - - - - - 32,462 - 32,462 - - - - - - - - - Comprehensive loss - - - - - - - - (9,373,643) ---------- ------- ------------ -------- ----------- ----------- ------- ------------- ------------- Balance December 31, 2007 2,250,000 2,250 84,425,538 $ 84,426 $44,351,978 $ - $32,447 $(11,463,009) $ 33,008,092 Net loss (13,523,353) (13,523,353) Warrant interest expense (recapture) (1,326,204) (1,326,204) Shares issued for service 318,181 318 29,682 30,000 Shares issued for penalty 6,250 6 306 312 Shares issued for penalty 2,612,276 2,612 (306) 2,306 Translation (loss) gain 12,224 12,224 Comprehensive loss - - ---------- ------- ------------ -------- ----------- ----------- ------- ------------- ------------- Balance September 30, 2008 2,250,000 $2,250 87,362,245 $ 87,362 $43,055,456 $ - $44,671 $(24,986,362) $ 18,203,377 ========== ======= ============ ======== =========== =========== ======= ============= ============= See accompanying notes to Consolidated Financial Statements 5 NASCENT WINE COMPANY, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows FOR THE NINE MONTHS ENDED -------------------------------- SEPTEMBER 30, JUNE 30, 2008 2007 ------------ ------------ Cash Flows from Operating Activities Net loss $(11,766,854) (6,404,105) Adjustment to reconcile net loss to net cash provided by operations: Depreciation 137,153 158,912 Amortization 807,649 1,252,294 Allowance for doubtful accounts 370,556 -- Allowance for inventory obsolescence 78,770 -- Allowance for uncollectible note receivable 1,300,000 -- Allowance for investment in AIP 2,707,959 -- Gain on sale of Palermo (1,548,940) -- Gain on exchange rate (344,151) -- Loss on sale of Pasani 3,165,921 -- Loss on sale of Eco 1,520,623 -- Shared-based compensation 30,000 129,000 Recapture of interest on warrants (1,326,204) 2,245,736 Impairment of amortizable intangibles 4,206,498 -- Impairment of management fees (intercompany A/R) 996,300 -- Impairment of goodwill 4,913,258 -- Impairment of accrued interest on acquisition loans (310,855) -- Impairment of acquisition loans (8,000,000) -- Changes in assets and liabilities, net of discontinued operations: (Increase)/decrease in accounts receivable 503,146 (10,234,684) (Increase)/decrease in notes receivable (394,212) -- (Increase)/decrease in inventory 420,373 (4,054,339) (Increase)/decrease in prepaids and other assets (686,056) (1,321,387) (Increase)/decrease in other noncurrent assets (70,003) -- Increase/(decrease) in accounts payable 1,591,873 (1,628,283) Increase/(decrease) in accrued expense (691,047) (1,236,745) Increase/(decrease) in accrued interest 226,707 116,423 ------------ ------------ Net cash used in continuing operations (2,161,536) (20,977,178) Net cash used in discontinued operations (378,758) 13,375,939 ------------ ------------ Net cash used in operating activities (2,540,294) (7,601,239) CASH FLOWS FROM INVESTING ACTIVITIES Purchased fixed assets (83,566) (1,279,740) Acquisition of Licensed Marks -- (400,000) Proceeds from sale of Eco Pak 70,000 -- Acquisition of Pasani/Eco Pak and Grupo, net of cash acquired -- (1,145,397) Other investment ------------ ------------ Net cash used in continuing operations (13,566) (4,738,485) Net cash used in discontinued operations 221,265 1,899,246 ------------ ------------ Net cash used in investing activities 207,699 (2,839,239) CASH FLOWS FROM FINANCING ACTIVITIES Line of credit, net 49,036 -- Bridge Loan -- (2,217,500) Shareholder loan advance 232,500 93,265 Shareholder loan payment -- (2,188,794) Proceeds - bank loans 1,610,917 330,044 Payments - bank loans (22,462) (218,852) Proceeds from the sale of Preferred Stock -- 7,343,305 Proceeds from the sale of Common Stock -- 8,459,183 Capital leases -- (17,931) ------------ ------------ Net cash used in continuing operations 1,869,991 11,582,720 Net cash used in discontinued operations -- 344,008 ------------ ------------ Net cash used in financing activities 1,869,991 11,926,728 EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,224 (56,890) ------------ ------------ NET DECREASE IN CASH (450,380) 1,429,360 CASH--BEGINNING OF PERIOD (INCLUDING $204,571 REPORTED UNDER ASSETS HELD FOR SALE AT DECEMBER 31, 2007) 1,165,814 476,376 ------------ ------------ CASH - ENDING OF PERIOD $ 715,434 $ 1,905,736 ============ ============ 6 NASCENT WINE COMPANY, INC., AND SUBSIDIARIES Consolidated Statement of Cash Flows (continued) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of stock for shareholder loan $ -- $ 1,171,872 ============ ============ Issuance of common stock for services $ 30,000 $ -- ============ ============ Warrants issued and attached to debt $ -- $ -- ============ ============ Warrant issued for interest (recapture) $ (1,326,204) $ -- ============ ============ Impairment of acquisition notes payable $ (8,000,000) $ -- ============ ============ Receipt of stock in lieu of cash payment for note receivable $ 2,707,959 $ -- ============ ============ Interest paid $ 223,620 $ -- ============ ============ Promissory note for sale of Palermo $ 1,000,000 $ -- ============ ============ AIP payment of promissory note by assuming certain liabilities $ 162,432 $ -- ============ ============ Income taxes paid $ 1,100 $ 810 ============ ============ Acquisition loans issued for the purchase of Pasani $ -- $ 4,000,000 ============ ============ Fixed assets purchased through capital leases $ -- $ 793,273 ============ ============ See accompanying notes to Consolidated Financial Statements
7 NOTE 1 - COMPANY OVERVIEW Company History - --------------- The Company was incorporated under the laws of the State of Nevada on December 31, 2002(Date of inception). The Company had minimal operations until July 1 2006, when the Company purchased the license to distribute Miller Beer in Baja California, from Piancone Group International, Inc. (PGII). In October 2006, the Company purchased the assets and assumed the liabilities of PGII, and in November 2006, the Company purchased the outstanding common stock of Palermo Italian Foods, LLC. (Palermo). In June 2008, the Company sold Palermo to AIP, Inc., a company founded by Victor Petrone, formerly the President and a Director of the Company on May 11, 2007, the Company acquired Pasani S.A de C.V. (Pasani) and Eco Pac Distributing, LLC (Eco)which are distribution companies based in Mexico City and San Antonio. On July 31, 2008, the Company entered into a settlement with the former owners of those companies to transfer such companies back to them (see Note 10 below). In July 2007, the Company acquired Grupo Sur Promociones de Mexico S.A. de C.V. (Groupo Sur) and related companies. In October 2007, the Company acquired all of the outstanding capital stock of Targa, S.A. de C.V. (Targa). In May 2008, the Company announced its decision to evaluate strategic options for Pasani, Eco and Grupo Sur. In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the assets and liabilities relating to Pasani, Eco and Grupo Sur have been reclassified as held for sale in the Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, and the assets and liabilities relating to Palermo have been reclassified as held for sale in the Consolidated Balance Sheet at December 31, 2007. The results of operations of Palermo, Pasani, Eco and Grupo Sur for the respective periods of ownership for the three and nine months ended September, 30, 2008 and 2007, have been reported as discontinued operations. NOTE 2 - GOING CONCERN The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2008, the Company had cash of $715,000 and working capital of $4,811,000. The Company had net losses from continuing operations of $2,697,000 and $11,004,000 for the three and nine months ended September 30, 2008, and $2,734,000 and $6,676,000 for the three and nine months ended September 30, 2007, respectively. The Company is currently in discussions with several lending institutions for a working capital credit facility and additional financing. Management believes that the existing working capital resources and cash forecasted by management to be generated by operations, together with planned short-term and long-term borrowings, lines of credit and/or capital raised through the sale of equity or equity-based securities will be sufficient to fund operations through at least the next twelve months. However, there is no assurance that external funding will be available on terms and conditions acceptable to the Company, or at all, or that we will be successful with our operating plans. If events and circumstances occur such that the Company does not meet its current operating plans and raise sufficient external financing, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance, including but not limited to, the premature sale of some or all of its assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations. 8 The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Best Beer S.A. de C. V., ("Best Beer") and International Food Services, Inc. "IFS" for the three and nine months ended September 30, 2008 and 2007, and Targa for the three and nine months ended September 30, 2008. The accompanying consolidated balance sheets include the net assets of Grupo Sur as assets held for sale at September 30 2008, and the net assets of Grupo Sur as assets held for sale at December 31, 2007. The results of operations of Palermo, Pasani, Eco and Grupo Sur are disclosed as discontinued operations for the three and nine months ended September 30, 2008 and for the respective periods since acquisition for the three and nine months ended September 30, 2007. All significant inter-company transactions and balances have been eliminated in consolidation. Basis of Preparation - -------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission"). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the audited financial statements and footnotes that are included in the Company's December 31, 2007 annual report on Form 10-KSB previously filed with the Commission on April 15, 2008. The financial statements have been prepared assuming that the Company will continue as a going concern. See Note 2 above. Estimates - --------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Revenue Recognition - ------------------- The Company, through its subsidiaries, sells food and beverage products to its customers in Mexico. Sales of products and related costs of products sold are recognized using the accrual method in which revenues are recorded as products are delivered and billings are generated. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" for the sale of products. SAB No. 104, which supersedes SAB No. 101, "Revenue Recognition in Financial Statements", provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. In general, the Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured. 9 Accounts Receivable - ------------------- The Company has reviewed the outstanding trade accounts receivable and has provided a reserve for slow paying accounts of approximately $916,745 at September 30, 2008 and $547,290 at December 31, 2007. The Company has obtained an insurance policy with AIG which insure its trade receivables losses incurred from customer non-payment during the first half 2008. Additionally, the Company has developed standard credit policies. Inventories - ----------- Inventories are accounted for on the first-in, first-out basis. Any products reaching their expiration dates are written off. The Company provided a reserve for slow moving inventory of $78,790 for the nine months ended September 30, 2008 and zero at December 31, 2007. Property and Equipment - ----------------------------- Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the assets, which is three to ten years. Business Combinations - --------------------- Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed to which the transaction costs are allocated under the purchase method of accounting. Certain liabilities are subjective in nature. The Company reflects such liabilities based upon the most recent information available. The ultimate settlement of such liabilities may be for amounts that are different from the amounts initially recorded. A significant amount of judgment is also involved in determining the fair value of assets acquired. Different assumptions could yield materially different results. Long-Lived Assets - ----------------- The Company accounts for intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144 " Accounting For The Impairment or Disposal of Long-Lived Assets". The Company acquired certain long-lived assets during 2007 and 2006. The acquired long lived Assets are attributed to acquisitions completed during 2007 and 2006. The Company reviewed the carrying values of its long-lived assets for possible impairment as of September 30, 2008 and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company completed the sale of Palermo as of June 30, 2008. Additionally, on July 31, 2008, the Company entered into a Settlement Agreement with the former owners of Pasani and Eco Pak terminating the Purchase Agreement. The Company has classified Grupo Sur as discontinued operations and accordingly the net assets have been classified as held for sale. Per Share Data - -------------- Basic net earnings (loss) from continuing operations per share is computed by dividing net earnings (loss) from continuing operations by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) from continuing operations per share is calculated by dividing net earnings (loss) from continuing operations and the effect of assumed conversions by the weighted average number of common and, when applicable, potential dilutive common shares outstanding during the period. 10 Preferred stock and warrants (described in Note 8 below) to purchase shares of common Stock, which represented 63 million potential common shares for the three and nine months ended September 30, 2008 and 25 million potential common shares for the three and nine months ended September 30, 2007, were not included in the computation of diluted earnings per share as the effect would be anti-dilutive. Basic loss per share is calculated by dividing net loss by the weighted-average number of shares of common shares outstanding. Diluted loss per share includes the component of basic loss per share and also gives effect to potential dilutive common shares. Potential dilutive common shares include stock options, warrants and preferred stock which is convertible into common stock. Income Taxes - ------------ The Company follows SFAS No. 109 "Accounting For Income Taxes" (SFAS No. 109) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the differences between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expense or benefit is based on the change in the asset or liability each period. If available evidence suggests that is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Advertising - ----------- The Company expenses advertising as incurred. Advertising expense was approximately $0 and $91,100 for the three and nine months ended September 30, 2008, respectively. For the three and nine months ended September 30, 2007, advertising expense was $51,800 and $ 211,900, respectively. Foreign Currency Translation - ----------------------------- Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our consolidated statements of operations are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (loss) in the period in which they occur. 11 Reclassifications - ----------------- Certain prior period amounts have been reclassified to conform to the current period's presentation. Recent Accounting Pronouncements - -------------------------------- In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, "Disclosures About Derivative Instruments And Hedging Activities - An Amendment Of FASB Statement No. 133," which changed the disclosure requirements for derivative instruments and hedging activities. Entities are now required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities," which classifies unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, "Earnings Per Share." This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this Staff Position, with early application not permitted. Management does not believe that the adoption of this Staff Position will have a material effect on the Company's historical or future reported earnings (loss) per share. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at September 30, 2008 and December 31, 2007: September 30, December 31, 2008 2007 -------------------------------- Distribution equipment $ 611,137 $ 734,458 Office furniture and equipment 177,333 39,902 Computer 71,859 15,823 Autos and trucks 208,291 204,415 Leasehold improvements 107,947 98,404 -------------------------------- Totals $1,176,567 1,093,002 Accumulated depreciation $ (467,854) (356,367) -------------------------------- Property and equipment, net $ 708,713 $ 736,635 ================================ 12 Depreciation expense for the three and nine months ended September 30, 2008 was $37,258 and $107,923, respectively, and $15,058 and $42,017 for the three and nine months ended September 30, 2007, respectively. Assets held for sale include $370,632 of property and equipment related to Grupo Sur (discontinued operations) and $341,547 of accumulated depreciation. Depreciation expense for the three and nine months ended September 30, 2008 are included in net income (loss) from discontinued operations. NOTE 5 - INTANGIBLE ASSETS AND GOODWILL In May 2008, the Company announced its decision to evaluate its strategic options for Pasani, Eco and Grupo Sur. In June 2008, in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the assets and liabilities relating to Pasani, Eco and Grupo Sur were reclassified as held for sale and the results of operations of these subsidiaries were reclassified as discontinued operations. In conjunction with these reclassifications, the Company performed an impairment analysis of the intangible assets and goodwill of these subsidiaries and determined that the carrying amounts of these assets were not recoverable and should be impaired. The Company recorded an impairment charge of $8,453,445 in the second quarter of 2008. In accordance with SFAS No. 144, the Company also performed an impairment analysis of the intangible assets and goodwill of PGII in June 2008, and determined that the carrying amounts of intangible assets and goodwill were not recoverable and should be impaired. The Company recorded an impairment charge of $5,341,036 in the second quarter of 2008 related to these assets, consisting of $500,000 of intangible assets and $4,913,258 of goodwill. As of September 30, 2008 As of December 31, 2007 -------------------------------------------------------------------- Gross Carrying Accum. Gross Carrying Accum. Amount Amortization Amount Amortization -------------------------------------------------------------------- Intangibles subject to amortization: Miller Beer Distribution Licenses $ 8,675,000 $ (2,083,129) $ 8,675,000 $ (1,432,503) Client lists - - 500,000 (16,666) -------------------------------------------------------------------- Total for Nascent 8,675,000 (2,083,129) 9,175,000 (1,449,169) Customer relations 290,000 (46,399) 290,000 (6,042) Trademarks 5,300,000 (398,750) 5,300,000 (210,834) Non-Compete Agreement 70,000 (10,500) 70,000 (2,334) -------------------------------------------------------------------- Total for Targa $ 5,660,000 $ (455,649) $ 5,660,000 $ (219,210) -------------------------------------------------------------------- $14,335,000 $ (2,538,778) $14,835,000 $ (1,668,379) ==================================================================== ------------------- ----------------- Intangibles subject to amortization, net $11,796,222 $13,166,621 =================== ================= Aggregate amortization expense: For the three months ending September 30, 2008 $ 259,081 For the three months ending September 30, 2007 $ 325,834 For the nine months ending September 30, 2008 $ 943,000 For the nine months ending September 30, 2007 $ 687,000 Estimated amortization expense for the years ended: - --------------------------------------------------- December 31, 2009 $ 1,182,758 December 31, 2010 $ 1,182,758 December 31, 2011 $ 1,182,758 December 31, 2012 $ 1,182,758 December 31, 2013 $ 1,182,758 Impairment of Intangibles as of September 30, 2008 - ---------------------------------------------------------------------------------------------------------- Impairment Accumulated Net of Intangibles Amortization Intangibles ----------------------------------------------------- PGII - Client List $ 500,000 $ 72,222 $ 427,778 Grupo Sur 1,950,000 128,840 1,821,160 Pasani 2,340,000 300,122 2,039,878 Eco Pak - - - ----------------------------------------------------- Total $ 4,290,000 $ 428,962 $ 3,861,038 13 Goodwill: The changes in the carrying amounts of goodwill for the nine months ended are as follows: Nascent Targa Grupo Sur Pasani Eco Palermo ------------------------------------------------------------------------------------- Balance as of January 1, 2008 $ 4,913,258 $ 2,567,307 $ 1,756,498 $ 2,187,233 $ 219,714 $ 2,522,958 Goodwill impairment - PGII (4,913,258) - - - - - Goodwill Included in gain on sale of Palermo - - - - - (2,522,958) Goodwill included in loss on sale of Pasani (2,187,233) Goodwill included in loss on sale of Eco (219,714) Goodwill impairment - - (1,756,498) - ------------------------------------------------------------------------------------- Balance as of September 30, 2008 $ - $ 2,567,307 $ - $ - $ - $ - =====================================================================================
NOTE 6 - NOTES PAYABLE The Company had the following loans outstanding at September 30, 2008: Interest Bank Rate Due Dates Amount - -------------------------------------------------------------------- Genesis 14% March 31,2009 $ 1,000,000 Cyril Capital, LLC 8% December 14, 2008 500,000 City National Bank 9% December 31, 2008 16,000 NetBank 15% December 15, 2008 31,084 Pentech 18% December 1, 2008 34,504 Steven Kownacki 2.5%/month December 1, 2008 80,000 ---------------- $ 1,661,588 ================ On March 31, 2008, the Company sold a $1,000,000 Senior Secured Promissory Note (the "Note") to Genesis Merchant Partners, LP, a Delaware limited partnership ("Genesis"). Interest accrues on the amount of the Note at a rate of 14% per annum and is payable monthly to Genesis. The Note is secured by all assets of the Company, and had an original maturity date of September 30, 2008. The Company elected to extend the term of the loan to March 31, 2009 for a fee of $20,000. On November 3, 2008, in connection with the extension of the Note, the Company entered into a Collateral Assignment of Contracts agreement (the "Assignment"). Pursuant to the Assignment, the Company assigned to Genesis, as additional security for the obligations under the Note, the Company's rights to receive payments under (i) the promissory note in the amount of $1,000,000 made by AIP, Inc., and (ii) the settlement agreement with Pasani. 14 On February 13, 2008, the Company entered into a loan agreement with Cyril Capital, LLC ("Cyril") in which Cyril lent the Company $500,000. The loan was due and payable on August 14, 2008. The primary security for the loan was the Company's inventory and accounts receivable. The secondary security was the personal guarantee of Sandro Piancone, the Company's Chief Executive Officer. In the event that the loan, including interest at 8% per annum, was not repaid on August 14, 2008, a penalty of 10% would apply. However, the Company opted to extend the term of the loan by 60 days to October 14, 2008 for a fee of $20,000. On October 14, 2008, the Company extended the term of the loan again by 60 days for a fee of $20,000. During the extension period, the loan is not in default and the penalty will not apply. Interest at the base rate of 8% per annum will continue to accrue. NOTE 7 - BRIDGE LOANS During 2007, the Company obtained bridge loan financing in varying amounts with interest payable at rate 8% annually. As additional consideration, the Company issued warrants to the lenders. See Note 8 below. These loans were paid at December 31, 2007. NOTE 8 - STOCKHOLDERS' EQUITY Common Stock - ------------ The Company is authorized to issue 195,000,000 shares of common stock. During the three and nine months ended September 30, 2007, the Company issued 925,160 and 31,591,707 shares of common stock, respectively. The Company issued 316,023 shares of common stock for services rendered in the amount of $162,371 and 3,002,545 shares of common stock to redeem notes payable to stockholders in the amount of $1,268,902. The Company issued 77,170 shares of common stock to purchase a truck valued at $30,868 and 244,900 shares of common stock valued at $120,000 as a finder's fee for the Targa acquisition and 250,000 shares of common stock valued at $115,000 as a finder's fee for the York preferred stock transaction. The Company received subscriptions for an additional 21,539,900 shares of common stock during the year and issued 28,484,900 shares for cash, including the 6,945,000 shares subscribed at December 31, 2006 in the amount of $2,334,727 for a total of $9,585,424. At September 30, 2008, the Company had outstanding warrants, not including the York Warrants (see below), to purchase 18,120,476 shares of common stock at prices between $0.25 and $1.05 expiring in 2010. If all warrants were exercised, the Company would receive $7,070,000. During June 2008, the Company issued 318,181 shares of common stock valued at $30,000 for services rendered. Liquidated Damages - ------------------ Under the terms an agreement with [Brookstreet Securities Corporation the Company's private placement agent]which was sold during June 2007 the Company was required to file a registration statement to register the shares. According to the agreement, the registration statement had to be filed within 60 days following the closing of the private placement. Following the 60 day period, the Company became subject to a weekly payment equal to 1% of the shares purchased, up to a maximum payment of 10% of the shares purchased, as liquidated damages for failure to timely file the registration statement. The Company filed a registration statement on Form SB-2 to register the purchased shares on November 14, 2007, and the delay in filing the registration statement resulted in the Company becoming subject to the maximum penalty of 10% of the purchased shares as liquidated damages. The SB-2 registration statement has since been withdrawn. In 2007, the Company recorded an accrued cost of issuance of these liquidated damages shares in the amount of $564,950. The Company discharged its obligation to pay liquidated damages under the private placement agreement by issuing approximately 6,250 shares of Common Stock in June and approximately 2,612,276 shares of Common Stock in August and September of 2008. 15 Preferred Stock - --------------- The Company is authorized to issue 5,000,000 shares of preferred stock. On July 3, 2007, the Company issued 1,000,000 shares of its Series A Convertible Preferred Stock for $8.00 per share to an affiliate, York Capital Management (York). The Series A Convertible Preferred Stock is convertible into 20,000,000 shares of common stock, based upon a conversion price of $0.40 per share and has a liquidation preference of $8.00 per share. The holders of the Series A Convertible Preferred Stock are entitled to receive a cumulative quarterly dividend at a rate of 15% of the stated liquidation preference amount per annum in preference to any distributions on common stock. The dividends are payable in additional shares of Series A and Series B Convertible Preferred Stock. In addition, the Company issued the following warrants to purchase: Series A-1 500,000 shares of Series A Convertible Preferred stock at $8.00 per share, immediately exercisable and expiring on July 3, 2010. These warrant were exercised on October 22, 2007. Series A-2 375,000 shares of Series A Convertible Preferred stock at $8.00 per share, immediately exercisable and expiring on July 3, 2014. These warrants were exercised on October 22 2007. Series B:375,000 shares of Series B Convertible Preferred Stock, exercisable into shares of Series B Convertible Preferred Stock at an exercise price equal to 33% of the volume weighted average closing price of the Company's common stock for the 30 days prior to exercise, immediately exercisable and expiring on July 3, 2014. These warrants were exercised on November 2, 2007. These warrants were exercised during the third quarter of 2007 for a total exercise price of $8,334,000 Warrants: At September 30, 2008, the common share purchase warrants outstanding were as follows: WEIGHTED AVERAGE NUMBER OF WARRANTS EXERCISE PRICE ----------------------------------- Outstanding at December 31, 2007 19,870,476 $ 0.40 =================================== Granted - - Forfeited - - Exercised - - ----------------------------------- Outstanding at September 30, 2008 19,870,476 $ 0.40 =================================== EXPIRY EXERCISE PRICE NUMBER OF WARRANTS - -------------------------------------------------------------------------------- December 31, 2010 $ .25 4,200,000 December 31, 2010 $ .40 13,200,000 December 31, 2010 $ .52 400,000 December 31, 2010 $ .65 1,480,000 December 31, 2010 $ .84 400,000 December 31, 2010 $ 1.05 190,476 -------------- 19,870,476 ============== The fair value of the share purchase warrants for the period ended September 30, 2008, was in the amount of $0, which was determined using the Black-Scholes option value model with the following assumptions: Expected Dividend Yield 0.00% Risk Free Interest Rate 3.00% Expected Volatility 66.00% Expected Option Life (in years average) 2.21 16 In October and November 2007, York exercised its warrants acquiring 1,250,000 shares of Series A and Series B Convertible Preferred Stock in the amount of $8,333,624 Series A and Series B Convertible Preferred Stock held by York collectively are convertible into 45,000,000 shares of the Company's Common Stock. The Company paid a cash finder's fee of $560,000 and issued to the finder a warrant to purchase 1,600,000 common shares, until July 3, 2010, at a purchase price of $0.40 per share. NOTE 9 - ACQUISITION OF TARGA, S.A. DE C.V. ACQUISITION OF TARGA, S.A. DE C.V. In October 2007, the Company acquired all of the outstanding capital stock of Targa, S.A. de C.V. (Targa) for $4,000,000. Targa is a cheese processor and distributor of imported cheeses into Mexico. Its office and distribution center is located in Tijuana, Mexico. The Company paid $3,550,000 at the closing to the former Targa shareholders and fees of $200,000. The Company also deposited $250,000 in an escrow account, which has subsequently been released to the former Targa shareholders. The $4,000,000 purchase price was allocated as follows: Current assets $ 2,482,524 Property and equipment 319,612 Customer relations 290,000 Trade name 1,300,000 Non-compete agreement 70,000 Goodwill 2,567,307 Current liabilities (3,029,443) -------------- Total Purchase Price $ 4,000,000 ============== NOTE 10 - DISCONTINUED OPERATIONS On July 10, 2007, pursuant to a Stock Purchase Agreement, the Company acquired Grupo Sur, an in store merchandising company. Subsequent to the closing of such acquisition, Nascent believed that Grupo Sur began taking actions that were contrary to the Stock Purchase Agreement and related employment agreements. Our attorneys are pursuing through available channels the return of $1.3million of loans See Note 15 below. As a result of these disputes, in June 2008, the Company determined to reclassify the Grupo Sur assets and related liabilities as assets and related liabilities held for sale, and the operations of Grupo Sur as discontinued operations, and recognized in the quarter ended June 30, 2008 an impairment loss on certain intangible assets and goodwill. See Note 5 above. On August 8, 2008, Nascent entered into a Settlement Agreement (the "Settlement Agreement"), effective June 30, 2008 (the "Settlement Date"), with Pasani, S.A. de C.V. ("Pasani") and Eco Distributing, LLC ("Eco"). On May 11, 2007, the Company entered into a Stock Purchase Agreement (the "Pasani Purchase Agreement") with Pasani, and the shareholders of Pasani, Alejandro Gutierrez Pederzini ("Mr. Pederzini") and Leticia Gutierrez Pederzini (together with Mr. Pederzini, the "Shareholders"), whereby the Company purchased (the "Acquisition") from the Shareholders 100% of the outstanding capital stock of Pasani ("Pasani Common Stock"), in exchange for a Promissory Note to the shareholders in the principal amount of USD $1,500,000 (the "Note"). Since the execution of the Pasani Purchase Agreement, $500,000 of the principal of the Note has been paid to the Shareholders. Pursuant to the Settlement Agreement, Nascent has returned the Pasani Common Stock to the Shareholders. In addition, the remaining balance of the Note has been forgiven and the Shareholders have agreed to pay Nascent the following: (i) $500,000 in cash within 180 days of the Settlement Date, $185,000 in additional funds within 180 days of the Settlement Date and (iii) $312,451.87 (for inventory sold) within 180 days of the Settlement Date. In addition, Pasani was obligated to pay Nascent on or before September 30, 2008, $92,259.13 for products delivered to Pasani during July 2008. the Company determined in June2008 to reclassify the Pasani and Eco assets and related liabilities as assets and related liabilities held for sale, and the operations of Pasani and Eco as discontinued operations, and recognized in the quarter ended September 30, 2008 an impairment loss on certain intangible assets and goodwill. See Note 5 above. 17 On June 30 , 2008, the Company sold all of the outstanding capital stock of Palermo to AIP, Inc., a company founded by the Company's former President who was also a Director. The consideration consisted of AIP's assumption of an accounts payable note not to exceed $800,000 and a secured bank loan in the aggregate principal of $249.999.00, a note in favor of the Company in the amount of $1,000,000.00 due and payable on June 30, 2009, and fifteen percent (15%) of the outstanding equity of AIP. The value of the equity interest in AIP is fully reserved against at September 30, 2008. As a result of the sale of Palermo, the assets and related liabilities of Palermo were reclassified as held for sale at December 31, 2007, and the operations of Palermo are reported as discontinued operations for the three and nine months ended September 30, 2007 and the nine months ended September 30, 2008. The revenues and income (loss) from operations from discontinued operations for the three and nine months ended September 30, 2008 and 2007 are as follows: Three Months Ended Nine Months Ended ----------------------------- --------------------------- September 30, September 30, September 30, September 30, 2008 2007 2008 2007 ----------------------------- -------------------------- Revenues - Palermo $ - $ 3,243,175 $ 3,394,000 $ 8,769,430 Revenues - Pasani - 1,106,941 3,461,000 2,562,792 Revenues - Eco - - - - Revenues - Grupo sur 6,034,132 5,696,000 6,034,132 ----------------------------- -------------------------- $ - $ 10,384,248 $ 12,551,000 $17,366,354 Income (loss) from operations of discontinued operations- Palermo - (619,158) (871,485) (861,549) Income (loss) from operations of discontinued Operations -Pasani (a) 2,143,632 165,572 (d) (1,903,205) 221,212 Income (loss) from operations of discontinued Operations -Eco (b) 219,714 - (e) 338,814 - Income (loss) from operations of discontinued Operations -Grupo (c) (1,301,718) 611,841 (f) (2,961,336) 611,841 Impairment of Acquisition note - Eco/Pasani 3,500,000 Impairment of Acquisition note - Grupo 4,500,000 Impairment of notes receivable - Grupo and other i/c receivables (1,985,445) ----------------------------- -------------------------- $ 1,061,628 $ 158,255 $ 617,343 $ (28,496) (a) Reversal of Goodwill Impairment $ 2,187,233 Write off of other comprehensive income (differences in exchange rate) (43,601) ------------ $ 2,143,632 (b) Includes reversal of Goodwill Impairment $ 219,714 (c) Reversal of write off of notes payable to Nascent $(1,300,000) Write off of other comprehensive income (differences in exchange rate) (1,718) ------------ $(1,301,718) (d) Includes impairment of intangibles $(2,039,878) (e) Includes impairment of intangibles - (f) Impairment of intangibles $(1,821,160)
18 Assets and related liabilities held for sale at September 30, 2008 consisted of the following: GRUPO SUR ---------- Cash $ 106,840 Accounts receivable 2,673,534 Inventory Prepaid and other current assets 371,237 Property, plant and equipment, net 370,632 Investment in AIP Amortizable intangibles assets, net Goodwill Other noncurrent assets Cancellation of acquisition note ---------- Assets held for sale $3,522,243 ========== Accounts payable $ 528,694 Accrued expenses 642,147 Accrued interest Line of credit Notes payable 1,300,000 Shareholder loans ---------- Liabilities related to assets held for sale $2,470,841 ========== NET ASSETS $1,051,402 ========== The Company is planning to finalize the disposition of Grupo Sur's net assets. However, there can be no assurance that the disposition of these net assets will result in a gain for the Company. The following table shows the effect of reclassifying Grupo Sur, Pasani and Eco as discontinued operations for the three and nine months ended September 30, 2007: PRO FORMA FOR As Reported Discontinued Operations FOR THE THREE -------------------------------------------- MONTHS ENDED Palermo Pasani Grupo Sur SEPTEMBER 30, 2007 ------------ ------------ ------------ ------------ ------------ REVENUE $ 12,490,061 (3,243,175) (1,106,941) (6,034,132) $ 2,105,813 GROSS PROFIT 2,158,905 (61,765) (820,401) (1,101,934) 174,805 INCOME (LOSS) FROM OPERATIONS (651,273) 583,037 (170,120) (609,851) (848,207) OTHER INCOME (EXPENSE) (1,924,226) 36,121 4,548 (1,990) (1,885,547) INCOME (LOSS) FROM DISCONTINUED OPERATIONS - (619,158) 165,572 611,841 158,255 ------------ ------------ ------------ ------------ ------------ NET GAIN (LOSS) $ (2,575,499) $ 619,158 $ (165,572) $ (611,841) $ (2,575,499) ============ ============ ============ ============ ============ PRO FORMA FOR As Reported Discontinued Operations FOR THE NINE -------------------------------------------- MONTHS ENDED Palermo Pasani Grupo Sur SEPTEMBER 30, 2007 ------------ ------------ ------------ ------------ ------------ REVENUE $ 25,415,739 (8,769,430) (2,562,792) (6,034,132) 8,049,385 GROSS PROFIT 4,341,716 (927,816) (1,072,805) (1,101,934) 1,239,161 INCOME (LOSS) FROM OPERATIONS (3,506,867) 805,704 (229,775) (609,851) (3,540,789) OTHER INCOME (EXPENSE) (2,898,238) 56,845 8,563 (1,990) (2,834,820) INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (861,549) 221,212 611,841 (28,496) ------------ ------------ ------------ ------------ ------------ NET GAIN (LOSS) $ (6,405,105) $ 862,549 $ (221,212) $ (611,841) (6,404,105) ============ ============ ============ ============ ============
19 NOTE 11 - SALE OF CERTAIN SUBSIDIARIES As discussed in Note 10 above, effective, June 30, 2008, the Company sold Palermo to a company founded by the Company's former President who was also a Director. The following table summarizes the calculation of the gain on the sale of Palermo. Consideration: Notes Receivable $1,000,000 Assumption of liabilities 440,000 ---------- Total Consideration 1,440,000 Net liability sold 109,000 ---------- Gain on Sale of Palermo $1,549,000 On November 3, 2008 , the Company assigned the rights to receive the $1,000,000 proceeds from the Palermo note to Genesis capital as collateral for Genesis extending the due date of the note payable (see Note 8 above). As discussed in Note 10 above, the Company entered into a settlement agreement with the former owners of Pasani and Eco whereby the Pasani Common Stock was returned to such owners. The following table summarizes the calculation of the additional gain on the sale of Pasani and Eco recorded in the third quarter of 2008: Consideration: Cash $ 70,000 ----------- Total Consideration 70,000 Net Assets sold (1,591,000) ----------- Loss on Sale of Eco $ 1,521,000 ECO: Consideration: Cash $ -- ----------- Total Consideration -- Net Assets sold (3,166,000) ----------- Loss on Sale of Pasani $ 3,166,000 NOTE 12 - SEGMENT INFORMATION The Company operates in one reportable business segment. The Company conducts its business through its subsidiaries in Mexico. The Company discloses summarized financial information for the geographic area of operations as if they were segments in accordance with SFAS No. 131, "Disclosures About Segments Of An Enterprise And Related Information." Such summarized financial information concerning the Company's geographical operations is shown in the following tables: United States Mexico --------------------------------- Net income (loss) for the three months ended September 30, 2008 $(4,725,019) $ (301,894) Net income (loss) for the nine months ended September 30, 2008 $(8,457,015) $(2,105,001) Net income (loss) for the three months ended September 30, 2007 $(2,440,908) $ (291,747) Net income (loss) for the nine months ended September 30, 2007 $(5,568,191) $ (807,418) Long lived assets (net) at September 30, 2008 $ 88,094 $ 620,618 Long lived assets (net) at September 30, 2007 $ 70,589 $ 341,494
NOTE 13 - RELATED PARTY TRANSACTIONS The Company has unsecured loans from stockholders totaling $862,500 at September 30, 2008. The loans have various due dates and contain interest rates ranging from 10% to 18%. All loans are due on demand. In July 2008, the Company through its subsidiary Best Beer Distributing SA DA CV ( Best Beer), started importing and providing certain products to Deli Express S.A., ("Deli"), a Cafe company with locations in Mexico. The Director General of Best Beer is an equity partner in the Deli and the father of the CEO. As of September 30, 2008 there was approximately $63,000 due to the company of which approximately $20,000 was past due. See Notes 10 and 11 regarding the sale of Palermo to the Company's former President who was also a Director. 20 NOTE 14 FOREIGN EXCHANGE The total impact of foreign currency items on the Consolidated Statements of Operations for the nine and three months ended September 30, 2008 were gains of approximately $324,000 and $249,364, respectively. NOTE 15 -COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company maintains its corporate offices including warehouse space in San Diego, California. In addition, it maintains warehouse space and offices in Tijuana, La Paz, Ensenada, Mexicali, Cabo San Lucas, Puerto Penasco and Mazatlan, Mexico. The Company currently has total leases of 212,000 square feet at a cost of $80,000 per month. In 2008, the Company acquired approximately 20 new leased trucks. The total rent paid on real and personal property operating leases was approximately $572,000 and $307,000 for the nine months ended September 30, 2008 and September 30, 2007 respectively. Future payments on the operating leases are as follows: 2009 $ 788,002 2010 $ 710,003 2011 $ 650,003 2012 $ 360,000 -------------- $ 2,508,008 ============== Dividend Contingency - -------------------- The holders Series A and the Series B convertible preferred stock, commencing on the date of issuance and for a period of three years following the issuance date, are entitled to receive a cumulative quarterly dividend at a rate of fifteen percent of the stated liquidation preference amount per annum in preference to any distributions on common stock. The dividends are payable in additional shares of Series A and the Series B convertible preferred stock. The Board of Directors has not declared dividends for the Series A and Series B convertible preferred stock. Liquidated Damages - ------------------ Under the terms of a Private Placement with Brook street Capital as the Placement Agent dated June 2007], the Company was required to file a registration statement to register the shares. According to the agreement, the registration statement had to be filed within 60 days following the closing of the private placement. Following the 60 day period, the Company became subject to a weekly payment shares? equal to 1% of the shares purchased, up to a maximum payment of 10% of the shares purchased, as liquidated damages for failure to timely file the registration statement. The Company filed a registration statement on Form SB-2 to register the purchased shares on November 14, 2007, and the delay in filing the registration statement resulted in the Company becoming subject to the maximum penalty of 10% of the purchased shares as liquidated damages. The SB-2 registration statement has since been withdrawn. In 2007, the Company recorded an accrued cost of issuance of these liquidated damages shares in the amount of $564,950. The Company discharged its obligation to pay liquidated damages under the private placement agreement by issuing approximately 6,250 shares of Common Stock in June and approximately 2,612,276 shares of Common Stock in August and September of 2008. Concentration of Sales - ---------------------- For the three and nine months ended September 30, 2008, no individual customer represented 10% or more of net revenues. 21 LEGAL PROCEEDING Grupo Sur Litigation - -------------------- On July 10, 2007, the Company entered into a Stock Purchase Agreement for the acquisition of Grupo Sur. As part of this transaction, the Company agreed to retain Grupo Sur's three former owners/managers (the "Employees"), all of whom executed employment agreements with the Company. After the purchase of Grupo Sur closed, the Company determined that the Employees were in breach of the Stock Purchase Agreement and their employment agreements. The Employees responded that the Company's purchase of Grupo Sur never closed and that the Company failed to pay a portion of the purchase price due under the Stock Purchase Agreement. The Employees asserted that they were terminating the Stock Purchase Agreement or, alternatively, repudiating the Stock Purchase Agreement. The Employees, have withheld and refused to refund monies that the Company has paid. The Company filed a lawsuit on August 13, 2008, against the Employees, Gregory Cowal Robbins, Francesca Wright De Cowal and Iliya Petar Zogovic Wright, in the United States District Court for the District of Nevada seeking to recover damages for: breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, and unjust enrichment and conversion. The complaint has not yet been served, and the parties continue to discuss resolution. In addition, from time to time, the Company is involved with legal proceedings, claims and litigation arising in the ordinary course of business. NOTE 16 - SUBSEQUENT EVENTS On November 3, 2008, the Company entered into a Collateral Assignment of Contracts agreement with Genesis, modifying the terms of the original agreement. See Note 15 above. On October 14, 2008, the Company extended the term of a loan with Cyril. See Note 15 above. 22 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following discussion and analysis provides information, which our management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements contained herein and the notes thereto. Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "projections", and words of similar import are forward looking as that term is defined by: (i) the Private Securities Litigation Reform Act of 1995 (the "1995 Act") and (ii) releases issued by the Securities and Exchange Commission ("SEC"). These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that any forward looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward looking statements as a result of various factors, including, but not limited to, any risks detailed herein or detailed from time to time in our other filings with the SEC including our most recent report on Form 10-K. We are not undertaking any obligation to update publicly any forward-looking statements. Readers should not place undue reliance on these forward-looking statements. The following discussion should be read in conjunction with the historical consolidated financial statements and the related notes and the other financial information included the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. We were incorporated in Nevada in December 2002 as a wine distribution company. In April 2006, we acquired the right to distribute Miller beer in Baja California. Our Company is the only broad line nationwide distributor of imported food and beverage products in Mexico. Operating from 11 distribution centers in Mexico and the US, the company markets and distributes over 2,300 national and proprietary brand food and non food items to more than 2,000 customers throughout Mexico. Nascent currently services over 8,000 sales points including supermarkets, convenience stores and traditional foodservice accounts including Wal-mart, Costco, Soriana, Comercial Mexicana, Casa Ley, AMPM, 7-Eleven, OXXO and more. We also distribute a full line of frozen foods, such as ice cream, frozen dinners, meats, ice cream and desserts, and a full line of canned and dry goods, fresh meats and imported specialties. We also distribute a wide variety of food-related items such as disposable napkins, plates and cups. Business strategy: The primary component of our business strategy involves the establishment of a nationwide footprint in Mexico. We will attempt to accomplish this by seeking to acquire profitable and well positioned distributors in Mexico. We also plan to obtain exclusive distribution rights to desirable and recognizable products to command higher operating margins and to use technology to leverage our operations and absorb acquisitions. Mexico Market overview: The population of Mexico is in excess of 110 million people and the country has a Gross Domestic Product of more than $1 trillion dollars. According to U.S Department of Agriculture, the foodservice industry in Mexico is a $46 billion industry and is fragmented. The industry is serviced by 25,000 small to medium food service distributors. Furthermore, the foodservice industry in Mexico carries higher margins than US foodservice distribution. In Mexico the margins generally range from 25-40% while the US foodservice industry margins tend to range between 10-15%. 23 RECENT EVENTS Our sales for the nine months ended September 30, 2008 have increased by 46% from the prior year period. The company has also opened two new warehouses since last year and has received certification from the California Milk Board to use the "Real Cheese" logo on its private label "Nery's" cheese products. During May 2008, Nascent became the exclusive distributor for Fusion Energy Drink in Mexico. During May 2008, we signed an agreement to distribute Rockstar Energy drinks in Mexico. During the second quarter of 2008, we announced a plan to review our growth strategy and effective June 30, 2008, we sold Palermo Italian Foods, LLC to a group of investors headed by Palermo's President, Victor Petrone, who was also President and a director of Nascent. Mr. Petrone subsequently resigned as President and from the Board of Directors, As of July 31, 2008. We completed the unwinding of our purchase of Pasani pursuant to a Settlement Agreement. Inflation/Energy We believe that the significant increase in energy prices during the first nine months of 2008 has had a negative effect on our margins . We are able to pass on some of the increased commodity costs in certain circumstances; however, for the most part we are absorbing these increased commodity costs resulting from the energy costs. The Mexican Peso has recently devalued against the U.S. Dollar. On July 31, 2008, the exchange rate was 10.3P to $1.00, and on October 31, 2008, the exchange rate was 12.8P to $1.00. The devaluation of the Peso has affected us in the following ways: (1) our collection of accounts receivable has slowed and customers that have purchased product at 10.5P dollar equivalent are now having to pay the receivable at a 12.5P equivalent; and (2) we believe our customers are slowing their ordering of products in anticipation of a monetary correction and/or stabilization of the exchange rate. RESULTS OF OPERATIONS (1) All costs incurred to bring product to our warehouses and distributions centers are included in cost of revenue. These items include shipping and handling costs, agent and broker fees, letter of credit fees, customs duty, inspection costs, inbound freight and internal transfer costs. Costs associated with our own distribution and warehousing are recorded in operating expenses. Our gross margins may not be comparable to others in the industry as some entities may record and classify these costs differently. Note: 2007 financial results have been reclassified to conform to the current presentation of Palermo, Pasani, Eco and Grupo Sur as discontinued operations. The Pro forma reconciliation is included elsewhere herein. THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE SAME PERIOD IN 2007. REVENUE for the three months ended September 30, 2008 was approximately $4.1 million, an increase of $2.0 million from the same period in the prior year. The increase reflects approximately $2.0 million of Targa revenue contribution which was purchased in the forth quarter of 2007. Sales of Best Beer and IFS were flat as compared to 2007. COST OF SALES for the quarter ended September 30, 2008 was approximately $3.2 million, an increase of $1.3 million for the same period in the prior year. The increase for the most part is attributable to Cost of Sales associated with Targa revenue which was purchased in the fourth quarter of 2007. GROSS PROFIT for the quarter ended September 30, 2008 was approximately $900 thousand or 22% of sales, an increase of approximately $700 thousand from the same period last year. Targa's gross profit for the quarter ended September 30, 2008 was approximately $500 thousand or 26% of sales. Targa was purchased in the fourth quarter of 2007. 24 OPERATING EXPENSES of approximately $2.2 million or 53% of sales included Distribution expense of $600 thousand, Sales and Marketing of $100 thousand, General and Administrative of $1.1 million and Depreciation and Amortization of $300 thousand for the quarter ended 2008. Operating expenses increased $1.1 million from $1.1 million in the same period in 2007. Targa contributed approximately $1.0 million of the increase. OTHER EXPENSE was approximately $1.4 million for the quarter ended September 30, 2008, a decrease of $400 thousand for the same period in 2007. The $1.4 million of other expense reflects a $2.7 million valuation reserve against the 15% ownership AIP, Inc., the Company which purchased Palermo. Other expense for the 2008 period, reflects $400 thousand of warrant interest recapture compared to warrant recapture loss of $1.5 million for the prior year period. NET LOSS of approximately of $4.6 million reflects a loss from continuing operations of approximately $2.6 million and loss from discontinued operations of $1.9 million for the quarter ended September 30, 2008, an increased loss of approximately $2.0 million compared to the $2.6 million net loss for the same period in 2007. The increase for the most part is the loss from discontinued operations. For the Three Months Ended September 30, 2008 --------------------------------------- Inc/Dec (unaudited) Of 2008 over (in thousands) % of % of % of 2008 Revenue 2007 Revenue 2007 Revenue -------- -------- ------- -------- ------- ------- REVENUE $ 4,095 100.0 $ 2,106 100 $ 1,989 48.6 COST OF REVENUE 3,189 77.9 1,931 91.7 1,258 30.7 ------------------ ------------------ ----------------- GROSS PROFIT 906 22.1 175 8.3 731 17.9 OPERATING EXPENSES: Distribution 610 14.9 110 5.2 500 12.2 Sales and Marketing 117 2.9 114 5.4 3 0.1 General and Administrative 1,136 27.7 458 21.7 678 16.6 Depreciation 38 0.9 -- 38 0.9 Amortization 258 6.3 341 16.2 (83) (2.0) Intangible Impairments - 0.0 - 0.0 - 0.0 ------------------ ------------------ ----------------- TOTAL OPERATING EXPENSES 2,159 52.7 1,023 48.6 1,136 27.7 LOSS FROM OPERATIONS (1,252) (30.6) (848) (40.3) (404) (9.9) OTHER INCOME (EXPENSE) Interest Income 24 0.6 3 0.1 21 0.5 Interest Expense (123) (3.0) (428) (20.3) (305) 7.5 Warrants interest recapture 442 10.8 (1,460) (69.3) (1,018) (24.9) Other Income (Expense), net (1,787) (43.6) - 0.0 (1,787) (43.6) ------------------ ------------------ ----------------- TOTAL INCOME (EXPENSE) (1,443) (35.2) (1,885) (89.5) (3,089) 75.4 LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES (2,696) (65.8) (2,733) (129.8) (37) 0.9 PROVISION FOR INCOME TAX 1 0.0 - 0.0 (1) 0.0 ------------------ ------------------ ----------------- LOSS FROM CONTINUING OPERATIONS (2,697) (65.8) (2,733) (129.8) (36) 0.9 Income(loss)from Discontinued Operations (3,625) (88.5) 158 7.5 (3,783) (92.4) ------------------ ------------------ ----------------- NET (LOSS) $(6,322) (154.4) $(2,575) (122.3) $(3,747) (91.5) ================== ================== =================
25 (1) All costs incurred to bring product to our warehouses and distributions centers are included in cost of revenue. These items include shipping and handling costs, agent and broker fees, letter of credit fees, customs duty, inspection costs, inbound freight and internal transfer costs. Costs associated with our own distribution and warehousing are recorded in operating expenses. Our gross margins may not be comparable to others in the industry as some entities may record and classify these costs differently. THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE SAME PERIOD IN 2007. REVENUE for the nine months ended September 30, 2008 was approximately $14 million, an increase of $6.8 million from the same period in the prior year. The increase reflects approximately $6.6 million of Targa revenue contribution which was purchased in the forth quarter of 2007. Sales of Best Beer and were flat as compared to 2007. COST OF SALES for the nine months ended September 30, 2008 was approximately $13.2 million, an increase of $6.3 million for the same period in the prior year. The increase for the most part is attributable to Costs of Sales associated with Targa revenue which was purchased in the fourth quarter of 2007. GROSS PROFIT for the nine months ended September 30, 2008 was approximately $1.7 million or 7% of sales, an increase of approximately $500 thousand from the same period last year. Targa's gross profit for the quarter ended September 30, 2008 was approximately $1.0 million or 16% of sales. Targa was purchased in the fourth quarter of 2007. OPERATING EXPENSES of approximately $12.0 million or 81% of sales included Distribution expense of $1.5 million, Sales and Marketing of $600 thousand, General and Administrative of $5.5 million and Depreciation and Amortization of $1.0 million and impairment of PGI's goodwill and intangible assets of approximately $ 5.4 million. Operating expenses for the nine months ended September 30, 2008 increased $7.0 million from $5.0 million in the same period in 2007. Targa contributed about $1.0 million of the increase. OTHER EXPENSE was approximately $700 thousand million for the nine months ended September 30, 2008, a decrease of $2.0 million for the same period in 2007. The $700 thousand expense reflects a $2.7 million valuation reserve against the 15% ownership AIP, Inc. the Company which purchased Palermo. Other expense for the 2008 period reflects $1.3 million of warrant interest recapture compared to warrant recapture loss of $1.5 million for the prior year period, and a reduction of $800 of interest expense compared to the prior year period. 26 NET LOSS of approximately of $11.8 million reflects a loss from continuing operations of approximately $11.0 million and loss from discontinued operations of $800 thousand for the nine months ended September 30, 2008, an increased loss of approximately $5.4 million compared to the $6.4 million in net loss for the same period in 2007. The increase for the most part is the $5.4 million attributable to impairment of goodwill and intangibles. For the Nine Ended September 30, 2008 ------------------------------------------- Increase/Decrease (unaudited) 2008 over 2008 2007 2007 ------------------- ---------------------- ------------------ REVENUE $ 14,823 100.0 $ 8,049 100 $ 6,774 45.7 COST OF REVENUE 13,110 88.4 6,810 45.9 6,300 42.5 ------------------- ---------------------- ------------------ GROSS PROFIT 1,714 11.6 1,239 8.4 (475) 3.2 OPERATING EXPENSES: Distribution 1,533 10.3 410 2.8 1,123 7.6 Sales and Marketing 567 3.8 452 3.0 115 0.8 General and Administrative 3,506 23.6 3,188 21.5 318 2.1 Depreciation 109 0.7 -- 109 0.7 Amortization 942 6.4 730 4.9 212 1.4 Intangible Impairments 5,341 36.0 -- 5,341 36.0 ------------------- ---------------------- ------------------ TOTAL OPERATING EXPENSES 11,997 80.9 4,780 32.2 7,217 48.7 LOSS FROM OPERATIONS (10,283) (69.4) (3,541) (23.9) (6,742) (45.5) OTHER INCOME (EXPENSE) Interest Income 30 0.2 9 0.1 21 0.1 Interest Expense (450) (3.0) (1,384) (9.3) (934) 6.3 Warrants interest recapture 1,326 8.9 (1,460) (69.3) (134) 0.9 Other Income (Expense), net (1,625) (11.0) -- -- (1,625) (11.0) ------------------- ---------------------- ------------------ TOTAL INCOME (EXPENSE) (719) (4.8) (2,835) (19.1) (2,116) 14.3 LOSS FROM CONTINUING OPERATIONS (11,002) (74.2) (6,376) 43.0 (4,626) (31.2) BEFORE PROVISION FOR INCOME TAXES PROVISION FOR INCOME TAX 1 0.0 1 0.01 ------------------- ---------------------- ------------------ LOSS FROM CONTINUING OPERATIONS (11,003) (74.2) (6,376) 43.0 (17,379) (117.2) Income(loss)from Discontinued Operations(2,520) (17.0) (28) (0.2) (2,549) (17.2) ------------------- ---------------------- ------------------ NET (LOSS) $(13,523) (91.2) $ (6,404) 43.2 $ (19,927) (134.4) =================== ====================== ==================
27 LIQUIDITY AND CAPITAL RESOURCES The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2008, the Company had cash of $715,000 and working capital of $4,811,000. The Company had net losses from continuing operations of $2,697,000 and $11,004,000 for the three and nine months ended September 30, 2008, and $2,734,000 and $6,676,000 for the three and nine months ended September 30, 2007, respectively. CASH FLOW LIQUIDITY AND CAPITAL RESOURCES For the Nine Months Ended, Cash Flow As of September 30, 2008 2008 2007 ------------------ -------------- Net Cash (Used for) for Operations $ (2,540,294) $ (7,601,239) Net Cash (Used for) for Investing 207,699 (2,839,239) Net Cash Providing by Financing 1,869,991 11,926,728 Effect of Exchange Rates 12,224 (56,890) ------------------ -------------- Net Increase Cash $ (450,380) $ 1,429,360 ================== ============== WORKING CAPITAL ANALYSIS (in thousands) September 30, December 31, 2008 2007 Increase/Decrease ---------------- ------------- ------------------ Current Assets: Cash $ 715 $ 961 $ (246) Accounts Receivable 2,609 3,879 (1,269) Notes Receivable 1,544 4,727 (3,182) Inventory 2,194 2,693 (499) Prepaid 1,380 694 686 Asset held for Sale 3,522 15,559 (12,037) ---------------- ------------- ------------------ Total Current Assets 11,965 28,513 (16,547) ---------------- ------------- ------------------ Current Liabilities: Accounts Payable $ 3,213 $ 2,620 $ 593 Accrued Liabilities 458 1,149 (691) Accrued Interest 195 279 (84) Line credit 49 0 49 Notes Payable 1,662 73 1,588 Shareholders Loans 863 630 233 Acquisition Loans 8,000 (8,000) Liabilities related to assets held for Sale 2,471 4,143 (1,672) ---------------- ------------- ------------------ Total Current Liabilities 8,911 16,895 (7,984) ---------------- ------------- ------------------ Working Capital (Deficit) $ 3,055 $ 11,618 $ (8,563) ================ ============= ==================
28 RECONCILIATION In non-GAAP financial measure of pro forma revenues, gross profit and EBITDA below, we have excluded unaudited prior year results of Palermo, Pasani/Eco-Pac and Grupo Sur. This information is provided to present the results for three months ended and nine months ended September 30, 2008 and 2007, respectively. The financial data for these subsidiaries was internally prepared and unaudited, and have not been reviewed by our independent accountants. EBITDA Three months ended September 30, Nine months ended September 30, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Loss from operations $ (1,252,452) $ (848,207) $(10,283,350) $ (3,540,789) ------------ ------------ ------------ ------------ Adjustments Add: Depreciation 37,258 15,058 107,923 42,017 Amortization 259,081 325,834 942,619 687,293 ------------ ------------ ------------ ------------ 296,339 340,892 1,050,542 729,310 ------------ ------------ ------------ ------------ EBITDA - (deficit) (956,113) (507,315) (9,232,808) (2,811,479) ============ ============ ============ ============
Working Capital of $4.8 million as of September 30 2008, reflects an increase of $1.3 million giving effect to the reclassifications to assets held for sale as of September 30, 2008 and December 31, 2007 discussed in Note 10 to the Consolidated Financial Statements. Current assets increased $ $4.8 million to $13.7 million. The increase in current assets reflects an increase of assets held for sale of $4.6 million. Accounts receivable decreased approximately $1.3 million, principally as a result of increased collection efforts combined with a short fall in sales due in part to a dislocation in physical inventory. Inventory decreased approximately $500 thousand. Current liabilities increased approximately $3.5 million to $8.9 million. The $3.5 million increase resulted from an increase in liabilities relating to assets held for sale of $1.8 million and notes payable of $1.6 million. On March 31, 2008, the Company sold a $1,000,000 Senior Secured Promissory Note (the "Note") to Genesis Merchant Partners, LP, a Delaware limited partnership ("Genesis"). Interest accrues on the amount of the Note at a rate of 14% per annum and is payable monthly to Genesis. The Note is secured by all assets of the Company, and had an original maturity date of September 30, 2008. The Company elected to extend the term of the loan to March 31, 2009 for a fee of $20,000. On November 3, 2008, in connection with the extension of the Note, the Company entered into a Collateral Assignment of Contracts agreement (the "Assignment"). Pursuant to the Assignment, the Company assigned to Genesis, as additional security for the obligations under the Note, the Company's rights to receive payments under (i) the promissory note in the amount of $1,000,000 made by AIP, Inc., and (ii) the settlement agreement with Pasani. On July 10, 2007, pursuant to a Stock Purchase Agreement, the Company acquired Grupo Sur, an in store merchandising company. Subsequent to the closing of such acquisition, disputes arose among the Company, and the three former Grupo Sur shareholders who became employed by the Company in connection with the Grupo Sur acquisition. As a result of these disputes, in June 2008, the Company determined to reclassify the Grupo Sur assets and related liabilities as assets and related liabilities held for sale, and the operations of Grupo Sur as discontinued operations, and recognized in the quarter ended June 30, 2008 an impairment loss on certain intangible assets and goodwill. 29 On August 8, 2008, Nascent entered into a Settlement Agreement (the "Settlement Agreement"), effective June 30, 2008 (the "Settlement Date"), with Pasani, S.A. de C.V. ("Pasani") and Eco Distributing, LLC ("Eco"). On May 11, 2007, the Company entered into a Stock Purchase Agreement (the "Pasani Purchase Agreement") with Pasani, and the shareholders of Pasani, Alejandro Gutierrez Pederzini ("Mr. Pederzini") and Leticia Gutierrez Pederzini (together with Mr. Pederzini, the "Shareholders"), whereby the Company purchased (the "Acquisition") from the Shareholders 100% of the outstanding capital stock of Pasani ("Pasani Common Stock"), in exchange for a Promissory Note to the Shareholders in the principal amount of USD $1,500,000 (the "Note"). Since the execution of the Pasani Purchase Agreement, $500,000 of the principal of the Note has been paid to the Shareholders. Pursuant to the Settlement Agreement, Nascent has returned the Pasani Common Stock to the Shareholders. In addition, the remaining balance of the Note has been forgiven and the Shareholders have agreed to pay Nascent the following: (i) $500,000 in cash within 180 days of the Settlement Date, $185,000 in additional funds within 180 days of the Settlement Date and (iii) $312,451.87 (for inventory sold) within 180 days of the Settlement Date. In addition, Pasani was obligated to pay Nascent on or before September 30, 2008, $92,259.13 for products delivered to Pasani during July 2008. Such amount was paid in August, 2008. As a result of this settlement, the Company determined in August 2008 to reclassify the Pasani and Eco assets and related liabilities as assets and related liabilities held for sale, and the operations of Pasani and Eco as discontinued operations, and recognized in the quarter ended June 30, 2008 an impairment loss on certain intangible assets and goodwill. Alejandro Pederzini and Leticia Gutierrez Pederzini the Shareholders made the initial payment at closing, however, subsequently failed to make the September 30, 2008, payment of $92,259.13. We are currently reviewing our options in order to insure that Alejandro Pederzini and Leticia Gutierrez Pederzini comply with the terms of the agreement. On June 30 , 2008, the Company sold all of the outstanding capital stock of Palermo to AIP, Inc., a company founded by the Company's former President who was also a Director. The consideration consisted of AIP's assumption of an accounts payable note not to exceed $800,000 and a secured bank loan in the aggregate principal of $249,999.00, a note in favor of the Company in the amount of $1,000,000.00 due and payable on June 30, 2009, and fifteen percent (15%) of the outstanding equity of AIP. The value of the equity interest in AIP is fully reserved against at September 30, 2008. As a result of the sale of Palermo, the assets and related liabilities of Palermo were reclassified as held for sale at December 31, 2007, and the operations of Palermo are reported as discontinued operations for the three and nine months ended September 30, 2007 and the nine months ended September 30, 2008. On February 13, 2008, the Company entered into a loan agreement with Cyril Capital, LLC ("Cyril") in which Cyril lent the Company $500,000. The loan was due and payable on August 14, 2008. The primary security for the loan was the Company's inventory and accounts receivable. The secondary security was the personal guarantee of Sandro Piancone, the Company's Chief Executive Officer. In the event that the loan, including interest at 8% per annum, was not repaid on August 14, 2008, a penalty of 10% would apply. However, the Company opted to extend the term of the loan by 60 days to October 14, 2008 for a fee of $20,000. On October 14, 2008, the Company extended the term of the loan again by 60 days for a fee of $20,000. During the extension period, the loan is not in default and the penalty will not apply. Interest at the base rate of 8% per annum will continue to accrue. The Company is currently in discussions with several lending institutions for a working capital credit facility and additional financing. Management believes that the existing working capital resources and cash forecasted by management to be generated by operations, together with planned short-term and long-term borrowings, lines of credit and/or capital raised through the sale of equity or equity-based securities will be sufficient to fund operations through at least the next twelve months. However, there is no assurance that external funding will be available on terms and conditions acceptable to the Company, or at all, or that we will be successful with our operating plans. If events and circumstances occur such that the Company does not meet its current operating plans and raise sufficient external financing, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance, including but not limited to, the premature sale of some or all of its assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to changes in foreign currency exchange rates. We purchase some of our inventory offshore from suppliers who require payment in Euros. Additionally, a certain amount of our domestic inventory purchases are commodity priced and are subject to the volatility in pricing Our Mexican subsidiaries purchase a portion of inventory from suppliers who require payment in U.S. Dollars. 30 Foreign Currency Translation - ----------------------------- Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our consolidated statements of operations are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (loss) in the period in which they occur. The total impact of foreign currency items on the Consolidated Statements of Operations for the three and nine months ended September 30, 2008 were gains of approximately $249,000 and $324,000, respectively. Item 4T. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act.") pursuant to Rules 13a-15 and 15d-15 under the Exchange Act, as of the end of the period covered by this report. These controls and procedures are designed to provide assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner that is intended to allow timely decisions regarding required disclosures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2008. The Company has identified material weaknesses with our Mexican subsidiaries which we identified in our Annual Report on Form 10-KSB for the year ended December 31, 2007. As a result of these material weaknesses, we determined that our disclosure controls and procedures were not effective at September 30, 2008. In making this determination, we took into account the remedial actions that we are taking or planning to take with respect to these material weaknesses. Based on a number of factors, including our performance of manual procedures to provide assurance of the proper collection, evaluation and disclosure of the information included in our consolidated financial statements, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP and that they are free of material errors. Since we originally identified those material weaknesses in connection with the preparation of our financial statements for the period ended December 31, 2007, we have been working to identify and remedy the causes of the problems that led to the existence of those material weaknesses, and we believe that: o we identified the primary causes of and appropriate remedial actions for these problems; o we have, except as otherwise noted below and subject to the completion of testing that we are conducting and plan to complete as of December 31, 2008, remedied substantially all of these material weaknesses; and o we are continuing to implement additional appropriate corrective measures to enable us to determine that those material weaknesses have been fully remedied. 31 With respect to testing, we have adopted, and pursued during the fourth quarter of 2007, a program that is designed to evaluate whether the remedial actions we have taken have been in effect for a sufficient period of time to determine their effectiveness as well as to test the effectiveness of those remedial actions. Notwithstanding our efforts, there is a risk that we ultimately may be unable to achieve the goal of fully remedying these material weaknesses and that the corrective actions that we have implemented and are continuing to implement may not fully remedy the material weaknesses that we have identified or prevent similar or other control deficiencies or material weaknesses from having an adverse impact on our business and results of operations or our ability to timely make required SEC filings in the future. The remedial actions that we have taken to remedy these material weaknesses may be regarded as material changes in our internal control over financial reporting that have occurred since December 31, 2007. Due, among other things, to the difficulties that we experienced in preparing timely financial statements. Those changes include the following: 1. For all periods ended on or after December 31, 2007, we adopted procedures to conduct additional detailed transaction reviews and control activities to confirm that our financial statements for each period present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. 2. These reviews and control activities include performing physical inventories and detailed account reconciliations of all material line-item accounts reflected on our Consolidated Balance Sheets and Consolidated Statements of Operations in order to confirm the accuracy of, and to correct any material inaccuracies in, those accounts as part of the preparation of our financial statements. 3. For periods ended on or after December 31, 2007, with respect to our failure to maintain a timely and accurate period-end financial statement closing process and our failure to effectively monitor our accounting function and our oversight of financial controls, we introduced new leadership to our accounting and financial functions and in certain operating functions. This included appointing a new Chief Financial Officer effective appointing a new controller and appointing new subsidiary controllers. 4. For periods ended on or after December 31, 2007, we reaffirmed and clarified our account reconciliation policies through additional procedural details and guidelines for completion, which expressly require (a) reconciliations of all material accounts no less frequently than monthly, (b) that any discrepancies noted be resolved in a timely fashion and (c) that all proposed reconciliations be reviewed in detail and on a timely basis by appropriate personnel to determine the accuracy and appropriateness of the proposed reconciliation. Changes in Internal Control Over Financial Reporting Except as set forth above, there were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 32 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS From time to time we are involved with legal proceedings, claims and litigation arising in the ordinary course of business. On July 10, 2007, the Company entered into a Stock Purchase Agreement for the acquisition of Grupo Sur. As part of this transaction, the Company agreed to retain Grupo Sur's three former owners/managers (the "Employees"), all of whom executed employment agreements with the Company. After the purchase of Grupo Sur closed, the Company determined that the Employees were in breach of the Stock Purchase Agreement and their employment agreements. The Employees responded that the Company's purchase of Grupo Sur never closed and that the Company failed to pay a portion of the purchase price due under the Stock Purchase Agreement. The Employees asserted that they were terminating the Stock Purchase Agreement or, alternatively, repudiating the Stock Purchase Agreement. The Employees, have withheld and refused to refund monies that the Company has paid. The Company filed a lawsuit on August 13, 2008, against the Employees, Gregory Cowal Robbins, Francesca Wright De Cowal and Iliya Petar Zogovic Wright, in the United States District Court for the District of Nevada seeking to recover damages for: breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, and unjust enrichment and conversion. The complaint has not yet been served, and the parties continue to discuss resolution. Nascent has agreed to mediate the dispute in November. Item 1A. RISK FACTORS N/A Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company issued 2,612,276 shares of Common Stock Par Value $0.001 in the quarter ended September 30, 2008 in satisfaction of liquidated damages accrued under a private placement agreement discussed elsewhere herein. Item 3 DEFAULTS ON SENIOR SECURITIES NONE Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE Item 5 OTHER INFORMATION NONE Item 6. (a) Exhibits The following Exhibits are incorporated herein by reference or are filed with this report as indicated below. Exhibit No. Description - ----------- ----------- 10.1 Loan Agreement with Cyril Capital, LLC dated February 13, 2008(incorporated by reference from exhibit 99.1 in Form 8-K filed on October 20, 2008) 10.2 Senior Secured Promissory Note sold to Genesis Merchant Partners, LP dated March 31, 2008 (incorporated by reference from exhibit 99.1 in Form 8-K filed on November 7, 2008) 10.3 Collateral Assignment of Contracts to Genesis Merchant Partners, LP dated as of October 31, 2008 (incorporated by reference from exhibit 99.2 in Form 8-K filed on November 7, 2008) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. Nascent Wine Company, Inc. Dated: November 14, 2008 By: /s/ Sandro Piancone ------------------------------ Sandro Piancone Chief Executive Officer Dated: November 14, 2008 By: /s/ Peter V. White ------------------------------- Chief Financial Officer and Treasurer Peter V. White (Principal Financial Officer) 34 EX-31.1 2 nascent_10qex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sandro Piancone, Chief Executive Officer of Nascent Wine Company, (the "Registrant") certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nascent Wine Company, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the period presented in this report; 4. The Registrant's's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the Registrant and have: (a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Registrants's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation or internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Smaller Reporting Company's internal control over financial reporting. Date: November 14, 2008 /s/ Sandro Piancone --------------------------------------------- Sandro Piancone, Chief Executive Officer EX-31.2 3 nascent_10qex31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter V. White, Chief Financial Officer of Nascent Wine Company, Inc. (the "Registrant ") certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nascent Wine Company, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the period presented in this report; 4. The Registrant's' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the Registrant and have: (a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Registrants's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation or internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Smaller Reporting Company's internal control over financial reporting. Date: November 14, 2008 /s/ Peter V. White --------------------------------------------- Peter V. White, Chief Financial Officer and Treasurer EX-32.1 4 nascent_10qex32-1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report on Form 10-Q of Nascent Wine Company, Inc. for the period ended September 30, 2008, we, Sandro Piancone and Peter V. White, Chief Executive Officer and Chief Financial Officer, respectively . hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: (1) such Quarterly Report on Form 10-Q for the period ended September 30, 2008, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in such Quarterly Report on Form 10-Q , fairly presents, in all material respects, the financial condition and results of operations of Nascent Wine Company, Inc. /s/ Sandro Piancone - ------------------------------------- Sandro Piancone Chief Executive Officer November 14, 2008 /s/ Peter V. White - ------------------------------------- Peter V. White Chief Financial Officer and Treasurer November 14, 2008 -----END PRIVACY-ENHANCED MESSAGE-----