UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from __________________ to _________________________
Commission file number: 333-136215
NANO HOLDINGS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | 20-3724068 |
(State or other jurisdiction of | (IRS Employer Identification No.) |
incorporation or organization) |
1640 Terrace Way
Walnut Creek, California 94597
(Address of principal executive offices)
(925) 938-0406
(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
As of November 8, 2007, 7,030,000 shares of Common Stock of the issuer were outstanding (“Common Stock”).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Traditional Small Business Disclosure Format. Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANO HOLDINGS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS | ||||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
CURRENT ASSETS | (Unaudited) | |||||||
Cash | $ | 21,067 | $ | 7,458 | ||||
Accounts receivable, net | 47,537 | 16,097 | ||||||
Total Current Assets | 68,604 | 23,555 | ||||||
PROPERTY AND EQUIPMENT, net | 2,696 | 3,295 | ||||||
OTHER ASSETS | ||||||||
Trademark | 275 | 275 | ||||||
Deposits | 728 | 728 | ||||||
Total Other Assets | 1,003 | 1,003 | ||||||
TOTAL ASSETS | $ | 72,303 | $ | 27,853 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 13,012 | $ | 13,529 | ||||
Notes payable and accrued interest | 196,867 | 138,092 | ||||||
Total Current Liabilities | 209,879 | 151,621 | ||||||
LONG-TERM DEBT | - | - | ||||||
Total Liabilities | 209,879 | 151,621 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Preferred stock:$0.001 par value, 10,000,000 shares | ||||||||
authorized; no shares issued and outstanding | - | - | ||||||
Common stock:$0.001 par value, 75,000,000 shares | ||||||||
authorized; 7,030,000 shares issued and outstanding | 7,030 | 7,030 | ||||||
Additional paid-in capital | 328,541 | 240,791 | ||||||
Accumulated deficit | (473,147 | ) | (371,589 | ) | ||||
Total Stockholders' Equity (Deficit) | (137,576 | ) | (123,768 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 72,303 | $ | 27,853 |
The accompanying notes are an integral part of these financial statements.
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NANO HOLDINGS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
REVENUES | ||||||||||||||||
Product sales | $ | 47,683 | $ | 43,370 | $ | 112,596 | �� | $ | 112,504 | |||||||
Cost of goods sold | 5,452 | 18,827 | 44,526 | 61,272 | ||||||||||||
Gross Margin | 42,231 | 24,543 | 68,070 | 51,232 | ||||||||||||
EXPENSES | ||||||||||||||||
General and administrative | 55,683 | 68,206 | 158,353 | 182,290 | ||||||||||||
Total Expenses | 55,683 | 68,206 | 158,353 | 182,290 | ||||||||||||
Loss from Operations | (13,452 | ) | (43,663 | ) | (90,283 | ) | (131,058 | ) | ||||||||
OTHER EXPENSES | ||||||||||||||||
Interest expense | (4,175 | ) | (2,650 | ) | (11,275 | ) | (7,406 | ) | ||||||||
Net Loss | $ | (17,627 | ) | $ | (46,313 | ) | $ | (101,558 | ) | $ | (138,464 | ) | ||||
PER SHARE DATA: | ||||||||||||||||
Basic and diluted loss per share | $ | (000 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
Weighted average number of shares outstanding | 7,030,000 | 7,030,000 | 7,030,000 | 6,905,000 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
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NANO HOLDINGS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance, December 31, 2005 | 6,600,000 | $ | 6,600 | $ | 120,920 | $ | (157,802 | ) | $ | (30,282 | ) | |||||||||
Common stock issued for services | ||||||||||||||||||||
performed by an officer | ||||||||||||||||||||
and shareholder | 100,000 | 100 | 116,901 | - | 117,001 | |||||||||||||||
Common stock issued for cash | ||||||||||||||||||||
at $0.01 per share | 330,000 | 330 | 2,970 | - | 3,300 | |||||||||||||||
Net loss for the year ended December 31, 2006 | ||||||||||||||||||||
- | - | - | (213,787 | ) | (213,787 | ) | ||||||||||||||
Balance, December 31, 2006 | 7,030,000 | 7,030 | 240,791 | (371,589 | ) | (123,768 | ) | |||||||||||||
Contributed services | ||||||||||||||||||||
performed by an officer | ||||||||||||||||||||
and shareholder | - | - | 87,750 | - | 87,750 | |||||||||||||||
Net loss for the nine months ended September 30, 2007 | ||||||||||||||||||||
- | - | - | (101,558 | ) | (101,558 | ) | ||||||||||||||
Balance, September 30, 2007 | 7,030,000 | $ | 7,030 | $ | 328,541 | $ | (473,147 | ) | $ | (137,576 | ) |
The accompanying notes are an integral part of these financial statements.
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NANO HOLDINGS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (101,558 | ) | $ | (138,464 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities: | ||||||||
Depreciation and amortization | 599 | 503 | ||||||
Allowance for bad debts | - | - | ||||||
Contributed services | 87,750 | 87,750 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
(Increase) decrease in receivables | (31,440 | ) | (24,825 | ) | ||||
(Increase) decrease in inventory | - | (5,855 | ) | |||||
(Increase) decrease in other assets | - | (1,002 | ) | |||||
Increase (decrease) in accrued interest payable | 11,275 | 7,406 | ||||||
Increase (decrease) in accounts payable | (517 | ) | 5,654 | |||||
Net Cash Used in Operating Activities | (33,891 | ) | (68,833 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of fixed assets | - | (3,998 | ) | |||||
Net Cash Provided (Used) By Investing Activities | - | (3,998 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Common stock issued for cash | - | 3,300 | ||||||
Proceeds from notes payable | 47,500 | 62,000 | ||||||
Contributed capital | - | - | ||||||
Net Cash Provided (Used) By Financing Activities | 47,500 | 65,300 | ||||||
INCREASE (DECREASE) IN CASH | 13,609 | (7,531 | ) | |||||
CASH AT BEGINNING OF YEAR | 7,458 | 20,483 | ||||||
CASH AT END OF YEAR | $ | 21,067 | $ | 12,952 | ||||
The accompanying notes are an integral part of these financial statements.
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NANO HOLDINGS INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated under the laws of the State of Delaware as Nano Holdings International, Inc. on April 16, 2004 with a principal business objective of seeking a merger with an existing operating company. Sunshine Group, LLC., was formed as a limited liability company, under the laws of the State of Florida on September 24, 2002, to engage in the manufacture and sale of alcoholic and non alcoholic beverages. On December 31, 2005, Nano Holdings International, Inc. acquired all of the ownership interests of Sunshine Group, LLC for 3,500,000 shares of its common stock. The shareholders of Sunshine Group, LLC became the controlling shareholders of the Company and Nano Holdings International, Inc. was inactive prior to the acquisition. Accordingly, the accompanying financial statements reflect the historical financial statements of Sunshine Group, LLC as the historical of the Company, i.e. a reverse merger.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Financial Statements
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2007 and 2006 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2006 audited financial statements. The results of operations for the periods ended September 30, 2007 and 2006 are not necessarily indicative of the operating results for the full years.
NOTE 3 - GOING CONCERN
The Company’s financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has generated significant losses from operations.
In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and developing a consistent source of revenues. Management’s plans include raising capital from the private placement of its debt or equity.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"), CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF NANO HOLDINGS INTERNATIONAL, INC. ("NANO", "THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO SEPTEMBER 30, 2007.
History:
We were incorporated as Nano Holdings International, Inc. in Delaware on April 16, 2004. We have 85,000,000 shares of stock authorized, representing 75,000,000 shares of common stock, $0.001 par value and 10,000,000 shares of preferred stock, $0.001 par value.
On December 15, 2005, we entered into a Share Exchange Agreement with Sunshine Group, LLC, a Florida, limited liability company, whereby we exchanged 3,500,000 newly issued shares of our restricted common stock for 100% of the outstanding membership units of Sunshine. The acquisition of Sunshine was an arms length transaction, with the exchange rate of the exchange determined by the mutual agreement of us and Sunshine based on the estimated value of Sunshine. Since that time, Sunshine has been our wholly owned subsidiary. We run all of our operations through Sunshine, and unless otherwise stated, all references to Nano Holdings International, Inc., the “Company,” “we,” “us,” or words of similar meaning used herein include the operations of Sunshine.
On or about June 6, 2007, our common stock was cleared to be quoted on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “NNOH.”
We have a webpage which describes our products and through which customers can purchase our products at http://www.shotskis.com, www.shotskis.sitefly.com, www.shotskisbarsupplies.com (and/or www.bombshots.com), which include information which we do not wish to be included in this report.
Through Sunshine, we sell party and drinking supplies including gelatin shot mixes, shot glasses, flavored sugar and salts, and various other drinking containers and paraphernalia including:
o | Gelatin Shooters - Our Gelatin Shooters are drink mixes, which customers can mix with water and alcohol to create Jello shots for consumption in bars or at individual customer’s homes. We currently offer gelatin shooters in the following cocktail flavors: Sex on the Beach, Purple Hooter, Margarita, Mai Tai, Pina Colada and Kamikaze. We do not sell alcoholic beverages, but instead our powdered Gelatin Shooter drink mixes are intended to be combined with alcoholic or non-alcoholic beverages to create flavored gelatin shooters, which are then intended to be eaten once hardened. We believe that our Gelatin Shooters will be popular with individuals as well as bar owners because the Gelatin Shooters themselves do not compete with other alcoholic beverages, but act instead as an add on sale for bar owners, and are often a spur of the moment impulse purchase. As the Gelatin Shooters are not an alcoholic beverage themselves, they can be sold to anyone of any age in any type of store. |
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o | Bomb Shots - Bomb shots are plastic shot glasses, which contain a smaller shot glass within a larger shot glass and allow the bartender to pour two liquids into the shot glass, but to keep the liquids separate until the shot is tilted up in a drinking position, at which time the two separate liquids mix as they are consumed. |
o | Shotski's Flavored & Colored Sugars and Salts - Our flavored and colored sugars and salts add eye appeal to any drink while improving the flavor as the sugars and salts are designed to compliment each beverage. We currently offer flavored sugars for use as a bar supply in the following flavors: Strawberry, Sour apple, Lemon and Lime, Red Raspberry, Blue Raspberry, Cranberry, Chocolate, Watermelon, Mojito Mint, Orange, and Peach. Additionally, we offer flavored salt in Lime and Strawberry flavors. |
o | Party Packages - Additionally, we sell party packages, containing Gelatin Shooters, shot glasses and various other drinking supplies. |
o | Various other bar supplies - We also sell various other bar and drinking supplies, including various other shot glasses, instruments for injecting and squirting our gelatin shots into individuals’ mouths, serving trays and cocktail stirrers. |
Sunshine does business as "Shotski's" and "Shotski's Gelatin Cocktail Mixes," "Shotski's Cocktail Sugars & Salts and Bar Supplies,” and “Shotski’s Bar Supplies & Party Mixes.”
We currently have partial distribution (where our distributors provide distribution to only a limited portion of each state) in approximately 16 states including Alabama, Arizona, California, Illinois, Indiana, Massachusetts, Michigan, Missouri, North Carolina, Ohio, Oregon, South Carolina, Texas, Virginia, Washington and Wisconsin. We have only partial distribution in the states above due to the fact that our various appointed distributors only distribute products regionally in the states presented above. In order to change a state’s distribution from partial to full distribution within the state, we would be forced to change distributors, which we do not currently have any plans to do.
We also have full distribution in Florida, Nevada Minnesota, and Oregon, which distribution covers all of such states. Additionally, we provide direct shipments nationwide and internationally through our website as described herein.
We may choose to expand our distribution channels in the future to cover all of the states above with which we only have partial distribution and/or expand to other states, however; we are able to sell all of our products to the entire country though our website and have no such plans for expansion in the United States. We currently have plans, funding permitting, to expand distribution to various locations in Mexico, Switzerland, the Bahamas and Trinidad in the next six (6) to twelve (12) months.
We distribute our products ourselves via web sales, trade shows and distributor sales. For our credit worthy customers, we extend net 30 day terms for our distributor relationships. For our internet direct customer orders, the products are paid for at the time of sale by credit card. Our sales mix at present is approximately 65% distributor sales and 35% internet sales.
Moving forward, we plan to concentrate our marketing efforts to two separate types of customers, 1) distributors to retail and on-site restaurant and beverage businesses and 2) internet retail customers, who are not covered in our distributor network and individual customers making one-time purchases. We anticipate our sales mix to remain relatively static during the next fiscal year, and plan to build our business base and hopefully add more distributors and gain greater market awareness through the internet.
8
Competition
The market for party drinks, drink mixes and drinking supplies is highly competitive and fragmented. The Company expects competition to intensify in the future. We compete in each of our markets with numerous national, regional and local companies, many of which have substantially greater financial, managerial and other resources than those presently available to us. Numerous well-established companies are focusing significant resources on providing party drinks, drink mixes and drinking supplies that will compete with our services. No assurance can be provided that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products, will not rise. In the event that we cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures will have a material adverse effect on our business, results of operations and financial condition.
We do not currently depend on one or a small number of customers for our sales. We currently offer and sell our products to a large number of customers, including distributors, hotels, restaurants, bars and clubs and direct retail via our website.
Subsidiaries
Our wholly owned subsidiary, Sunshine Group LLC, conducts business under the d/b/a of "Shotski's Gelatin Cocktail Mixes," "Shotski's," "Shotski's Cocktail Sugars & Salts and Bar Supplies” and “Shotski’s Bar Supplies & Party Mixes.”
Patents, Trademarks And Licenses
The President of Sunshine, Marion R. "Butch" Barnes, holds a registered trademark for the term "Shotski's," serial number 76419327, registration number 2877880, which he licenses to us free of charge. In September 2006, we entered into a Trademark Licensing Agreement with Mr. Barnes in connection with our use of the "Shotski's" trademark. Pursuant to the licensing agreement, Mr. Barnes agreed to provide us a one (1) year non-revocable license to use of the trademark, which license shall automatically renew for additional one (1) year terms unless either party terminates the licensing agreement at least sixty, but not more than ninety days prior to the end of the then current term of the agreement. In September 2007, the licensing agreement renewed automatically for an additional one (1) year term. We have no reason to believe that Mr. Barnes will not continue to license us the use of the "Shotski's" trademark indefinitely.
Other than the trademark for "Shotski's," which we license from Mr. Barnes, we have no other patents, trademarks or licenses.
Need For Government Approval
We operate in the food and beverage industry and as such, our operations are regulated by the U.S. Food and Drug Administration, as well as by various other state, county and city regulations as required by law.
We have obtained all required federal and state permits, licenses, and bonds to operate our business. However, there can be no assurance that in the future, our operations and profitability will not be subject to more restrictive regulation and/or increased taxation by federal, state, or local agencies.
Recent Events
In April 2007, we entered into an agreement with Island Stock Transfer (“Island”) to serve as our transfer agent on our behalf for a period of twelve months from the date of the agreement, which does not include various other fees charged by various third parties and billed by Island and/or any charges associated with lost share certificates, issuances, cancellations, transfers or related fees, and/or a monthly service fee charged by Island. Pursuant to the agreement we paid Island $5,000 and agreed to issue Island certain shares of our common stock. We have subsequently verbally agreed to amend this agreement with Island, whereby we agreed to pay Island $20,000 cash in lieu of issuing Island shares of common stock; however, no formal written amendment has been entered into to date. On November 1, 2007, we wired $20,000 of cash to Island to satisfy this commitment.
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We may terminate the agreement with Island at any time for any reason, provided that we provide Island thirty (30) days written notice in the form of a resolution of our Board of Directors and pay the $500 termination fee, as well as other termination costs estimated by Island to be between $2,500 and $15,000. Island may terminate the agreement at any time and for any reason with ten (10) days written notice to us.
On August 1, 2007, with an effective date of July 31, 2007, we entered into a First Amendment Agreement to Promissory Notes with Jenadosa Holdings Limited (“Jenadosa” and the “First Amendment”). Pursuant to the terms of the First Amendment, Jenadosa agreed to extend the due date of $127,000 in promissory notes (along with any accrued and unpaid interest thereon) which they had previously granted us in 2006, from July 31, 2007 to July 31, 2008; and to waive any event of default which may have occurred due to our failure to repay such notes on the original due date, July 31, 2007, as well as any default interest which may have otherwise been accrued thereunder.
Subsequent Events
On November 1, 2007, we entered into a loan agreement with Viking Investment Group II, Inc. (“Viking”). Pursuant to the loan agreement, we received $30,000 and entered into a promissory note which bears interest at the rate of 10% per year and is due and payable on December 31, 2008.
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PLAN OF OPERATIONS
We are currently funded solely by our shareholders and from loans from Jenadosa Holdings, Ltd. and Viking Investment Group II, Inc., and believe we can continue operations for at least the next three months with the funds we receive through sales of our products, the $21,067 of cash on hand we had as of September 30, 2007, and the $30,000 in loans we received from Viking in November 2007. We also believe that that we are close to generating sufficient revenues to pay our ongoing liabilities, however we can provide no assurances that we will not continue to generate net losses. In addition to our ongoing working capital needs, we do not currently have sufficient funds to repay the $177,000 of notes payable plus accrued interest which are payable to Jenadosa and Viking in 2008, which, could cause us to default on that payment and could force us to curtail or abandon our business operations to pay such debts. We plan to work to increase our sales in the future, by starting a mail, fax and email marketing program, and by utilizing and building upon the interest we generate for our products at trade shows.
We believe we may require up to $250,000 in the next twelve months to expand our operations, purchase a printing machine (which we believe would allow us to increase the volume of our sales), pay the travel expenses associated with attending trade shows, and purchase additional inventory and magazine ads. This amount does not include the $177,000 of notes plus accrued interest due to Jenadosa and Viking in 2008, which we do not currently have sufficient funds to repay. We do not currently have any commitments for this funding.
We are currently actively recruiting new distributors to expand our sales coverage for our product lines. Distributors can be regional, serving multiple states, within a state or distribute in or around a large city. We have found that getting the attention of a larger distributor with a new product line can be difficult and have found that we are more successful in recruiting multiple smaller distributors with limited coverage areas to date. However, because of this, we currently believe that there are currently many open areas within the states that we distribute our products to that are not serviced by the smaller distributors which we distribute our products through. To provide coverage to these areas, we conduct direct email marketing campaigns in an effort to attract customers and service such customers directly through our website. This two-pronged approach of recruiting regional distributors and directly marketing our products to individual customers will be the primary sales and marketing strategy for us for the next several years.
We have experienced a limited amount of increased demand for our products around the winter holidays, spring break and summer vacation. Other than these limited seasonal increases in our sales, we have experienced no significant seasonal increases in our sales to date. We are currently spending the majority of our efforts in growing our distribution channels and sales. At present, our sales growth has been relatively unaffected by any seasonality trends. For the foreseeable future, we do not anticipate any significant increases or decreases in sales due to seasonality factors.
Our primary branded product, Shotski's Gelatin Bar Mixes, is a product concept that has been in place for several years. With the unique formulation of the Shotski's product and the supporting line of bar accessories to help the on-site accounts market the products, we believe we have been able to differentiate ourselves from the mainstream and begin to build brand awareness as well as our revenue base. We believe that the key to our Shotski's mix product concept is the longevity of the on-site prepared gelatin product; that is that it remains useable for multiple weeks, where other gelatin products are only good for approximately 24-48 hours before they spoil. We experienced a significant increase in growth for the year ended December 31, 2006, compared to the year ended December 31, 2005, and plan to use the majority of our revenues moving forward, assuming we are able to continue to generate such revenues, and have any funds left over after paying our expenses, of which there can be no assurance, to increase our inventories and continue and expand our marketing campaign.
Our operations are based on just-in-time inventory policies and therefore our working capital is held to a minimum. However, we also try to take advantage of costs saving that can be gained from purchasing our supplies in bulk, which benefits we believe, along with the practice of keeping our working capital at a minimum has benefited our gross margins to date. We believe that our lines of supply are well-established and reliable to date and that moving forward, our suppliers have great flexibility to effectively handle any increases in sales volume we may experience, without delays.
We also believe that we have strong support and an excellent working relationship with our significant shareholder and financial advisor, Viking Investment Group II, Inc., who will work with us on an ongoing basis to help provide assistance in generating additional working capital funds, if such funds are needed in the future.
Additionally, we may enter into a merger or acquisition transaction in the future, which merger or acquisition if consummated may change our business focus, officers and Directors and may cause substantial dilution to our existing shareholders. While we have not entered into any agreements or understandings to date in connection with a merger or acquisition and can provide no assurances that we will enter into a merger or acquisition in the future, we have been in contact with several parties regarding the entry into a potential merger and/or acquisition transaction in the future.
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COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2006
We had product sales of $47,683 for the three months ended September 30, 2007, compared to product sales of $43,370 for the three months ended September 30, 2006, an increase in product sales of $4,313 or 10% from the prior period. The increase in product sales was due to increased marketing efforts through an aggressive mailing program conducted during the three months ended September 30, 2007. The increase in marketing efforts, offset the effects of us selling our products at their market price during the three months ended September 30, 2007, rather than in discounted volume sales as we did during the three months ended September 30, 2006. In 2006 we sold products at a discount to the market price of such products in an attempt to build product awareness.
We had cost of goods sold of $5,452 for the three months ended September 30, 2007, compared to cost of goods sold of $18,827 for the three months ended September 30, 2006, a decrease in cost of good sold of $13,375 or 71%. The significant decrease in cost of goods sold was a direct result of buying raw materials (such as the Shotski’s retail box) in bulk from inexpensive foreign suppliers. During the three months ended September 30, 2007 we purchase our materials from a Chinese supplier, instead of from a higher priced domestic supplier as we did for the three months ended September 30, 2006.
We had a gross margin of $42,231 for the three months ended September 30, 2007, compared to a gross margin of $24,543 for the three months ended September 30, 2006, an increase in gross margin of $17,688 or 72% from the prior period. Our gross margin was 89% of sales for the three months ended September 30, 2007, compared to 57% for the three months ended September 30, 2006. The increase in gross margin, as well as the increase in gross margin as a percentage of sales for the three months ended September 30, 2007, compared to the three months ended September 30, 2006, was a direct result of us selling our products at the market rate for the three months ended September 30, 2007, instead of below cost as we did for the three months ended September 30, 2006; increased marketing efforts for the three months ended September 30, 2007, compared to the three months ended September 2006; and reduced costs associated with bulk buying of raw materials during the three months ended September 30, 2007, compared to the three months ended September 30, 2006.
We had total expenses, consisting solely of general and administrative expenses of $55,683 for the three months ended September 30, 2007, compared to total expenses consisting solely of general and administrative expenses of $68,206 for the three months ended September 30, 2006, a decrease in general and administrative expenses of $12,523 or 18% from the prior period. The decrease in general and administrative expenses was caused by decreased professional fees from the prior period. We had an unusually high amount of professional fees during the three months ended September 30, 2006, in connection with the review, audit and preparation of our Form SB-2 filing with the Commission.
We had a loss from operations of $13,452 for the three months ended September 30, 2007, compared to a loss from operations of $43,663 for the three months ended September 30, 2006, a decrease in loss from operations of $30,211 or 69% from the prior period.. This decrease in loss from operations was mainly caused by the decrease in general and administration expenses, relating mainly to the decrease in professional fees and the increase in gross margin as described above
We had other expenses, consisting of interest expense of $4,175 for the three months ended September 30, 2007, compared to other expenses consisting of interest expense of $2,650 for the three months ended September 30, 2006, an increase in interest expense of $1,525 or 58% from the prior period. Interest expense for the three months ended September 30, 2007 and September 30, 2006, was in connection with the Jenadosa Notes (described in greater detail and defined below). Interest expense increased due to a larger amount of Jenadosa Notes being outstanding during the three months ended September 30, 2007, compared to the three months ended September 30, 2006, and the resulting additional accrual of interest on such larger outstanding amount.
We had a net loss of $17,627 for the three months ended September 30, 2007, compared to a net loss of $46,313 for the three months ended September 30, 2006, a decrease in net loss of $28,686 or 62% from the prior period. This decrease in net loss was due to the increase in gross margin caused by us charging market prices for our products during the three months ended September 30, 2007, compared to the three months ended September 30, 2006, when we sold our products at below cost to build brand awareness, coupled with the decease in general and administrative fees for the three months ended September 30, 2007, compared to the three months ended September 30, 2006, and increased marketing efforts for the three months ended September 30, 2007, compared to the three months ended September 2006, plus reduced costs associated with bulk buying of raw materials during the three months ended September 30, 2007, compared to the three months ended September 30, 2006..
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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2006
We had product sales of $112,596 for the nine months ended September 30, 2007, compared to product sales of $112,504 for the nine months ended September 30, 2006, a nominal increase in product sales of $92 from the prior period. The insignificant change in product sales was due to increased marketing efforts through an aggressive mailing program and trade shows, during the nine months ended September 30, 2007, offsetting the effects of selling our products at their market price during the nine months ended September 30, 2007, rather than in discounted volume sales as we did during the nine months ended September 30, 2006. In 2006 we sold products at a discount to the market price of such products in an attempt to build product awareness. Beginning in fiscal 2007 we began selling our products at their market prices, which increase in prices led to decreased demand for such products and decreased unit sales.
We had cost of goods sold of $44,526 for the nine months ended September 30, 2007, compared to cost of goods sold of $61,272 for the nine months ended September 30, 2006, a decrease in cost of good sold of $16,746 or 27%. The decrease in cost of goods sold was a direct result of buying material in bulk from inexpensive foreign suppliers, as described above.
We had a gross margin of $68,070 for the nine months ended September 30, 2007, compared to a gross margin of $51,232 for the nine months ended September 30, 2006, an increase in gross margin of $16,838 or 33% from the prior period. Our gross margin was 60% of sales for the nine months ended September 30, 2007, compared to 46% for the nine months ended September 30, 2006.
We had total expenses, consisting solely of general and administrative expenses of $158,353 for the nine months ended September 30, 2007, compared to total expenses consisting solely of general and administrative expenses of $182,290 for the nine months ended September 30, 2006, a decrease in general and administrative expenses of $23,937 or 13% from the prior period. The decrease in general and administrative expenses was mainly caused by decreased professional fees, as described above.
We had a loss from operations of $90,283 for the nine months ended September 30, 2007, compared to a loss from operations of $131,058 for the nine months ended September 30, 2006, a decrease in loss from operations of $40,775 or 31% from the prior period. This decrease in loss from operations was mainly caused by the decrease in general and administration expenses, relating mainly to the decrease in professional fees and the increase in gross margin as described above.
We had other expenses, consisting of interest expense of $11,275 for the nine months ended September 30, 2007, compared to other expenses consisting of interest expense of $7,406 for the nine months ended September 30, 2006, an increase in interest expense of $3,869 or 52% from the prior period. Interest expense for the nine months ended September 30, 2007 and 2006, was in connection with the Jenadosa Notes (described in greater detail and defined below). Interest expense increased due to a larger amount of Jenadosa Notes being outstanding during the nine months ended September 30, 2007, compared to the nine months ended September 30, 2006, and the resulting additional accrual of interest on such larger outstanding amount.
We had a net loss of $101,558 for the nine months ended September 30, 2007, compared to a net loss of $138,464 for the nine months ended September 30, 2006, a decrease in net loss of $36,906 or 27% from the prior period. This decrease in net loss was due to the increase in gross margin caused by us charging market prices for our products during the nine months ended September 30, 2007, compared to the nine months ended September 30, 2006, when we sold our products at below cost to build brand awareness, coupled with the decease in general and administrative fees for the nine months ended September 30, 2007, compared to the nine months ended September 30, 2006, and increased marketing efforts for the nine months ended September 30, 2007, compared to the nine months ended September 2006, plus reduced costs associated with bulk buying of raw materials during the nine months ended September 30, 2007, compared to the nine months ended September 30, 2006.
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LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $72,303 as of September 30, 2007, which included current assets of $68,604, consisting of cash on hand of $21,067, net accounts receivable of $47,537, and non-current assets of $2,696, including property and equipment, net of depreciation, trademark of $275, consisting of the trademark “Shotski’s” licensed to us from Mr. Barnes pursuant to the Trademark Licensing Agreement described above, and deposits of $728.
We had total liabilities of $209,879 as of September 30, 2007, consisting solely of current liabilities, including accounts payable of $13,012, and notes payable and accrued interest of $196,867 in connection with the notes payable to Jenadosa Holdings Limited, described below.
We received two $50,000 loans, one $5,000 loan, one $7,000 loan and one $15,000 loan from a third party, Jenadosa Holdings Limited ("Jenadosa"), during the years ended December 31, 2005 and 2006, and entered into promissory notes which evidence the loans, which notes bear interest at the rate of 10% per year until paid. We received $50,000 in connection with one promissory note on November 20, 2005, $50,000 in connection with another promissory note on February 14, 2006, $5,000 in connection with a third promissory note on August 21, 2006, $7,000 in connection with a fourth note on September 20, 2006, and $15,000 in connection with a fifth note on October 13, 2006 (collectively the “2005 and 2006 Notes”). The Notes were all payable on July 31, 2007, together with any accrued and unpaid interest, but were later extended until July 31, 2008, pursuant to the First Amendment Agreement to Promissory Notes, described above. Any amounts not paid on the Notes when due bear interest at the rate of 15% per annum until paid.
On January 15, 2007, we received an additional $10,000 loan from Jenadosa and entered into an additional promissory note with Jenadosa to evidence the loan, which bears interest at 10% per annum and is due and payable on March 31, 2008 (the “January 2007 Note”). On April 4, 2007, and April 24, 2007, respectively, we received a $10,000 and a $7,500 loan from Jenadosa and entered into Promissory Notes with Jenadosa to evidence such loans, which are due and payable on June 30, 2008 (the “April 2007 Notes,” and collectively with the 2005 and 2006 Notes and the January 2007 Note, the “Notes” or the “Jenadosa Notes”).
In addition to loans received from Jenadosa, we also entered into a loan agreement with Viking Investment Group II, Inc. on November 1, 2007. Pursuant to the loan agreement, we received $30,000 and entered into a promissory note which bears interest at the rate of 10% per year until paid. This loan was entered into subsequent to the end of the reporting period covered by this report and is therefore not reflected in the financial statements included herewith.
We had negative working capital of $141,275, and total stockholders’ deficit of $137,576 as of September 30, 2007.
We had $33,891 of net cash used in operating activities for the nine months ended September 30, 2007, which mainly consisted of $101,558 of net loss, offset by $87,750 of contributed services to us by our Chief Executive Officer, David Rector and the President of Sunshine, Marion "Butch" Barnes, neither of which we pay a salary, a $517 decrease in accounts payable, and an $11,275 increase in accrued interest payable in connection with the Jenadosa Notes.
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We had $47,500 of net cash provided by financing activities for the nine months ended September 30, 2007, which was due to proceeds from notes payable in connection with the January 2007 Note and the April 2007 Notes entered into with Jenadosa as described above.
We have no current commitment from our officers and Directors or any of our shareholders to supplement our operations or provide us with financing in the future. If we are unable to raise additional capital from conventional sources and/or additional sales of stock in the future, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.
In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.
RISK FACTORS
You should carefully consider the following risk factors and other information in this quarterly report on Form 10-QSB before deciding to become a holder of our Common Stock. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.
Our business and the value of our common stock are subject to the following Risk Factors:
WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS PLAN WITHOUT ADDITIONAL FINANCING.
We depend to a great degree on the ability to attract external financing in order to conduct our business activities and in order that we have sufficient cash on hand to expand our operations. We are currently funded solely by our shareholders and through loans received from Jenadosa Holdings, Ltd. and we believe that our business has attained a cash flow sustainable base of operations that should continue onward at very slow growth curve with the funds we receive through sales of our products, the $21,067 of cash on hand we had as of September 30, 2007, and the $30,000 in loans we received from Viking in November 2007. We anticipate, however, the need for approximately $250,000 in the next twelve months to expand our operations (as described above under “Plan of Operations”), not including approximately $177,000 (not including accrued and unpaid interest) on the amounts loaned to us by Jenadosa and Viking (as described below), which we do not currently have any commitments from any related or third parties to provide. If we are unable to generate sufficient revenues to support our operations and/or fail to raise additional funds after the three months which we currently believe we will be able to continue our operations, and/or if we are unable to raise sufficient capital to increase our sales, we may be forced to abandon our current business plan. If you invest in us and we are unable to raise the required funds, your investment could become worthless.
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WE WILL REQUIRE APPROXIMATELY $177,000, NOT INCLUDING ANY ACCRUED AND UNPAID INTEREST, PRIOR TO THE DUE DATE OF SUCH NOTES ON MARCH 31, 2008, JUNE 30, 2008, JULY 31, 2008, AND DECEMBER 31, 2008, TO REPAY AMOUNTS WE OWE UNDER OUTSTANDING NOTES PAYABLE, WHICH FUNDS WE DO NOT CURRENTLY HAVE.
Jenadosa Holding Limited ("Jenadosa"), loaned us a total of $127,000 during 2006, which was due and payable on July 31, 2007, but which has since been extended until July 31, 2008, pursuant to the First Amendment as described above under “Recent Events”; as well as $10,000 in January 2007, which is due and payable on March 31, 2008; and $17,500 in April 2007, which is due and payable on June 30, 2008. Further, Viking Investment Group II, Inc. (“Viking”) loaned us $30,000 on November 1, 2007, which is due and payable on December 31, 2007. All these promissory notes bear interest at the rate of 10% per annum until paid, and we do not currently have sufficient cash on hand to repay the $177,000 (not including accrued and unpaid interest as of September 30, 2007) owed under the promissory notes with Jenadosa and Viking. If we are unable to generate a sufficient amount of net income to provide us enough funds to repay the notes prior to March 31, 2008, June 30, 2008, July 31, 2008, and/or December 31, 2008, respectively, we may be forced to raise additional funds through the sale of equity or debt securities, and/or issue shares of common stock to Jenadosa or Viking in consideration for the amounts owed, either of which could cause substantial dilution to our existing shareholders. As a result, if we fail to generate sufficient net income to repay our outstanding promissory notes with Jenadosa, the value of our securities, if any, could decline in value or become worthless.
WE HAVE BEEN IN CONTACT WITH OTHER ENTITIES IN CONNECTION WITH VARIOUS MERGER AND ACQUISITION OPPORTUNITIES AND MAY CHOOSE TO ENTER INTO A MERGER AND/OR ACQUISITION TRANSACTION IN THE FUTURE.
We have been in contact with parties seeking to merge and/or be acquired by us. While we have no immediate plans to merge with or acquire any entity, in the event that we do enter into a merger and/or acquisition with a separate company in the future, our majority shareholders will likely change and new shares of common stock could be issued resulting in substantial dilution to our then current shareholders. As a result, our new majority shareholders will likely change the composition of our Board of Directors and replace our current management. The new management will likely change our business focus and we can make no assurances that our new management will be able to properly manage our direction or that this change in our business focus will be successful. If we do enter into a merger or acquisition, and our new management fails to properly manage and direct our operations, we may be forced to scale back or abandon our operations, which will cause the value of our common stock to decline or become worthless. We have not entered into any merger or acquisition agreements as of the date of this filing.
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO WHETHER OUR COMPANY CAN CONTINUE AS A GOING CONCERN.
We have generated only limited revenues since our inception and have incurred substantial losses. These factors among others indicate that we may be unable to continue as a going concern, particularly in the event that we cannot generate sufficient cash flow to conduct our operations and/or obtain additional sources of capital and financing.
WE RELY UPON KEY PERSONNEL AND IF THEY LEAVE US, OUR BUSINESS PLAN AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We rely heavily on our Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and Director, David Rector, as well as the President of Sunshine, Marion R. "Butch" Barnes. Their experience and input create the foundation for our business and they are responsible for the directorship and control over our products. We do not currently have an employment agreement or "key man" insurance policy on either Mr. Rector or Mr. Barnes. Moving forward, should we lose the services of Mr. Rector or Mr. Barnes, for any reason, we will incur costs associated with recruiting replacements and delays in our operations. If we are unable to replace either Mr. Rector or Mr. Barnes with another suitably trained individual or individuals, we may be forced to scale back or curtail our business plan. As a result of this, your investment in us could become devalued.
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WE FACE INTENSE COMPETITION FOR OUR PRODUCTS AND AS A RESULT, WE MAY BE UNABLE TO COMPETE IN THE MARKET FOR PARTY AND ALCOHOLIC DRINKING MIXES AND SUPPLIES.
The market for party drinks, drink mixes and drinking supplies is highly competitive and fragmented. The Company expects competition to intensify in the future. We compete in each of our markets with numerous national, regional and local companies, many of which have substantially greater financial, managerial and other resources than those presently available to us. Numerous well-established companies are focusing significant resources on providing party drinks, drink mixes and drinking supplies that will compete with our services. No assurance can be given that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products, will not rise. In the event that we cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures will have a material adverse effect on our business, results of operations and financial condition.
OUR INTERNET SALES ARE DEPENDENT ON OUR WEBSITES BEING OPERATIONAL.
We have webpages which describe our products and through which customers can purchase our products at http://www.shotskis.com, www.shotskis.sitefly.com, www.shotskisbarsupplies.com (and/or www.bombshots.com), which include information which we do not wish to be included in this report. Our website sales currently account for approximately 30% of our total sales, with 70% of our total sales coming from distributors. In the event that our website hosting company is down for maintenance and/or there are problems with our customers and potential customers being able to display our webpage and browse our products, our internet sales could be adversely impacted, which in turn could cause our revenues to decrease and could cause any investment in us to decline in value and/or become worthless.
WE HAVE NOT AND DO NOT ANTICIPATE PAYING ANY CASH DIVIDENDS ON OUR COMMON STOCK AND BECAUSE OF THIS OUR SECURITIES COULD FACE DEVALUATION IN THE MARKET.
We have paid no cash dividends on our common stock to date and it is not anticipated that any cash dividends will be paid to holders of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of our business operations, it is anticipated that any earnings will be retained to finance our business operations and future expansion.
OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS, SO IT WILL BE DIFFICULT TO SEEK DAMAGES FROM OUR OFFICERS AND/OR DIRECTORS IN A LAWSUIT.
Our Bylaws provide that our officers and Directors will only be liable to us for acts or omissions that constitute actual fraud, gross negligence or willful and wanton misconduct. Thus, we may be prevented from recovering damages for certain alleged errors or omissions by our officers and Directors for liabilities incurred in connection with their good faith acts on our behalf. Additionally, such an indemnification payment on behalf of our officers and/or Directors may deplete our assets. Investors who have questions respecting the fiduciary obligations of our officers and Directors should consult with their own independent legal counsel prior to making an investment in us. Additionally, it is the position of the Securities and Exchange Commission that exculpation from and indemnification for liabilities arising under the 1933 Act and the rules and regulations thereunder is against public policy and therefore unenforceable.
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WE HAVE A LIMITED OPERATING HISTORY AND BECAUSE OF THIS IT MAY BE DIFFICULT TO EVALUATE OUR CHANCES FOR SUCCESS.
We were formed as a Delaware corporation on April 16, 2004. From April 16, 2004, until December 31, 2005, the date we acquired Sunshine Group, LLC, we had limited operations. While we have had a limited volume of sales to date, we can provide no assurances that our sales will increase in the future and/or that our sales will not decline in the future. Although we feel that our results of operations are encouraging, we are a relatively new company and, as such, run a risk of not being able to compete in the marketplace because of our relatively short existence. New companies in the competitive environment of drinking mixes and supplies, such as ours, may have difficulty in continuing in the highly competitive beverage and drink mix industry, and as a result, we may be forced to abandon or curtail our business plan. Under such a circumstance, the value of any investment in us may become worthless.
WE FACE A RISK OF A CHANGE IN CONTROL DUE TO THE FACT THAT OUR CURRENT SOLE DIRECTOR DOES NOT OWN A MAJORITY OF OUR OUTSTANDING COMMON STOCK.
Our current Director, David Rector, owns 100,000 shares of our common stock, representing only 1.4% of our outstanding common stock and can therefore not exercise majority voting control over us. As a result, our shareholders who are not officers and Directors of us are able to obtain a majority of voting shares, which would allow such shareholders to choose who serves as our Director(s). Because of this, Mr. Rector may not be reappointed by our shareholders when he is up for re-election and/or may be replaced by another individual or individuals, and such replacement would be outside of Mr. Rector's control. If that were to happen, our new management could affect a change in our business focus and/or curtail or abandon our business operations, which in turn could cause the value of our securities, if any, to decline.
DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AUTHORIZE US TO ISSUE SHARES OF STOCK, WHICH SHARES MAY CAUSE SUBSTANTIAL DILUTION TO OUR EXISTING SHAREHOLDERS AND/OR HAVE RIGHTS AND PREFERENCES GREATER THAN THE COMMON STOCK CURRENTLY OUTSTANDING.
Pursuant to our Certificate of Incorporation, we have 75,000,000 shares of common stock and 10,000,000 shares of Preferred Stock authorized. As of the filing of this Report, we have 7,030,000 shares of common stock issued and outstanding and - 0 - shares of Preferred Stock issued and outstanding. As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without shareholder approval, which if issued could cause substantial dilution to our then shareholders. Additionally, shares of Preferred Stock may be issued by our Board of Directors without shareholder approval with voting powers, and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding. As a result, shares of Preferred Stock may be issued by our Board of Directors which cause the holders to have super majority voting power over our shares, provide the holders of the Preferred Stock the right to convert the shares of Preferred Stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock shareholders and/or have other rights and preferences greater than those of our common stock shareholders. Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and Preferred Stock, which could cause substantial dilution to our existing shareholders. Additionally, the dilutive effect of any Preferred Stock, which we may issue may be exacerbated given the fact that such Preferred Stock may have super majority voting rights and/or other rights or preferences which could provide the preferred shareholders with voting control over us and/or give those holders the power to prevent or cause a change in control. As a result, the issuance of shares of common stock and/or Preferred Stock, may cause the value of our securities to decrease and/or become worthless.
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EFFECT OF UNFAVORABLE PUBLICITY FOR OUR PRODUCTS, OTHER DRINK MIX PRODUCTS, OR THE ALCOHOLIC DRINK MARKET AS A WHOLE.
We believe that the market for our products will be affected by national media attention regarding the consumption of alcoholic beverages as a whole. Future publicity regarding the potential effects of the daily consumption and/or excess consumption of alcoholic beverages could have a material adverse effect on our sales and marketing efforts. If we or other drink mix suppliers, and/or alcoholic beverage suppliers were to suffer adverse media attention, it could cause the value of our common stock to decrease, and could lead to any investment you have in us becoming worthless.
EFFECT OF GOVERNMENT REGULATIONS ON OUR FUTURE PRODUCTS AND POTENTIAL LEGAL PROCEEDINGS SUCH CHANGES IN REGULATIONS COULD CREATE.
The manufacturing, packaging, labeling, advertising, distribution and sale of our products and mixes are subject to regulation by federal, state and local agencies, the most active of which is the U.S. Food and Drug Administration (the "FDA"). While we currently believe that our operations fully comply with all FDA rules and regulations, there can be no assurance that the FDA will not enact stricter rules and regulations in the future. There can be no assurance, that if FDA rules are enacted, that we will be able to comply with them without incurring material expenses. Additionally, any additional products we may choose to distribute in the future, if any, will likely be regulated by federal, state and local agencies as well, including the FDA. Currently all of our drink mix ingredients have previously passed FDA approval, however there can be no assurance that such ingredients will continue to be approved by the FDA. If any of our ingredients were found in the future to be harmful by the FDA, we could be forced to change the ingredients in our products and/or may face legal proceedings in connection with the defense of any customers who claim they were harmed by such ingredients. If this were to happen we could be forced to abandon or curtail our business plan. Additionally, if stricter regulations are enacted in the future and we are unable to meet these new laws or regulations, any investment in our securities could become worthless.
OUR SALES EXPERIENCE LARGE FLUCTUATIONS DUE TO THE SEASONALITY OF OUR PRODUCTS.
We generally experience greater sales in the spring, summer and during the winter holidays, as in our opinion, there are a greater number of individuals consuming alcoholic beverages during the spring and summer months and during the winter holidays, due to the fact that schools are on spring break and summer and winter vacations occur during those months. As such, our results of operations for any one quarter may not be indicative of the results of operations for any other quarter and/or our yearly results of operations.
IN THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING AS A FULLY REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.
Moving forward, we anticipate incurring significant legal, accounting and other expenses in connection with our status as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices. As such, our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, commencing in fiscal 2008, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
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IF WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
On or about June 6, 2007, our common stock was approved for trading on the Over-The-Counter Bulletin Board (“OTCBB”) under they symbol “NNOH.” Pursuant to OTCBB rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer which fails to file a periodic report (Form 10-QSB's or 10-KSB's) by the due date of such report (notwithstanding any extension granted to the issuer by the filing of a Form 12b-25), three (3) times during any twenty-four (24) month period is automatically de-listed from the OTCBB. Such removed issuer would not be re-eligible to be listed on the OTCBB for a period of one-year, during which time any subsequent late filing would reset the one-year period of de-listing. If we are late in our filings three times in any twenty-four (24) month period and are de-listed from the OTCBB, our securities may become worthless and we may be forced to curtail or abandon our business plan.
WE CURRENTLY HAVE NO MARKET FOR OUR COMMON STOCK, AND EVEN IF A MARKET DEVELOPS IN THE FUTURE, WE ANTICIPATE SUCH MARKET REMAINING LIMITED, SPORADIC AND VOLATILE.
We currently have no market for our common stock, even though such common stock is quoted on the OTCBB, no trades have been affected in our common stock to date. Moving forward, in the event a market for our common stock does develop, we expect such market to be limited, sporadic and volatile. We also anticipate the market for our common stock will be subject to wide fluctuations in response to several factors, including, but not limited to:
(1) actual or anticipated variations in our results of operations;
(2) our ability or inability to generate new revenues;
(3) the number of shares in our public float;
(4) increased competition; and
(5) conditions and trends in the market for alcoholic and party drinks.
Furthermore, because our common stock is traded on the OTCBB, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. Further, due to the limited volume of our shares which trade and our limited public float, we believe that our stock prices (bid, asked and closing prices) are entirely arbitrary, are not related to the actual value of the Company, and do not reflect the actual value of our common stock (and reflect a value that is higher than the actual value of our common stock). Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in the Company's public reports, industry information, and those business valuation methods commonly used to value private companies.
INVESTORS MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO FEDERAL REGULATIONS OF PENNY STOCKS.
Once our common stock is listed on the OTC Bulletin Board, it is likely that it will be subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $4.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $4.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-QSB (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit No. | Description |
3.1(1) | Certificate of Incorporation of Nano Holdings International, Inc. |
3.2(1) | Bylaws of Nano Holdings International, Inc. |
10.1(1) | Exchange Agreement between Nano Holdings International, Inc. and Sunshine Group LLC |
10.2(1) | $50,000 Promissory Note with Jenadosa Holdings Limited (11/20/05) |
10.3(1) | $50,000 Promissory Note with Jenadosa Holdings Limited (2/14/06) |
10.4(2) | $5,000 Promissory Note with Jenadosa Holdings Limited (8/21/06) |
10.5(3) | $7,000 Promissory Note with Jenadosa Holdings Limited (9/20/06) |
10.6(3) | $15,000 Promissory Note with Jenadosa Holdings Limited (10/13/06) |
10.7(2) | Trademark Licensing Agreement |
10.8(4) | $10,000 Promissory Note with Jenadosa Holdings Limited (01/15/07) |
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10.9(5) | $10,000 Promissory Note with Jenadosa Holdings Limited (04/04/07) |
10.10(5) | $7,5000 Promissory Note with Jenadosa Holdings Limited (04/24/07) |
10.11(6) | First Amendment Agreement to Promissory Notes with Jenadosa |
10.12* | $30,000 Promissory Note with Viking Investment Group II, Inc. (11/01/07) |
31.1* | Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed herein.
(1) Filed as exhibits to our Form SB-2 Registration Statement filed with the Commission on August 1, 2006 and incorporated herein by reference. |
(2) Filed as exhibits to our amended Form SB-2 Registration Statement filed with the Commission on September 20, 2006 and incorporated herein by reference. |
(3) Filed as exhibits to our amended Form SB-2 Registration Statement filed with the Commission on November 29, 2006 and incorporated herein by reference. |
(4) Filed as an exhibit to our Form 10-KSB Annual Report, filed with the Commission on April 2, 2007, and incorporated herein by reference. |
(5) Filed as an exhibit to our Form 10-QSB Quarterly Report, filed with the Commission on May 11, 2007, and incorporated herein by reference. |
(6) Filed as an exhibit to our Form 10-QSB Quarterly Report, filed with the Commission on August 10, 2007, and incorporated herein by reference. |
b) | REPORTS ON FORM 8-K |
We did not file any reports on Form 8-K during the time period covered by this Report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NANO HOLDINGS INTERNATIONAL, INC.
DATED: November 13, 2007 | By: /s/ David Rector |
David Rector | |
Chief Executive Officer, Chief Financial Officer, (Principal Accounting Officer), Treasurer, Secretary and Director |
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