KOLR Kolorfusion International Inc (CE)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-28351

KOLORFUSION INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

COLORADO		84-1317836
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

16075 E. 32 ^nd Ave. Unit A, CO 80011

(Address and zip code of principal executive offices)

(303) 340-9994

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject of the filing requirements for at least the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

23,709,540 Common Shares and 1,076,923 Preferred Shares were outstanding as of November 1, 2007

 

 

KOLORFUSION INTERNATIONAL, INC.

INDEX

						Page
PART I				FINANCIAL INFORMATION			1
Item 1.				Financial Statements (Unaudited)			1
				Condensed Balance Sheets September 30, 2007 (Unaudited) and June 30, 2007			1
				Statements of Operations Three month periods ended September 30, 2007 and 2006 (Unaudited)			2
				Condensed Statements of Cash Flows Three month periods ended September 30, 2007 and 2006 (Unaudited)			3
				Selected Notes to Condensed Financial Statements (Unaudited)			4-9
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.				Controls & Procedures			13
PART II				OTHER INFORMATION			14
Exhibit 31.1
Exhibit 32.1

KOLORFUSION INTERNATIONAL, INC.

See Notes to Condensed Financial Statements.

See Notes to Condensed Financial Statements.

KOLORFUSION INTERNATIONAL, INC.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

SFAS 123 (R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight line basis over the requisite service periods in the Company’s Consolidated Statements of Operations. The Company recorded $2,217 and $1,830 of related compensation expense for the three month periods ended September 30, 2007 and 2006, respectively. This expense is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense due to the Company having a full income tax valuation. The compensation expense had impacted both basic and diluted loss per share by $0.00 for the three months ended September 30, 2007 and 2006. As of September 30, 2007, $19,766 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.50 years.

The Company uses the Black —Sholes-Merton (“Black Sholes”) option-pricing model as a method for determining the estimated fair market value for employee stock awards. The adoption of SFAS 123(R) also requires certain changes to the accounting for income taxes and the method used in determining diluted shares, as well as additional disclosure related to the cash flow effects resulting from share-based compensation. The relevant interpretative guidance of Staff Accounting Bulletin 107 was applied in connection with its implementation and adoption of SFAS 123 (R).

Information regarding outstanding stock options for the three months ended September 30, 2007 is as follows:

The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The total aggregate intrinsic value of outstanding options was $0.00 at September 30, 2007.

Note 4. Patents and Other Assets:

The Company purchased the patent rights for Canada and the United States. The costs of the patent rights are amortized using the straight-line method over fifteen years. Patent amortization expense amounted to $61,542 for each of the quarters ended September 30, 2007 and 2006. Patent amortization will be fully amortized at the end of fiscal year ending June 30, 2008. The primary patents of the Company expire in 2012 and 2018, yet the Company continues to enter twenty (20) year License Agreements with its Licensees. Accordingly no asset impairment charges have been recorded upon these patent assets.

Note. 5 Debt-

Revolving Notes Payable to Bank

The Company has a revolving note with a bank allowing borrowings of up to $200,000 at September 30, 2007, with interest 5.5%. The note matured July 12, 2007 and was extended until January 8, 2008. There was $200,000 outstanding on this note at September 30, 2007 and June 30, 2007. The note is secured by the general assets of the Company and co-signature of the President of the Company.

Line of Credit — Bank

The Company has a $5,000 line of credit associated with one of its checking accounts. The line bears interest at an annual percentage rate of 17.25%. The outstanding balance on the line of credit was $2,306 and $2,400 at September 30, 2007 and June 30, 2007, respectively.

Interest expense incurred to stockholder and related party of the company totaled $769 and $1,205 for the three months ended September 30, 2007 and 2006, respectively.

Note 6. Capital Leases

The Company has entered into three capital lease agreements for equipment during 2007 that expire through May of 2013.

The gross amount of equipment and related accumulated depreciation recorded under capital leases was as follows at September 30, 2007 and June 30, 2007:

Note 7. Company’s Continued Existence:

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses totaling $11,288,117. At September 30, 2007 the Company’s current liabilities exceeded current assets by $652,999. Management believes that with the continued growth within its existing customer base and additional known licensing negotiations in progress the Company can achieve a positive cash-flow. Management is also seeking an additional investment or line of credit to support its plans for future growth and working capital needs. The Company, however, may not be able to obtain such financing on acceptable terms or at all. If the Company is unable to obtain such financing, it will be required to significantly revise its business plans and drastically reduce operating expenditures such that it may not be able to develop or enhance is products, gain market share in the United States of America or respond to competitive pressures or unanticipated requirements, which could seriously harm its business, financial position and results of operations.

Note 8. Deferred Revenue:

The Company had various contracts that are amortized into revenue over the contract period. The total amount of deferred revenue relating to these contracts was $90,000 and $90,709 as of September 30, 2007 and June 30, 2007, respectively.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes"-an Interpretation of FASB Statement No. 109”. (FIN No. 48”), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Additionally, FIN 48 provides guidance on de-recognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. FIN No. 48 became effective for the Company on July 1, 2007 and the Company determined that there was no material effect on its financial position, results of operations or cash flows for the three months ended September 30, 2007.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this statement. The Company believes the adoption of SFAS No. 157 will not have a material impact on the Company’s financial position or results of operations.

Note 10. Reclassifications

Certain amounts in the June 30, 2007 financial statements have been reclassified to conform to the September 30, 2007 presentation. The reclassifications had no effect on the June 30, 2007 cash flows, financial position or net income, as originally reported.

KOLORFUSION INTERNATIONAL, INC.

The primary decrease in selling and general expenses related to the Company reducing personnel costs and facility rent. Management of the Company anticipates that the profit margin will increase as the Company acquires new customers and lowers the cost of processing and materials.

Liquidity and Capital Resources

Three Month Period Ended September 30, 2007

The Company has historically had more expenses than income in each year of its operations. The accumulated deficit from inception to September 30, 2007 was $11,288,117 and current liabilities are in excess of current assets in the amount of $652,999. The Company anticipates the further conversion of other existing note liabilities into stock, such amounts to include $533,373 which are due to the Company’s Board members either directly or indirectly through secured bank loans. The Company has been able to maintain a positive cash position through operations and additional financing activities. The Company is seeking to finalize an additional equity placement or working capital line during the next few months to support its plans for future growth and working capital needs.

The Company created $54,971 in positive operating cash flow for the three months ended September 30, 2007, as compared to a negative operating cash flow of $46,160 during the three months ended September 30, 2006. The increase is due primarily to our positive net income for the quarter compared to the prior period. During the three-month period ended September 30, 2007, net cash flows used in investing activities was $-0- compared to $23,697 three months ended September 30, 2006. During the three month period ended September 30, 2007, net cash flow used in financing activities was $39,164 compared to net cash provided of $40,563 for the three months ended September 30, 2006. This change in cash flow from financing activities was primarily due to the payments on the capital leases and loans entered during the fiscal year ending June 30, 2007. No new debt arrangements were initiated during the three months ended September 30, 2007.

The Company’s future success and viability are dependent on the Company’s ability to develop, provide and market its products and services, and the continuing ability to generate capital financing. Management is optimistic that the Company will be successful in its business operations and capital raising efforts; however, there can be no assurance that the Company will be successful in generation of substantial revenue or raising additional capital. The failure to generate substantial revenues or raise additional capital may have a material and adverse effect upon the Company and its stockholders.

There are no known trends, events or uncertainties that are likely to have a material impact on the short or long term liquidity, except perhaps declining sales. The primary source of liquidity in the future will be from increased sales accounts in many categories, including, electronics, sporting goods, outdoor product manufacturers, household and building products. Additionally, existing accounts should continue to expand the use of the Company’s process resulting in higher revenues. In the event that sales do not increase, the Company may have to seek additional funds through equity sales or debt. Additional equity sales could have a dilutive effect. The debt financing, if any, would most likely be convertible to common stock, which would also have a dilutive effect. There can be no assurance that additional capital will be available on terms acceptable to the Company or on any terms whatsoever. There are no material commitments for capital expenditures. There are no known trends, events or uncertainties reasonably expected to have a material impact on the net sales or revenues or income from continuing operations. There are no significant elements of income or loss that do not arise from continuing operations. There are no seasonal aspects to the business of Kolorfusion International, Inc.

Significant Accounting Policies

Financial Reporting Release No. 60, which was recently released by the Securities and Exchange commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company. In addition, Financial Reporting Release No. 61 was recently released by the SEC to require all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments.

General

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 and the disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from these estimates.

Inventory Valuation

Inventories consist of raw materials, and are valued at the lower of cost or market (first-in, first-out method).

Revenue Recognition and Deferred Revenue

As described in Note 1 to the Financial Statements, license and royalty revenue is recognized upon completion of the earnings process. We recognize sales when products are shipped; collection is probable and the fee if fixed or determined. In addition, we have various contracts, which are amortized into revenues over the contract period pursuant to Staff Accounting Bulletin No. 104, Revenue Recognition (SAB “104”)

Estimate

The debt restructuring completed during the fiscal year ended June 30, 2007 represents a significant estimate made by management. It is at least reasonably possible that a change in the estimate may occur in the near term.

Patent Rights

The cost of the patent rights is being amortized using the straight-line method over fifteen years. In accordance with SFAS No. 144, the Company evaluates whether changes have occurred that would require revision of the remaining estimated lives of recorded long-lived assets, or render those assets not recoverable. If such circumstances arise, recoverability is determined by comparing the undiscounted cash flows of long-lived assets to their respective carrying values. The amount of impairment, if any, is measured on the projected cash flows using an appropriate discount rate.

Item 3. CONTROLS & PROCEDURES

The Company’s management, Stephen Nagel, our Chief Executive Officer/President and Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of September 30, 2007 (the “Disclosure Controls Evaluation”). Based on that evaluation, the Company’s chief executive officer concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective to provide a reasonable level of assurance that: (i) information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the specific time periods in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed in the reports the Company files or submits under Exchange Act are accumulated and communicated to management, including the chief executive officer and chief accounting officer, to allow timely decisions regarding required disclosure, all in accordance with Exchange Act Rule 13a-15(e).
There were no changes in the Company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II — OTHER INFORMATION

EXHIBIT INDEX

* Filed herewith.

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