- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2008

OR

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)

[phone]

(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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

24,309,540 Common Shares and 1,076,923 Preferred Shares were outstanding as of November 11, 2008

 

 

 

 

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KOLORFUSION INTERNATIONAL, INC.

INDEX

		Page
PART I FINANCIAL INFORMATION			1
Item 1. Financial Statements (Unaudited)			1
Condensed Balance Sheets as of September 30, 2008 (Unaudited) and June 30, 2008			1
Statements of Operations for the three month periods ended September 30, 2008 and 2007 (Unaudited)			2
Condensed Statements of Cash Flows for the three month periods ended September 30, 2008 and 2007 (Unaudited)			3
Selected Notes to Condensed Financial Statements (Unaudited)			4-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures about Market Risk			11
Item 4. Controls and procedures
PART II OTHER INFORMATION			12
Exhibit 31.1
Exhibit 32.1

 

 

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KOLORFUSION INTERNATIONAL, INC.

PART I — FINANCIAL INFORMATION

Item I. FINANCIAL STATEMENTS

CONDENSED BALANCE SHEETS

		September 30				June 30
		2008				2008
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	12,477			$	7,009
Trade accounts receivable, net of allowance for doubtful accounts of $2,678 as of September 30, 2008 and June 30, 2008			119,077				131,202
Inventories, net			145,515				136,659
Prepaid expenses			13,454				13,454
Total current assets			290,523				288,324
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET			306,165				325,856
OTHER ASSETS:
Other			31,296				27,600
Total other assets			31,296				27,600
		$	627,984			$	641,780
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt		$	354,510			$	368,630
Current portion of capital lease obligations			71,414				93,704
Accounts payable			220,900				253,998
Deferred revenue			40,000				45,000
Customer deposits			65,040				18,015
Accrued expenses			31,971				20,076
Accrued expenses due officer/stockholders			333,373				333,373
Advances from stockholder			50,968				40,968
Total current liabilities			1,168,176				1,173,764
Long-term debt, net of current portion			—				—
Capital lease obligations, net of current portion			140,185				134,228
Total Liabilities			1,308,361				1,307,992
STOCKHOLDERS’ DEFICIT:
Preferred stock Series C-1, $.001 par value, 10,000,000 shares authorized: 1,076,923 issued and outstanding			1,077				1,077
Common stock, $.001 par value, 100,000,000 shares authorized, and 24,309,540 issued and outstanding as of September 30 and June 30, 2008			24,310				24,310
Additional paid-in capital			11,098,834				11,096,617
Accumulated deficit			(11,804,598	)			(11,788,216	)
Total Stockholders Deficit			(680,377	)			(666,212	)
Total Liabilities and Stockholders Deficit		$	627,984			$	641,780

See Notes to Condensed Financial Statements.

 

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KOLORFUSION INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2008 and 2007
(Unaudited)

		Three Months Ended
		September 30				September 30
		2008				2007
Revenues:
Sales		$	391,790			$	507,361
License and royalty revenue			25,092				33,375
			416,882				540,736
Expenses:
Cost of sales			243,739				262,879
Selling, general and administrative expenses			167,499				245,448
Operating income			5,644				32,409
Interest expense			(22,026	)			(15,765	)
Net Income (loss) before taxes			(16,382	)			16,644
Income tax provision			—				—
Net income (loss)		$	(16,382	)		$	16,644
NET INCOME (LOSS) PER COMMON SHARE- BASIC		$	0.00			$	.0.00
Weighted average shares outstanding-basic			24,309,540				23,709,540
NET INCOME (LOSS) PER COMMON SHARE-DILUTED		$	0.00			$	0.00
Weighted average shares outstanding-diluted			24,309,540				31,794,155

See Notes to Condensed Financial Statements.

 

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KOLORFUSION INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2008 and 2007
(Unaudited)

		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)		$	(16,382	)		$	16,644
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation			2,217				2,217
Depreciation and amortization			19,690				79,820
Non-cash interest expense added to principle of long-term debt			2,400				2,400
Change in Operating Assets and Liabilities
(Increase) decrease in trade accounts receivable			12,125				(99,319	)
(Increase) in inventories			(8,856	)			(3,482	)
(Increase) in other assets			(3,696	)			—
(Decrease) in accounts payable			(33,098	)			47,352
(Decrease) in deferred revenue			(5,000	)			(709	)
Increase in customer deposits			47,025				—
Increase in accrued liabilities			11,895				12,449
Net cash provided from operating activities			28,321				57,372
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities			—				—
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit			—				(95	)
Payments on long-term and short-term debt			(16,520	)			(21,363	)
Payments on capital leases			(16,333	)			(11,876	)
Advances from (repayments to) stockholder			10,000				(8,231	)
Net cash used in financing activities			(22,853	)			(41,565	)
Increase in cash and cash equivalents			5,468				15,807
Cash and cash equivalents:
Beginning of period			7,009				1,617
End of period		$	12,477			$	17,424
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest		$	19,626			$	13,365

See Notes to Condensed Financial Statements.

 

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KOLORFUSION INTERNATIONAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Condensed Financial Statements:

The condensed balance sheets as of September 30, 2008 and June 30, 2008, the condensed statements of operations for the three month periods ended September 30, 2008 and 2007, and the condensed statements of cash flows for the three month periods then ended have been prepared by the Company, without audit. Operating results for the three months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2009. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows at September 30, 2008 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 June 30, 2008 audited financial statements.

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying condensed financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.

Note 2. Earnings (Loss) per share:

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share includes the effect of all dilutive potential common shares (primarily related to stock options & preferred stock), unless the effect is anti-dilutive. Incremental shares attributable to the assumed exercise of stock options and conversion of preferred stock for the three months ended September 30, 2008 were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

Note 3. Stock Based Compensation:

Effective July 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the fair value of share based-based payments, including grants of employee stock options and employee stock purchase plan shares, recognized in the income statement based on their fair values. The Company’s financial statements as of and for the three months ended September 30, 2008, reflect the impact of SFAS 123(R). 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 awards that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations.

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 Statements of Operations. The Company has recorded $2,217 of related compensation expense for the three month periods ended September 30, 2008 and 2007, 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 impacted both basic and diluted loss per share by $0.00 for the three months ended September 30, 2008 and 2007. As of September 30, 2008, $10,895 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of approximately 1.99 years.

 

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The Company uses the Black —Scholes-Merton (“Black Scholes”) 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 No. 107 was applied in connection with the implementation and adoption of SFAS 123 (R).

Information regarding outstanding stock options as of September 30, 2008 is as follows:

														Weighted
														Average
						Weighted								remaining
						average				Aggregate				contractual
		Number				exercise				intrinsic				term
		of options				price				value				(years)
Outstanding at June 30, 2008			3,000,000			$	0.71
Granted			—				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at September 30, 2008			3,000,000			$	0.71			$	—				4.05
Exercisable at September 30, 2008			2,800,000			$	0.67			$	—				3.68

The following table summarizes information about stock options outstanding as of September 30, 2008:

		Options Outstanding												Options Exercisable
						Weighted												Weighted
						Average				Weighted								Average				Weighted
Exercise		Number				Remaining				Average				Number				Remaining				Average
Prices		Outstanding				Contractual Life				Exercise Price				Exercisable				Contractual Life				Exercise Price
$.38 - .50			1,325,000				2.80			$	.44				1,325,000				2.75			$	.44
$.75 - 1.00			1,575,000				4.94			$	.89				1,475,000				5.00			$	.89
$1.01-1.50			100,000				6.51			$	1.50				—				—				—
$.38 - 1.50			3,000,000				4.05			$	.71				2,800,000				3.68			$	.67

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 and exercisable options was $0.00 at September 30, 2008.

 

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Note. 4 Debt:

		September 30,				June 30,
		2008				2008
Notes payable to related party, due dates expired and extended on a month-to-month, plus interest at 12%		$	108,097			$	105,697
Note payable to bank, payable on demand but no later than January, 2009, including interest at 5.5% at September 30, 2008, collateralized by substantially all assets and guaranteed by a Company stockholder			200,000				200,000
Note payable bank in monthly installments of principal and interest of $558.46 at 9.75% interest through September 2008, collateralized by specific equipment and guaranteed by a Company stockholder			—				1,648
Line of credit US Bank at 14% revolving month-to-month			5,057				5,057
Bank term note at prime rate plus 2% due in full May 2009 with monthly payments of $4,500			41,356				56,228
Totals			354,510				368,630
Less current portion			(354,510	)			(368,630	)
Long-term portion		$	—			$	—

Note 5. Capital Leases:

The Company leases various equipment under agreements that are classified as a capital lease. The equipment is leased under agreements which expire through January 2013 at various interest rates.

The gross amount of equipment and related accumulated depreciation recorded under capital leases was as follows at September 30, 2008 and June 30, 2008:

		September 30,				June 30,
		2008				2008
Equipment		$	303,263			$	303,263
Less: accumulated depreciation			(83,485	)		$	(68,789	)
		$	219,798			$	234,474

 

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Future minimum capital lease payments are as follows :

Years ending September 30
2009		$	93,010
2010			57,007
2011			54,072
2012			39,024
2013			13,296
Thereafter			—
Total			256,409
Less amount representing interest			( 44,810	)
Net capital lease obligations			211,599
Less current portion			( 71,414	)
Long-term portion		$	140,185

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 $11,804,598. At September 30, 2008, the Company’s current liabilities exceeded current assets by $877,653. Management believes with 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 continue to grow sales or obtain 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 its 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 sales contracts that are amortized into revenue over the contract period. The total amount of deferred revenue relating to these contracts was $40,000 and $45,000 as of September 30, 2008 and June 30, 2008, respectively.

 

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Note 9. Recently Issued Accounting Pronouncements

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share using the two-class method outlined in SFAS No. 128, Earnings per Share . The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The adoption of this new guidance on January 1, 2009 should not have an effect on our reported earnings per share.

In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets . This guidance addresses the determination of the useful life of intangible assets which have legal, regulatory or contractual provisions that potentially limit a company’s use of an asset. Under the new guidance, a company should consider its own historical experience in renewing or extending similar arrangements. We are required to apply the new guidance to intangible assets acquired after December 31, 2008.

In February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and non-financial liabilities assumed in a business combination. The Company has not applied the provisions of SFAS No. 157 to its non-financial assets and non-financial liabilities in accordance with FSP FAS 157- 2.

In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations”. SFAS No. 141 (revised 2007) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141 (revised 2007) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Early application is not permitted.

 

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KOLORFUSION INTERNATIONAL, INC.

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain statements in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements may appear in a number of places in this report and can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “intend,” “may,” “could,” “possible,” “plan,” “forecast,” and similar words or expressions. The Company’s forward-looking statements generally relate to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declaration of any payment of dividends. Investors must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. The Company undertakes no obligation to update any forward-looking statement.

General

Kolorfusion International, Inc., a Colorado corporation (the “Company”) currently trades on the Over-the-Counter Bulletin Board under the symbol “KOLR”.

The Company was created to develop and market a system for transferring color patterns to metal, wood, glass and plastic products. “Kolorfusion” is a process that allows the transfer of colors and patterns into coated metal, wood and glass and directly into a plastic surface that can be any shape or size. The creation of a pattern to be a part of a product’s surface is designed to enhance consumer appeal, create demand for mature products, achieve product differentiation and customization and as a promotional vehicle. The Company currently has customers such as Polaris — all terrain vehicles, Sony-laptop lids, Alcoa-wheel rims, Leatherman — hand tools, Commodore Gaming- computer towers, Sunrise Medical — wheelchairs, Excalibur — cross-bows, Wahl-hair clippers, and other customers. The Company is expanding its markets by the use of its new digital imaging technology; wherein the customer can submit a new design and the Company can now create the design for its process with no up-front cost to the customer. Other applications are anticipated by management, as the Company is currently working with other manufacturers in various markets.

Results of Operations:

For the three-month period ended September 30, 2008 compared to three-month period ended September 30, 2007:

The Company had a net loss of $16,382 for the three-month period ended September 30, 2008 compared to net income of $16,644 for the three-month period ended September 30, 2007. During the three-month period ended September 30, 2008, the Company generated $416,882 in gross revenues compared to $540,736 in gross revenues during the three-month period ended September 30, 2007 a decrease of $123,854. The decrease was primarily related to a decrease in processing or general sales of $391,790 for the three month period ended September 30, 2008 as compared to $507,361 the three month period ended September 30, 2007. During the three-month period ended September 30, 2008, the Company incurred $411,238 in expenses and cost of goods sold (selling & general administrative expenses were $167,499) as compared to the three-month period ended September 30, 2007 where the Company incurred $508,327 in expenses and cost of goods (selling & general administrative expenses were $245,448) a decrease of $97,089. Cost of sales as percent of revenues decreased to 41.5% for the three months ended September 30, 2008 compared to 51.4% for the three months ended September 30, 2007. The decrease in sales and gross margin during the comparable three month periods was primarily attributable to the loss of print sales with a higher margin to a significant licensee that the Company is in a testing phase to convert it to the new digital print methods from previous print methods.

 

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The decrease of $77,949 in selling, general and administrative expenses is primarily related to the elimination of amortization of patents ($61,500 per quarter), which ended June 30, 2008. Interest expense increased due to additional debt on printing equipment and additional higher interest loans. Management anticipates profit margin will increase as the Company secures new customers and lowers the cost of processing and materials.

Liquidity and Capital Resources- Three month period ended September 30, 2008:

The Company has historically had more expenses than income in each year of its operations. The accumulated deficit from inception to September 30, 2008 was $11,804,598 and current liabilities are in excess of current assets in the amount of $877,653. The Company anticipates the further conversion of other existing note liabilities into stock, such amounts to include $692,438 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 $28,321 and $57,372 in positive operating cash flow for the three months ended September 30, 2008 and 2007, respectively. The decrease is primarily due to a larger loss as a result of decreased sales activity for the quarter. During the three-month period ended September 30, 2008, net cash flows used in investing activities was $-0-. During the three month period ended September 30, 2008, net cash flow used in financing activities was $22,853 compared to a net cash used of $41,565 for the three months ended September 30, 2007. This decrease in cash flow used in financing activities was primarily due to the Company receiving a $10,000 advance from a shareholder instead of making an $8,231 payment to them a year ago. No new debt arrangements were initiated during the three months ended September 30, 2008.

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 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 and the maturity of debt. 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 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 requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments.

 

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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

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 is 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”).

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk for the effect of interest changes. Information relating to quantitative and qualitative disclosure about market risk is set forth below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources. As of September 30, 2008, the Company did not have any off-balance sheet investments or hedging investments.

Item 4. CONTROLS & PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13(a)-15(e) of the Securities Exchange Act of 1934) was carried out by the Company’s management, primarily Stephen Nagel, our Chief Executive Officer/President and Financial Officer.

Based on that evaluation, our Chief Executive Officer/President and Financial Officer have concluded that the disclosure controls and procedures were not effective due to a lack of segregation of duties in our accounting and financial functions, including our lack of financial expertise relating to our financial reporting and our quarterly close process. See our Form 10-KSB for additional information on this matter. Due to our lack of sufficient capital, management has concluded that with certain oversight controls that are in place, the risks associated with the lack of segregation of duties and lack of internal financial expertise are not sufficient to justify the costs of potential benefits to be gained by adding additional employees at this time. Management intends to periodically reevaluate this situation. If we secure sufficient capital, we expect to examine the possibility of increasing staffing to mitigate the current lack of segregation of duties within the accounting and financial functions.

Notwithstanding the material weaknesses referred to above that continued to exist as of September 30, 2008, our Chief Executive/Financial Officer has concluded that the financial statements included in this Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company as required for interim financial statements.

 

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(b) Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the three months ended September 30, 2008, 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

Item 1. Legal Proceedings

The Company is from time-to-time a party to litigation arriving in the normal course of its business. The Company believes that none of these activities will have a material adverse effect on its financial condition or results of operations.

Item 1 A. Risk Factors

We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or a part of your investment.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

 

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

	31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).*
	32.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

(b) No reports on Form 8-K were filed during the three months ended September 30, 2008.

*		Files herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KOLORFUSION INTERNATIONAL, INC.
Date: November 14, 2008	By:	/s/ Stephen Nagel
		Director, President and Chief Financial Officer

 

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EXHIBIT INDEX

Exhibit
No.				Description
	31.1			Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
	32.1			Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*		Filed herewith.

 

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