Item 1. Financial Statements.

In the opinion of management, the accompanying unaudited consolidated financial statements included in this Form 10-QSB reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

 

INCA DESIGNS, INC. AND SUBSIDIARIES

BALANCE SHEETS

 

		September 30,			December 31,
		2007			2006
		Unaudited			Audited
ASSETS
Current Assets:
Cash		$	-		$	81,754
Accounts receivable, net of allowance for doubtful accounts of
$0 at September 30, 2007 and $4,950 at December 31, 2006			1,983			74,425
Escrow receivables			-			100,000
Restricted cash			142,325			-
Inventory			177,589			71,231
Prepaid expenses and other current assets			124,068			61,087
Total current assets			445,965			388,497
Fixed Assets:
Store equipment, net of accumulated depreciation of $485			16,991			-
Other Assets:
Security deposit			58,923			-
Lease purchase costs, net of amortization of $2,004			117,996			-
			176,919			-
Total assets		$	639,875		$	388,497
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes and loans payable		$	1,629,439		$	275,000
Convertible notes payable, net of discount			1,030,000			325,000
Derivative liabilities			1,286,750			-
Accounts payable			236,282			75,587
Accrued expenses and other liabilities			749,520			81,889
Accrued interest			1,191,891			45,162
Due to officers and other related parties			658,225			549,480
Total current liabilities			6,782,107			1,352,118
Common stock subject to rescission of 63 shares issued and outstanding			181,189			-
Bridge loans expected to convert to equity			343,300			-
Total liabilities			7,306,596			1,352,118
Commitments and contingencies			-			-
Stockholders' deficit:
Preferred stock - par value $0.0001; 10,000,000 shares authorized;
no shares issued and outstanding			-			-
Common stock - par value $.0001; 1,000,000,000 shares authorized;
52,309,814 shares issued and outstanding at September 30, 2007 and
par value $.0001;100,000,000 shares authorized; 20,000,000 shares
issued and outstanding at December 31, 2006			5,231			2,000
Additional paid-in capital			678,044			-
Members' deficit			-			(951,042	)
Accumulated deficit			(7,349,996	)		(14,579	)
Total stockholders' deficit			(6,666,721	)		(963,621	)
Total liabilities and stockholders' deficit		$	639,875		$	388,497

INCA DESIGNS INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006
Revenues, net		$	-		$	137,948		$	96,287		$	676,212
Cost of revenues			-			220,386			49,157			518,762
Gross profit			-			(82,438	)		47,130			157,450
Operating expenses:
General and administrative			245,099			54,901			501,561			270,617
Selling expense			116,469			33,791			344,265			214,842
Depreciation			2,490			-			2,490			-
Total operating expense			364,058			88,692			848,316			485,459
Operating income (loss)			(364,058	)		(171,130	)		(801,186	)		(328,009	)
Other income and (expense)
Interest expense			(104,178	)		(9,294	)		(1,452,165	)		(20,453	)
Amortization of debt discount			(209,916	)		-			(275,000	)		-
Change in derivatives			522,000			-			396,600			-
Debt extinguishment			154,789			-			154,789			-
Other income			-			-			1,000			6,250
Total other income (expense)			362,695			(9,294	)		(1,174,776	)		(14,203	)
Income (loss) before taxes			(1,363	)		(180,424	)		(1,975,962	)		(342,212	)
Provision for income taxes			-			-			-			(500	)
Net income (loss)		$	(1,363	)	$	(180,424	)	$	(1,975,962	)	$	(342,712	)
Earnings Per Share, Basic and Diluted:
Net income (loss)			($0.000	)		($0.009	)		($0.058	)		($0.017	)
Weighted Average Number of
Shares Outstanding			52,309,814			20,000,000			34,295,904			20,000,000

INCA DESIGNS INC. AND SUBSIDIARIES

STATEMENT OF STOCKHOLDERS' EQUITY

FROM DECEMBER 31, 2005 THROUGH SEPTEMBER 30, 2007

 

								Additional
		Common Stock						Paid In			Members'			Accumulated
		Shares			Amount			Capital			Deficit			Deficit			Total
Balance, December 31, 2005			-		$	-		$	-		$	(561,576	)	$	-		$	(561,576	)
Stock Compensation			20,000,000			2,000			-			-			-			2,000
Net loss			-			-			-			(389,466	)		(14,579	)		(404,045	)
Balance, December 31, 2006			20,000,000			2,000			-			(951,042	)		(14,579	)		(963,621	)
Effect of merger and recapitalization
pursuant to execution of Security
Exchange Agreement			6,246,064			625			-			951,042			(5,359,455	)		(4,407,788	)
Shares issued in exchange for debt			26,063,750			2,606			678,044			-			-			680,650
Net loss			-			-			-			-			(1,975,962	)		(1,975,962	)
Balance, September 30, 2007			52,309,814		$	5,231		$	678,044		$	-		$	(7,349,996	)	$	(6,666,721	)

INCA DESIGNS, INC. AND SUBSIDIARIES

UNAUDITED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

		Nine Months Ended
		September 30,
		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(1,975,962	)	$	(342,712	)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization expense			2,490			-
Change in fair value of derivative instruments			(396,600	)		-
Recognition of expense-derivative conversion feature			1,255,042			-
Amortization of debt discount			275,000			-
Extinguishment of debt			(154,789	)		-
Bad debt expense			(4,950	)		(3,108	)
Changes in assets and liabilities:
Restricted cash			100,000			-
Accounts receivable			77,392			197,811
Inventory			(106,358	)		145,967
Prepaid expenses and other current assets			(121,905	)		(26,143	)
Accounts payable			160,695			(328,643	)
Accrued interest			199,095			20,796
Accrued expenses and other current liabilities			213,897			125,543
Net cash flows used in operating activities			(476,953	)		(210,489	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment			(17,476	)		-
Lease purchase costs			(120,000	)		-
Issuance of loan receivable, net			(142,325	)		-
Net cash flows used in investing activities			(279,801	)		-
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties			-			201,568
Proceeds from convertible notes payable			675,000			-
Net cash flows provided by financing activities			675,000			201,568
Decrease in cash			(81,754	)		(8,921	)
Cash, beginning of period			81,754			15,643
Cash, end of period		$	-		$	6,722
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	-		$	-
Cash paid for income taxes		$	-		$	500

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

INCA Designs, Inc. (the “Company”) was formed in Nevada in 1998 under the name of Accident Prevention Plus, Inc. In December 2004, the Company changed its name to Transportation Safety Technology, Inc.

During fiscal 2005, upon information and belief, all of the Company’s officers and directors abandoned their respective positions with the Company. In October 2006, a Nevada court appointed a custodian who performed appropriate searches to determine that the Company was inactive and had no liens or judgments outstanding. On November 8, 2006 the Court filed an Order Approving (the) Report and Discharging (the) Custodian.

In March 2007, the Company changed its name to INCA Designs, Inc. and on May 21, 2007 entered into a Security Exchange Agreement with S2 New York Design Corp (“S2”), whereby the Company acquired 100% of the issued and outstanding shares of S2. S2 designs, contracts for the manufacture of, and retails comprehensive collections of resort wear, swimwear and accessories for the upscale designer market. For more details on the transaction, see NOTES C - COMMON STOCK AND PREFERRED STOCK and N - ACQUISITION.

Basis of Accounting

The Company maintains its financial records and financial statements on the accrual basis of accounting.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

For purposes of the Statements of Cash Flows, the Company considers amounts held by financial institutions and short-term investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company periodically deposits cash with financial institutions in excess of the maximum federal insurance limits (FDIC) of $100,000 per bank.

Accounts Receivable

Accounts receivable are customer obligations due under normal trade terms. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will be potentially uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes its allowance for doubtful accounts as of September 30, 2007 is adequate.

 

7

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventory is stated at the lower of cost (First-In, First-Out ("FIFO") method) or market. Inventories consist primarily of finished goods.

Shipping and Handling Costs

The Company expenses all shipping and handling costs as incurred. These costs are included in Cost of Sales.

Advertising Costs

The Company expenses all advertising costs as incurred.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences for financial and income tax reporting related to net operating losses that are available to offset future federal and state income taxes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

The Company also has an entity that has elected under the Internal Revenue Code and state law to be taxed as a partnership. In lieu of corporation income taxes, the members of a partnership include their proportionate share of the Company’s taxable income or net operating loss in their individual income tax returns. For this entity, no provision or liability for federal income taxes has been included in these financial statements. The Company is late in filing tax returns for previous years.

Fair Value of Financial Instruments

For accounts payable and accrued expenses, the carrying amount approximates fair value because of the short term maturity of these instruments.

Fair value estimates are made at a specific point in time, based on relevant information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

8

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the principal that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 if effective for the Company on January 1, 2008. The Company is in the process of evaluating SFAS 157 but does not believe it will have a significant effect on its financial position or results of operation.

In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 ("SFAS 159"). SFAS159 permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective, however, the amendment to SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", applies to all entities with available for sale or trading securities. SFAS 159 is elective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. SFAS 159 was recently issued and the Company is currently assessing the financial impact the statement will have on our financial statements.

Earnings Per Share

Basic loss per common share ("EPS") is computed as net loss divided by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the impact of common stock potentially issuable upon the exercise of options and warrants. Potential common stock has been excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

Revenue Recognition

Revenue from product sales is recognized when the product has been shipped and collectibility is reasonably assured. Revenue recognized from these sales is net of applicable provisions for refunds, discounts and allowances.

Stock Based Compensation

The Company follows the requirements of SFAS 123(R), Share Based Payments with regard to stock based compensation issued to both employees and non-employees. The Company has various employment agreements and consulting arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock based compensation is equal to the fair value of the stock that was determined by using the closing trading price on the day the stock was awarded multiplied by the number of shares awarded.

 

9

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

NOTE B - GOING CONCERN

As of September 30, 2007, the Company had no cash, a loss from operations, was in default of certain convertible debt obligations and was in arrears with trade creditors and payroll taxes. In addition, the Company is in arrears with respect to revised payment arrangements with its bank debt. Should the bank take action against the Company the results could adversely affect the Company. The foregoing matters raise substantial doubt about the ability of the Company to continue as a going concern.

The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

NOTE C - COMMON AND PREFERRED STOCK

Common Stock

At September 30, 2007, the Company had 1,000,000,000 shares of common stock, par value $0.0001 authorized, 52,309,814 shares issued and outstanding.

In February 2007, the Company prepared and mailed an Information Statement and obtained proxies to reconstitute its capital structure (increasing the authorized common stock to 1 billion shares and changing its par value to $0.0001) and reverse split its common stock on a 1 for 10 basis.

In March 2007, changed it’s name to INCA Designs, Inc. and completed the previously authorized reconstitution of the Company’s capital structure (increasing the authorized common stock to 1 billion shares, changing its par value to $0.0001, reverse splitting the common stock on a 1 for 10 basis, and authorizing the issuance of up to 10 million shares of preferred stock at a par value of $0.0001).

A Shareholders Majority Action in Lieu of a Special Meeting was taken on May 7, 2007. The holder of approximately sixty-five percent (65%) of the issued and outstanding shares of the Company participated in the Majority Action whereby the following Amendment to the Company’s Articles of Incorporation was approved to: (a) reverse split the outstanding shares of the company’s Common Stock 1 for 20; (b) maintain the par value of the Company’s Common Stock at $0.0001; and (c) restore the number of shares of Common Stock the Company is authorized to issue to 1,000,000.

10

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE C - COMMON AND PREFERRED STOCK (continued)

On May 21, 2007, the Company entered into a Securities Exchange Agreement by and between the Company, S2, and Stacy Josloff and Stephanie Hirsch (the “S2 Shareholders”). Upon closing of the acquisition contemplated under the Securities Exchange Agreement (the “Acquisition”), S2 and its subsidiaries became a wholly owned subsidiary of the Company.

Pursuant to the terms and conditions of the Securities Exchange Agreement:

·	At the closing of the Acquisition, 100% of the issued and outstanding shares of common stock of S2 owned by the S2 Shareholders were transferred to the Company in exchange for an aggregate of 26,000,000 shares of common stock of the Company.

·

Immediately following the closing of the Acquisition, under the terms of the Securities Exchange Agreement, the Company assumed subordinated convertible promissory notes previously issued by S2 (the “S2 Notes”) in the aggregate principal amount of $500,000, which, if and when converted, will convert into shares of the Company’s common stock. In association with the assumption of the S2 Notes, the Company issued an aggregate of 1,000,000 common stock purchase warrants to the holders of the convertible promissory notes which warrants were substituted for like warrants previously issued by S2. The warrants are exercisable for three years at an exercise price of $.50 per share and expire on October 31, 2009.

·	Immediately following the closing of the Acquisition, an aggregate of $680,650 in the Company debt was converted by non-affiliates into 26,063,750 shares of its Common Stock at a conversion ratio of $.026 per share.

Preferred stock

At September 30, 2007, the Company had 10,000,000 shares of preferred stock, par value $0.0001 authorized and unissued which can be designated in series as desired by the Company’s Board of Directors.

In February 2007, the Company prepared and mailed an Information Statement and obtained proxies to reconstitute the capital structure (authorizing the issuance of up to 10 million shares of preferred stock at a par value of $0.0001).

Stock Options

Effective January 1, 1999, the Company established a non-qualified stock option plan ("Stock Option Plan") pursuant to which 30,000 (post split) shares of common stock are reserved for issuance upon the exercise of options. The option plan is designed to serve as an incentive for retaining qualified and competent key employees, officers and the director of the Company. As of September 30, 2007, no options are outstanding.

 

11

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE C - COMMON AND PREFERRED STOCK (continued)

A summary of the Company's stock option activity and related information follows (all amounts have been adjusted to take into effect the Company’s 1 for 10 and 1 for 20 reverse stock splits):

		Number of Shares Under Option			Range of Options Price Per Share			Weighted Average Exercise Price
Balance at December 31, 2005			15,000		$	150.00-500.00		$	284.00
Granted			-0-			-0-			-0-
Exercised			-0-			-0-			-0-
Cancelled			-0-			-0-			-0-
Balance at December 31, 2006			15,000			150.00-500.00			284.00
Granted			-0-			-0-			-0-
Exercised			-0-			-0-			-0-
Cancelled			(15,000	)		(150.00-500.00	)		(284.00	)
Balance at September 30, 2007			-0-		$	-0-		$	-0-

NOTE D - INCOME TAXES

As of September 30, 2007, the Company has a net operating loss carry forward of approximately $125,000 resulting in a deferred tax asset of $50,000. The deferred tax asset has been fully reserved against a valuation allowance. As a result, the valuation allowance for the nine months ended September 30, 2007 increased by $50,000.

NOTE E - LOAN RECEIVABLE

During the nine month ended September 30, 2007, the Company advanced an unrelated entity $142,325. The loan is non-interest bearing and has no stated terms for repayment.

 

12

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE F - NOTES AND LOANS PAYABLE

As of September 30, 2007, the Company is in default in the following obligations.

The principal balance on promissory notes with a financial institution totaled $484,000. In August 2002, the Company negotiated a settlement with the financial institution with payment terms of $5,000 per month on the promissory notes. During the nine months ended September 30, 2007 no payments were made.		$	484,000
Promissory note with interest accruing at 8% per annum, due on demand to a former officer/director.			50,000
Promissory note which the former officer/director secured personally through a financial institution. The Company has guaranteed to reimburse the officer for all interest and the direct cost of such loan. This loan bears interest at 9.25% per annum and is due on demand.			240,000
Promissory note with interest accruing at 10% per annum, due on demand to a former officer/director.			7,500
Promissory note with interest accruing at 10% per annum, due on demand to a former officer/director.			3,500
Non-interest bearing advances and unreimbursed expenses by a former officer/director.			79,143
Notes and loans payable to individuals with interest accruing at 10% per annum, due on demand.			288,000
Notes payable to an individual with interest accruing at 10%, all with a due date of March 1, 2002.			102,296
On June 21, 2002, the Company issued a note for $150,000 with a maturity date of July 1, 2006 and an interest rate of one (1%) percent. As a result of a default for non-payment, the interest rate on the note accelerated to fifteen (15%) percent per annum on the date of maturity. The default also prompted a late charge of five (5%) per annum on any overdue amount.			150,000
On October 8, 2004, S2 New York Design LLC issued a promissory note for $62,500 with a maturity date of April 30, 2005 and an interest rate (5.75%) equal to the Prime Rate on the day prior to the date the principle payment is due.			62,500
On December 1, 2004, S2 New York Design LLC issued a promissory note for $62,500 with a maturity date of April 30, 2005 and an interest rate (5.75%) equal to the Prime Rate on the day prior to the date the principle payment is due.			62,500
On April 3, 2007, INCA issued a Single Payment Promissory Note to an individual for $100,000. The note accrues interest at a rate of 15% per annum and is due on April 2, 2008.			100,000
TOTAL		$	1,629,439

13

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE G - CONVERTIBLE PROMISSORY NOTES

As of September 30, 2007, the Company had the following convertible debt obligations:

In December 1999, the Company executed a convertible promissory note with a now former officer and director, bearing interest at prime per annum (4.75% at December 31, 2001) with principal payable in full on December 31, 2001. Commencing on September 30, 2000 the note was convertible into Common Stock at the rate of $14.50 per share. This convertible promissory note is in default at September 30, 2007		$	250,000
During the year ended December 31, 2000, the Company entered into sixteen convertible 10% promissory notes to individuals aggregating $593,400. The promissory notes are due on December 31, 2002, bearing interest at 10% per annum and are payable monthly in arrears or upon maturity or any earlier conversion of the note. The promissory notes contain a provision stating that beginning January 2, 2001 that upon a 10 day notice the note is due on demand. At any time subsequent to December 31, 2000, the noteholders will have the right to convert the principal and accrued interest in whole or in part into common stock at $14.50 per share. This convertible promissory note is in default at September 30, 2007			180,000
On May 21, 2007, INCA assumed and reissued a Convertible Promissory Note with an effective date of November 20, 2006 to an individual in the amount of $100,000 with a due date of May 15, 2007 (the “Note”). The due date of the Note was verbally extended by mutual agreement of the parties to September 30, 2007. The Note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s common stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. In conjunction with the Note, the Company issued Warrants to purchase 200,000 shares of common stock of INCA for an exercise price of $0.50 per share. The Warrants expire on October 31, 2009. The shares underlying the Note and the Warrants are covered under a registration rights agreement.			100,000
On May 21, 2007, INCA assumed and reissued a Convertible Promissory Note with an effective date of November 20, 2006 to an individual in the amount of $125,000 with a due date of May 15, 2007 (the “Note”). The due date of the Note was verbally extended by mutual agreement of the parties to September 30, 2007. The Note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. In conjunction with the Note, the Company issued Warrants to purchase 250,000 shares of common stock of INCA for an exercise price of $0.50 per share. The Warrants expire on October 31, 2009. The shares underlying the Note and the Warrants are covered under a registration rights agreement.			125,000
On May 21, 2007, INCA assumed and reissued a Convertible Promissory Note with an effective date of November 20, 2006 to an individual in the amount of $100,000 with a due date of September 30, 2007 (the “Note”). The note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. In conjunction with the Note, the Company issued Warrants to purchase 200,000 shares of common stock of INCA for an exercise price of $0.50 per share. The Warrants expire on October 31, 2009. The shares underlying the Note and the Warrants are covered under a registration rights agreement.			100,000

 

14

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

On May 21, 2007, INCA assumed and reissued a Convertible Promissory Note with an effective date of May 16, 2006 to an individual in the amount of $100,000 with a due date of October 31, 2007. The note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. In conjunction with the Note, George D. Schaefer was issued Warrants to purchase 200,000 shares of common stock of INCA for an exercise price of $0.50 per share. The Warrants expire on October 31, 2009. The shares underlying the Note and the Warrants are covered under a registration rights agreement.			100,000
On May 21, 2007, INCA assumed and reissued a Convertible Promissory Note with an effective date of May 16, 2006 to an individual in the amount of $75,000 with a due date of October 31, 2007. The note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. In conjunction with the Note, Robert J. Smith was issued Warrants to purchase 150,000 shares of common stock of INCA for an exercise price of $0.50 per share. The Warrants expire on October 31, 2009. The shares underlying the Note and the Warrants are covered under a registration rights agreement.			75,000
On June 20, 2007, INCA issued a Convertible Promissory Note to an entity for $200,000 with a due date of June 20, 2008. The note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. The shares underlying the Note are covered under a registration rights agreement.			200,000
On June 20, 2007, INCA issued a Convertible Promissory Note to an entity for $200,000 with a due date of June 20, 2008. The note is convertible into shares of INCA’s common stock at a forty percent discount to the market price of the Company’s stock or $0.50 per share, whichever is lower. The Note contains 4.99% ownership cap provisions. The shares underlying the Note are covered under a registration rights agreement.			200,000
			1,330,000
Debt Discount			(300,000	)
TOTAL		$	1,030,000

NOTE H - COMMON STOCK SUBJECT TO RESCISSION OFFER

Common stock sold subsequent to August 3, 1999 pursuant to the Company's limited offering memorandums of January and April 1999, may be in violation of the requirements of the Securities Act of 1933. In addition, certain state securities rules and regulations may not have been complied with to ensure availability of a private placement transaction exemption. As such, the proceeds of $202,939 from the issuance of 70 (post splits) shares of common stock through December 31, 1999 were classified outside of equity in the balance sheet and classified as common stock subject to rescission. On April 18, 2000, the Company repurchased 7 (post splits) shares of common stock from two of the related shareholders. The Company subsequently canceled these shares. As of December 31, 2002, the balance of proceeds was $181,189 and the related shares were 63 (post splits). As of September 30, 2007, no additional investors have requested the Company to repurchase their shares.

 

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE I - BRIDGE LOANS EXPECTED TO BE CONVERTED TO EQUITY

During the year ended December 31, 2002, the Company entered into various bridge loans which are convertible into Common Stock of the Company. As of September 30, 2007, there remains outstanding three such bridge loans totaling $343,300. These bridge loans bear an interest rate of 10%.

NOTE J -DUE TO OFFICERS AND RELATED PARTIES

At September 30, 2007, amounts due to officers and related parties consisted of the following:

Advances from officer		$	596,425
Advances from related party			61,800
TOTAL		$	658,225

The amounts are non-interest bearing and have no stated terms of repayment.

NOTE K -ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following at September 30, 2007:

Amounts due to former officers for accrued compensation and advances		$	409,295
Loans (non-interest bearing) and advances			206,625
Accrued legal settlements			71,000
Cash advanced for stock purchase			38,500
Payroll taxes			18,225
Customer deposits			5,875
TOTAL		$	749,520

NOTE L - DERIVATIVES

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the conversion features associated with the convertible debentures are variable and contain an embedded derivative that requires bifurcation from their hosts contacts. The company has recognized the embedded derivatives as a liability at the date the debentures were issued. As of September 30, 2007 the change in the fair value of the derivative resulted in an accounting gain of $396,600. Amortization of the debt discount totaled $275,000 for the nine months ended September 30, 2007. The unamortized portion of the debt discount related to the derivatives was $300,000 at September 30, 2007. As of September 30, 2007, the fair value of the derivative liabilities was $1,286,750.

 

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE M - COMMITMENTS AND CONTINGENCIES

Employment Agreements

In connection with the Acquisition, INCA entered into employment agreements with Stacy Josloff to serve as Chief Executive Officer and Chief Financial Officer and with Stephanie Hirsch to serve as President and Secretary. The initial terms of the agreements are five years, with an option to renew for an additional five-year period. Pursuant to the agreements, Josloff and Hirsch are to receive an annual base salary of $65,000. In addition to the base salary, Josloff and Hirsch are eligible for an annual bonus payment at the end of each fiscal year. The bonus is granted in the sole discretion of the Company’s board of directors and is based upon the Company’s performance and productivity. Bonus compensation may be paid to Josloff and Hirsch in the form of cash, stock options, or a combination thereof. Josloff and Hirsch are eligible for insurance benefits, reasonable expenses, and five (5) weeks of paid vacation in each calendar year.

Litigation

The Company is a named defendant in a lawsuit filed in the New York Supreme Court County of Nassau. The lawsuit claims that the Company breached a contract claim stemming from the Company's failure to install certain devices in the Plaintiff's fleet of ambulances, and seeks compensatory damages in the amount of $195,000. The Company has asserted counter-claim based upon tortious interference with contract, and has denied all of the Plaintiff's allegations. A settlement offer has been made by the Company, whereby the Company would complete installation of its devices in exchange for a general release. The plaintiff has not responded to that offer. While the Company cannot predict the outcome of any settlement, the Company estimates that its liability under this litigation will not exceed $71,000. Accordingly, an accrual of $71,000 was reflected in the accompanying September 30. 2007 consolidated balance sheet.

Management is not aware of any other legal proceedings contemplated by any governmental authority or other party involving the Company or its properties. No director, officer or affiliate of the Company is (i) a party adverse to the Company in any legal proceedings, or (ii) has an adverse interest to the Company in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against the Company or its properties. As of June 30, 2007, the Company owes approximately $18,000 in payroll taxes originating in periods prior to 1999. Federal and state tax liens have been filed against the Company in connection with unpaid payroll taxes.   Although the Internal Revenue Service and the Employment Commission of the State of New York have filed liens against the Company, respectively, as a result of unpaid payroll taxes, these governmental entities have not initiated legal proceedings against the Company to seize the Company's assets to pay such taxes.

Leases

On August 16, 2007, the Company purchased its current lease from the prior occupant of the property for the sum of $120,000 and reimbursement of $30,000 that is held as a security deposit for a total of $150,000. The term of the lease was originally for ten years and commenced on January 1, 2005 with monthly payments of $10,000.

 

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INCA DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

 

NOTE M - COMMITMENTS AND CONTINGENCIES (continued)

The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2007.

2007		$	47,741
2008			131,128
2009			135,062
2010			139,114
2011			143,288
Thereafter			456,178
Total Future Minimum Payments Required		$	1,052,511

NOTE N - ACQUISITIONS

On May 21, 2007, S2 New York Design Corp. and its wholly owned subsidiaries, I NCA of South Beach, LLC and I NCA on L EX , LLC, (collectively referred to as “S2”) entered into a Security Exchange Agreement with Inca Designs, Inc., a publicly held corporation.   A total of 26,000,000 shares of the Company's common stock were issued to the shareholders of S2 in exchange for the purchase of the S2 and its subsidiaries.

The above transaction has been accounted for as a reverse merger (recapitalization) with S2 being deemed the accounting acquirer and Inca Designs, Inc. being deemed the legal acquirer. Accordingly, the historical financial information presented in the financial statements is that of S2 as adjusted to give effect to any difference in the par value of the issuer's and the accounting acquirer's stock with an offset to additional paid in capital.   The basis of the assets and liabilities of S2, the accounting acquirer, has been carried over in the recapitalization.

NOTE O - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the nine months ended September 30, 2007, the Company settled $ 680,650 in liabilities in common stock.

 

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