UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number:
333-131531
PANGLOBAL BRANDS INC.
(Exact name of small business issuer as specified in its charter)
Delaware
|
20-8531711
|
(State or other jurisdiction of incorporation or
|
(I.R.S. Employer Identification Number)
|
organization)
|
|
2853 E. Pico Blvd. Los Angeles, CA 90023
(Address of principal executive offices)
323.226-6500
(Issuers telephone
number, including area code)
N/A
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the
Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site,
if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was
required to submit and
post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a
smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller
reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ]
|
|
Accelerated
filer
[ ]
|
Non-accelerated filer [ ]
|
(Do not check if a smaller
reporting company)
|
Smaller reporting company
[X]
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
As of September 18, 2009, the Company had 49,016,710 shares of
common stock issued and outstanding.
ii
TABLE OF CONTENTS
1
PART I FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. These
statements relate to future events or future financial performance. In some
cases, you can identify forward-looking statements by terminology such as may,
should, expects, plans, anticipates, believes, estimates,
predicts, potential or continue or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled Risk Factors, that may cause our industrys actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results.
Our actual results could differ materially from those discussed
in the forward looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below and
elsewhere in this quarterly report, particularly in the section entitled "Risk
Factors" beginning on page 35 of this quarterly report.
Our financial statements are stated in United States Dollars
(US$) unless otherwise stated and are prepared in accordance with United States
Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all
references to "common shares" refer to the common shares in our capital
stock.
As used in this quarterly report, the terms "we", "us", "our",
means Panglobal Brands Inc. and our wholly-owned subsidiary, Mynk Corporation,
unless otherwise indicated.
ITEM 1. FINANCIAL STATEMENTS.
Panglobal Brands Inc.
June 30, 2009
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
$
|
268,212
|
|
$
|
---
|
|
Accounts receivable, net of allowance of $400,232 and
$544,176 as
|
|
|
|
|
|
|
of June 30, 2009 and September 30, 2008,
respectively
|
|
510,570
|
|
|
444,291
|
|
Due from factor, net
|
|
2,206,253
|
|
|
1,411,456
|
|
Inventory
|
|
1,463,436
|
|
|
1,304,407
|
|
Prepaid expenses and other current assets
|
|
140,727
|
|
|
97,354
|
|
Total current assets
|
|
4,589,198
|
|
|
3,257,508
|
|
|
|
|
|
|
|
|
Property and equipment
,
net
|
|
442,193
|
|
|
587,992
|
|
Trademarks and intangible assets
|
|
1,177,235
|
|
|
1,177,235
|
|
Deposits
|
|
128,392
|
|
|
134,520
|
|
Total assets
|
$
|
6,337,018
|
|
$
|
5,157,255
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Bank overdraft
|
$
|
---
|
|
$
|
171,521
|
|
Accounts payable and accrued expenses
|
|
4,505,885
|
|
|
3,861,562
|
|
Convertible notes payable to shareholders
|
|
---
|
|
|
750,000
|
|
Total current liabilities
|
|
4,505,885
|
|
|
4,783,083
|
|
|
|
|
|
|
|
|
Convertible notes payable to
shareholders-long term
|
|
889,154
|
|
|
---
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity :
|
|
|
|
|
|
|
Authorized - 600,000,000 shares; issued and
outstanding
|
|
|
|
|
|
|
49,016,710 shares and 37,671,710 shares at
|
|
|
|
|
|
|
June 30, 2009 and September 30, 2008,
respectively
|
|
4,903
|
|
|
3,767
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
18,165,704
|
|
|
14,741,439
|
|
Accumulated deficit
|
|
(17,228,628
|
)
|
|
(14,371,034
|
)
|
Total stockholders equity
|
|
941,979
|
|
|
374,172
|
|
Total liabilities and stockholders equity
|
$
|
6,337,018
|
|
$
|
5,157,255
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-1
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
8,585,235
|
|
$
|
5,321,794
|
|
$
|
20,214,494
|
|
$
|
8,405,346
|
|
Cost of sales
|
|
6,555,494
|
|
|
4,268,641
|
|
|
15,106,873
|
|
|
6,657,008
|
|
Gross profit
|
|
2,029,741
|
|
|
1,053,153
|
|
|
5,107,621
|
|
|
1,748,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Design and development
|
|
707,971
|
|
|
784,967
|
|
|
2,214,211
|
|
|
2,580,354
|
|
Selling and shipping
|
|
781,854
|
|
|
708,711
|
|
|
2,119,729
|
|
|
1,613,190
|
|
General and administrative, including
|
|
|
|
|
|
|
|
|
|
|
|
|
$382,972 and $815,612 of stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2009 and 2008,
|
|
|
|
|
|
|
|
|
|
|
|
|
respectively; and $784,003 and
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,878,411 for the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 and 2008, respectively
|
|
1,109,118
|
|
|
1,890168
|
|
|
3,023,214
|
|
|
4,146,940
|
|
Depreciation and amortization
|
|
32,333
|
|
|
26,862
|
|
|
95,163
|
|
|
62,686
|
|
Total costs and expenses
|
|
2,631,276
|
|
|
3,410,708
|
|
|
7,452,316
|
|
|
8,403,170
|
|
|
|
(601,535
|
)
|
|
(2,357,555
|
)
|
|
(2,344,695
|
)
|
|
(6,654,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
46
|
|
|
82
|
|
|
51
|
|
|
22,065
|
|
Interest (expense)
|
|
(309,434
|
)
|
|
(44,679
|
)
|
|
(480,011
|
)
|
|
(53,169
|
)
|
Loss on extinguishment of debt
|
|
(32,939
|
)
|
|
---
|
|
|
(32,939
|
)
|
|
---
|
|
|
|
(342,327
|
)
|
|
(44,597
|
)
|
|
(512,899
|
)
|
|
(31,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(943,862
|
)
|
$
|
(2,402,152
|
)
|
$
|
(2,857,594
|
)
|
$
|
(6,685,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
$
|
(0.02
|
)
|
$
|
(0.08
|
)
|
$
|
(0.07
|
)
|
|
(0.23
|
)
|
Weighted average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding - basic and diluted
|
|
46,496,000
|
|
|
29,661,500
|
|
|
41,481,000
|
|
|
29,401,500
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
26,731,771
|
|
|
2,673
|
|
|
6,363,418
|
|
|
(4,758,107
|
)
|
|
1,607,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
placement
|
|
10,871,759
|
|
|
1,087
|
|
|
6,152,731
|
|
|
|
|
|
6,153,818
|
|
Shares issued as loan fees
|
|
68,180
|
|
|
7
|
|
|
48,856
|
|
|
|
|
|
48,863
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
2,176,434
|
|
|
|
|
|
2,176,434
|
|
Net loss for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
(9,612,927
|
)
|
|
(9,612,927
|
)
|
Balance, September 30, 2008
|
|
37,671,710
|
|
$
|
3,767
|
|
$
|
14,741,439
|
|
$
|
(14,371,034
|
)
|
$
|
374,172
|
|
Shares issued in private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
placement
|
|
3,700,000
|
|
|
370
|
|
|
369,630
|
|
|
|
|
|
370,000
|
|
Conversion of shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
|
|
6,145,000
|
|
|
616
|
|
|
614,317
|
|
|
|
|
|
614,933
|
|
Conversion of Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
|
|
1,500,000
|
|
|
150
|
|
|
149,850
|
|
|
|
|
|
150,000
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
784,003
|
|
|
|
|
|
784,003
|
|
Discount on notes payable due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to warrants and beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
|
|
|
|
|
|
|
|
1,506,465
|
|
|
|
|
|
1,506,465
|
|
Net loss for the nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
(2,857,594
|
)
|
|
(2,857,594
|
)
|
Balance, June 30, 2009
|
|
49,016,710
|
|
$
|
4,903
|
|
$
|
18,165,704
|
|
$
|
(17,228,628
|
)
|
$
|
941,979
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
$
|
(2,857,594
|
)
|
$
|
(6,685,936
|
)
|
Adjustments to reconcile net loss to net
|
|
|
|
|
|
|
Cash used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
95,163
|
|
|
62,686
|
|
Bad debt expense (recovery)
|
|
(143,944
|
)
|
|
320,355
|
|
Provision for returns
|
|
18,702
|
|
|
(76,403
|
)
|
Stock-based compensation
|
|
784,003
|
|
|
1,878,412
|
|
Amortization of beneficial conversion
|
|
175,180
|
|
|
---
|
|
Loss on extinguishment of debt
|
|
32,939
|
|
|
---
|
|
Stock issued as loan fees
|
|
---
|
|
|
48,863
|
|
Loss on abandoned leasehold improvements
|
|
---
|
|
|
4,243
|
|
Cancellation of website development contract
|
|
53,999
|
|
|
---
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
Accounts receivable
|
|
77,665
|
|
|
(924,379
|
)
|
Due from factor
|
|
(813,499
|
)
|
|
(1,504,094
|
)
|
Inventory
|
|
(159,029
|
)
|
|
(1,129,453
|
)
|
Prepaid expenses and other current assets
|
|
(43,373
|
)
|
|
(109,787
|
)
|
Deposits
|
|
6,128
|
|
|
(66,455
|
)
|
Increase (decrease) in -
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
644,323
|
|
|
2,494,539
|
|
Net cash used in operating activities
|
|
(2,129,337
|
)
|
|
(5,687,409
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchase of office equipment
|
|
(3,363
|
)
|
|
(379,958
|
)
|
Purchase of trademarks and intangible assets
|
|
---
|
|
|
(1,177,235
|
)
|
Net cash used in investing activities
|
|
(3,363
|
)
|
|
(1,557,193
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from private placements
|
|
572,433
|
|
|
6,153,818
|
|
Loan from related party-officer
|
|
---
|
|
|
400,000
|
|
Proceeds from shareholder notes
|
|
2,000,000
|
|
|
750,000
|
|
Repayment of bank overdraft
|
|
(171,521
|
)
|
|
---
|
|
Repayment of related party loans
|
|
---
|
|
|
(160,000
|
)
|
Net cash provided by financing activities
|
|
2,400,912
|
|
|
7,143,818
|
|
|
|
|
|
|
|
|
Net increase(decrease) in cash
|
|
268,212
|
|
|
(100,784
|
)
|
Cash and cash equivalents at beginning of period
|
|
---
|
|
|
1,170,214
|
|
Cash and cash equivalents at end of period
|
$
|
268,212
|
|
$
|
1,069,430
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing
and financing activities:
|
|
|
|
|
|
|
Notes payable subject to beneficial conversion feature
|
$
|
1,506,465
|
|
|
---
|
|
Non-cash conversion of notes to Common stock
|
|
614,933
|
|
|
---
|
|
Common stock issued as loan fees
|
$
|
---
|
|
$
|
48,863
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for -
|
|
|
|
|
|
|
Interest
|
$
|
304,831
|
|
$
|
53,169
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
---
|
|
$
|
---
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
PANGLOBAL BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization and Nature of Operations
EZ English Online Corp, a
Delaware corporation (EZ English), was incorporated in the State of Delaware
on March 2, 2005. EZ English sold common stock pursuant to a registration
statement on Form SB-2 declared effective by the Securities and Exchange
Commission on February 28, 2006, and raised gross proceeds of approximately
$85,000. Through September 30, 2006, EZ English was a development stage company
offering a teacher training course to teach English as a second language over
the Internet.
Beginning in December 2006, in
conjunction with a new controlling shareholder acquiring approximately 79% of
the issued and outstanding common shares, EZ English began a program to
discontinue its existing business operations and prepare to enter the fashion
industry. On February 2, 2007, in order to better reflect its future business
operations and prepare for its acquisition of Mynk Corporation, a privately-held
Nevada corporation (Mynk), EZ English completed a merger with its wholly-owned
Delaware subsidiary, in order to effect a name change to Panglobal Brands Inc.
(Panglobal). Mynk was incorporated in Nevada on February 3, 2006 to engage in
the business of design, manufacture and distribution of clothing and accessories
throughout the United States and Canada.
Unless the context indicates
otherwise, Panglobal and Mynk are hereinafter referred to as the Company.
The Company sells its products
through a network of wholesale accounts.
Basis of Presentation
Interim Financial Information
The interim consolidated
financial statements are unaudited, but in the opinion of management of the
Company, contain all adjustments (including normal recurring adjustments),
necessary to present fairly the financial position at June 30, 2009, the results
of operations for the three and nine months ended June 30, 2009 and the cash
flows for the nine months ended June 30, 2009.
Operating results for the three
and nine months ended June 30, 2009 are not necessarily indicative of the
results to be expected for the full fiscal year ending September 30, 2009.
2. Business Operations and Summary of Significant Accounting
Policies
Going Concern and Plan of Operations
The Companys consolidated
financial statements have been presented on the basis that it is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Prior to December 31, 2007 the
Company had been in the development stage. It generated approximately $13.9
million in revenues from operations for the year ended September 30, 2008 and
$20.2 million for the nine months ended June 30, 2009 but is still dependent
upon debt and equity financing which raises substantial doubt about its ability
to continue as a going concern. The Companys ability to continue as a going
concern is dependent upon its ability to achieve profitable operations. As of
June 30, 2009, the Company had an accumulated deficit of ($17,228,628); and
negative working capital of ($805,841) and had incurred a net loss of
($2,857,594) and used net cash in operating activities of ($2,129,337) for the
nine months ended June 30, 2009. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
At June 30, 2009, the Company had
six quarters of revenue-generating operations. Principal activity through
December 31, 2007 related to the Companys formation, capital raising efforts
and initial product design and development activities. Revenue generating
activities generated approximately $34.0 million in revenue for the period from
January 1, 2008-June 30, 2009 and the Company has an order backlog of
approximately $4,500,000
million in prospective sales as of September 14, 2009. The
Company is essentially dependent on debt and equity funding from both related
and unrelated parties to finance its operations.
Principles of Consolidation
The accompanying consolidated
financial statements include the financial statements of Panglobal Brands, Inc.
and its wholly-owned subsidiary, Mynk Corporation. All intercompany balances and
transactions have been eliminated in consolidation.
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 at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and
cash equivalents, accounts receivable, due from factor, prepaid expenses,
accounts payable, accrued expenses, loan from officer and convertible note
payable to shareholders approximate their respective fair values due to the
short-term nature of these items and/or the current interest rates payable in
relation to current market conditions.
Cash and Cash Equivalents
The Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents. At times, such cash and cash equivalents may
exceed federally insured limits. The Company has not experienced a loss in such
accounts to date. The Company maintains its accounts with financial institutions
with high credit ratings. The cash held by the factor is not included in cash
and cash equivalents (see Note 5).
Accounts Receivable
The Company extends credit to
customers whose sales invoices have not been sold to our factor based upon an
evaluation of the customers financial condition and credit history and
generally require no collateral. Management performs regular evaluations
concerning the ability of our customers to satisfy their obligations and records
a provision for doubtful accounts based on these evaluations. Based on existing
economic conditions and collection practices, the Companys allowance for
doubtful accounts has been estimated to be $400,232 and $544,176 at June 30,
2009 and September 30, 2008, respectively. The Companys credit losses for the
periods presented have not significantly exceeded managements estimates.
Concentration of Credit Risks
During the three months ended
June 30, 2009 sales to three customers accounted for 22.0%, 19.7% and 12.4% of
the Companys net sales. During the three months ended June 30, 2009, purchases
from two suppliers totaled $2,883,953 and $1,267,157, respectively. At June 30,
2009, one customer accounted for 60% of the Accounts Receivable, net of
allowance.
Inventory
Inventories are valued at the
lower of cost or market, with cost being determined by the first-in, first-out
method. The Company continually evaluates its inventories by assessing
slow-moving product and records mark-downs as appropriate. At June 30, 2009,
inventories consisted of finished goods, work-in-process and raw materials.
Property and Equipment
Property and equipment are
recorded at cost. Expenditures for major renewals and improvements that extend
the useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to
expense as incurred. When assets are retired or sold, the property accounts and related accumulated depreciation and amortization accounts are relieved, and any resulting gain or loss is included in operations.
Depreciation is computed on the straight-line method based on the estimated useful lives of the assets of five years. Leasehold improvements are amortized over the remaining life of the related lease, which has been
determined to be shorter than the useful life of the asset.
Trademarks and Intangibles
Effective with the Companys adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, since inception of the Company, intangibles (including
trademarks) with indefinite lives are no longer amortized, but instead tested for impairment. Intangible assets are reviewed for impairment annually or whenever events or changes in business circumstances indicate the carrying value of the assets
may not be recoverable. Impairment losses are recognized if future cash flows of the related assets are less than their carrying values.
Impairment of Long-Lived Assets and Intangibles
Long-lived assets, including purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management has considered the net loss incurred
for the three months ended June 30, 2009 and has concluded that there is no impairment of long lived assets or intangibles at June 30, 2009.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise to its wholesale accounts when products are shipped and the customer takes title and assumes the risk of loss, collection of the relevant receivable is
reasonably assured, pervasive evidence of an arrangement exists, and the sales price is fixed or otherwise determinable. Sales allowances are recorded as a reduction to revenue. Management has evaluated the effects of estimating and accruing for
sales returns in the current and prior periods and provides for an estimated allowance for returns.
Design and Development
Design and development costs related to the development of new products are expensed as incurred.
Advertising
The Company expenses advertising costs, consisting primarily of placement in publications, along with design and printing costs of sales materials when incurred. Advertising expense for the three months ended June 30,
2009 and 2008 amounted to $0 and $17,925, respectively. Advertising expense for the nine months ended June 30, 2009 and 2008 amounted to $1,100 and $39,745, respectively.
Shipping and Handling Costs
The Company records shipping and handling costs billed to customers in selling and shipping expenses. Shipping and handling costs incurred by the Company for inbound freight are recorded in cost of sales and costs for
outbound freight are recorded in selling and shipping expenses. Total shipping and handling costs amounted to $53,582 and $57,065 for the three months ended June 30, 2009 and 2008, respectively. Total shipping and handling costs amounted to
$164,333 and $85,045 for the nine months ended June 30, 2009 and 2008, respectively.
Stock-Based Compensation
Effective February 3, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), a revision to SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123R requires that the Company measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards, with the cost to be
recognized as compensation expense in the Company's financial statements over the period of benefit, which is generally the vesting period of the awards. Accordingly, the Company recognizes compensation cost for equity-based compensation for all new
or modified grants issued after February 3, 2006 (Inception).
The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, and EITF 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees, whereas the value of the stock compensation
is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the
expected impact of differences between the financial statements and the tax basis of assets and liabilities.
The Company will provide a valuation allowance for the full amount of the deferred tax asset since there is no assurance of future taxable income. Tax deductible losses can be carried forward for 20 years until
utilized.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN
48). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position
should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The adoption of the provisions of FIN 48 did not have a material effect on the Companys financial statements. The Company currently files or has in the past filed income tax
returns in Canada and the United States. The Company is subject to tax examinations by tax authorities for tax years ending in 2006 and subsequently.
The Companys policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2009, the Company has no accrued interest or penalties related to uncertain tax
positions.
Loss per Common Share
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share are the same for all
periods presented because all warrants and stock options outstanding are anti-dilutive. The related party loan continues to be convertible to common shares and is not repaid at June 30, 2009, but the conversion is anti-dilutive.
3. Private Placements
On October 23, 2007, the Company closed a private placement of 2,871,759 units for gross proceeds of $2,153,818. Each unit was sold for $0.75 and consists of one common share and one common share purchase
warrant. Each common share purchase warrant entitles the holder to purchase, if exercised, one additional common share of our company at a price of $1.00 per common share until October 23, 2008 and at $1.50 per common share if exercised
during the period from October 24, 2008 until the warrants expire on October 23, 2009.
On July 11, 2008, the Company
closed a private placement, selling 8,000,000 shares of common stock at a price
of $0.50 per share for proceeds of $4,000,000. The Company issued 560,000 shares
pursuant to the exemption from registration under the United States Securities
Act of 1933 provided by Section 4(2), Section 4(6) and/or Rule 506 of Regulation
D promulgated under the 1933 Act to four (4) investors who are accredited
investors within the respective meanings ascribed to that term in Rule 501(a)
under the 1933 Act. The Company issued 7,440,000 shares to eighteen (18) non
U.S. persons (as that term is defined in Regulation S of the Securities Act of
1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of
the Securities Act of 1933.
On February 6, 2009, the Company
raised $370,000 in a private placement selling 3,700,000 units consisting of
3,700,000 common shares at a price of $0.10 per share plus 1,850,000 warrants to
purchase common shares at a price of $0.25 per share. The warrants are
exercisable for twelve months. The Company issued 3,700,000 shares to four (4)
non U.S. persons (as that term is defined in Regulation S of the Securities Act
of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2)
of the Securities Act of 1933.
Stock Options
On May 29, 2009, the Company
granted to Gary Bub, an employee of the company, stock options to purchase an
aggregate of 500,000 shares of common stock, exercisable for a period of five
years at $0.10 per share, vesting immediately. The fair value of this option, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $85,000 ($0.17 per share), and is being charged to operations in the period
ending June 30, 2009.
The fair value of these stock
options were calculated using the following Black-Scholes input variables: stock
price on date of grant - $0.19; exercise price - $0.1075; expected life 5.00
years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 3.0% .
On May 29, 2009, the Company
granted to Dru Narwani, a consultant to the company, stock options to purchase
an aggregate of 500,000 shares of common stock, exercisable for a period of one
year at $0.10 per share, vesting immediately. The fair value of this option, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $60,000 ($0.12 per share), and is being charged to operations during the
period ended June 30, 2009. The fair value of these stock options were
calculated using the following Black-Scholes input variables: stock price on
date of grant - $0.19; exercise price - $0.10; expected life 1.0 year;
expected volatility -210%; expected dividend yield - 0%; risk-free interest rate
3.0% .
On May 29, 2009, the Company
granted to two directors of the Company, stock options to purchase an aggregate
of 750,000 shares of common stock (375,000 per director), exercisable for a
period of one year at $0.15 per share, with 125,000 shares for each director
vesting June 30, 2009, September 30, 2009 and December 31, 2009, respectively.
The fair value of this option, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $75,000 ($0.10 per share), and is
being charged to operations in the amount of $25,000 at June 30, September 30,
and December 31, 2009, respectively.
The fair value of these stock
options were calculated using the following Black-Scholes input variables: stock
price on date of grant - $0.19; exercise price - $0.15; expected life 1.0
year; expected volatility -210%; expected dividend yield - 0%; risk-free
interest rate 3.0% .
On June 8, 2009, the Company
granted to Kelly Fountain, an employee, stock options to purchase an aggregate
of 500,000 shares of common stock, exercisable for a period of five years at
$0.18 per share, with 100,000 shares vesting monthly commencing June 8, 2009
through November 7, 2009. The fair value of this option, as calculated pursuant
to the Black-Scholes option-pricing model, was determined to be $75,000 ($0.15
per share), and is being charged to operations monthly from June through
October, 2009. During the three months ended June 30, 2009 the Company recorded
a charge to operations of $15,000 with respect to this option.
The fair value of these stock
options were calculated using the following Black-Scholes input variables: stock
price on date of grant - $0.18; exercise price - $0.18; expected life 5.0
years; expected volatility -210%; expected dividend yield - 0%; risk-free
interest rate 3.0% .
A summary of stock option
activity for the nine months ended June 30, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008
|
|
4,160,000
|
|
$
|
0.540
|
|
|
4.00
|
|
|
Granted
|
|
2,250,000
|
|
$
|
0.143
|
|
|
1.66
|
|
|
Exercised
|
|
---
|
|
|
---
|
|
|
---
|
|
|
Cancelled
|
|
(125,000
|
)
|
|
0.750
|
|
|
4.00
|
|
|
Options outstanding at June 30, 2009
|
|
6,285,000
|
|
$
|
0.393
|
|
|
3.52
|
|
|
Options exercisable at June 30, 2009
|
|
3,460,834
|
|
$
|
0.332
|
|
|
3.47
|
|
The weighted-average grant-date
fair value of options granted during the three months ended June 30, 2009, and
2008 was $0.131 and $0.75, respectively.
The aggregate intrinsic value of
stock options outstanding at June 30, 2009 was $0.
Share Purchase Agreements
On February 12, 2007, Stephen
Soller, the Companys Chief Executive Officer, acquired the beneficial rights to
1,800,000 shares of common stock from Jacques Ninio, the controlling shareholder
of Panglobal at that time, at a price of $0.0001 per share. Pursuant to a
related Escrow Agreement, the shares are to vest and be released to Mr. Soller
at the rate of 600,000 shares every six months beginning on August 12, 2007,
provided that Mr. Sollers underlying employment agreement has not been
terminated. The fair value of this transaction, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $810,000 ($0.45 per
share), reflecting the difference between the $0.0001 purchase price and the
$0.45 private placement price, and is being charged to operations ratably from
May 11, 2007 through August 11, 2008. During the three months ended June 30,
2009, the Company recorded a charge to operations of $0.
On February 12, 2007, the fair
value of the aforementioned share purchases was calculated using the following
Black-Scholes input variables: stock price on date of grant - $0.45; exercise
price - $0.0001; expected life 1.25 years; expected volatility - 125%;
expected dividend yield - 0%; risk-free interest rate 5.0% . On May 11, 2007,
the fair value of the aforementioned share purchases was calculated using the
following Black-Scholes input variables: stock price of grant - $0.45; exercise
price - $0.0001; expected life 3 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% . At June 30, 2007, the fair
value of the aforementioned share purchase was calculated using the following
Black-Scholes input variables: stock price of grant - $1.02; exercise price -
$0.0001; expected life 2.875 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% .
On May 11, 2007, Craig Soller and
David Long, two consultants to the Company, acquired the beneficial rights to
125,000 shares and 100,000 shares of common stock, respectively, from Jacques
Ninio, the controlling shareholder of Panglobal at that time, at a price of
$0.0001 per share. Pursuant to related Escrow Agreements, the 225,000 shares are
to vest and be released to the consultants at the rate of 75,000 shares annually
beginning on May 11, 2008, provided that the underlying consulting agreements
have not been terminated. The fair value of these transactions, as calculated
pursuant to the Black-Scholes option-pricing model, was initially determined to
be $101,250 ($0.45 per share), reflecting the difference between the $0.0001
purchase price and the $0.45 private placement price. In accordance with EITF
96-18, such compensation arrangements granted to consultants are valued each
reporting period to determine the amount to be recorded as an expense in the
respective period. On June 30, 2009, the fair value of the transaction, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $0.015 per share, which resulted in a charge to operations of $1,562 during
the three months ended June 30, 2009. As the restricted shares vest, they will
be valued on each vesting date and an adjustment will be recorded for the
difference between the value already recorded and the then current value on the
date of vesting. On October 31, 2007 the relationship of one of the consultants
with the Company ended and the right to acquire 100,000 shares of common stock
has ceased and previously calculated compensation related to this right to
acquire 100,000 shares of common stock in the amount of $14,116 had been
reversed during the three months ended December 31, 2007. Accordingly, there
will be no further non-cash compensation expenses charged relating to those
100,000 shares.
On October 23, 2007, Charles
Lesser, the Companys Chief Financial Officer and Chief Executive Officer at
this time, acquired the beneficial rights to 250,000 shares of common stock from
Jacques Ninio, the controlling shareholder of Panglobal at that time, at a price
of $0.0001 per share. Pursuant to a related Escrow Agreement, the shares are to
vest and be released to Mr. Lesser according to the following schedule: 100,000
shares on June 30, 2008 and 75,000 shares on December 31, 2008 and June 30,
2009, provided that Mr. Lessers underlying employment status has not been
terminated. The fair value of this transaction, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $220,000 ($0.88 per
share), reflecting the difference between the $0.0001 purchase price and the
fair market value of $0.88 on October 23, 2007, and is being charged to
operations ratably from November 1, 2007 through June 30, 2009. During the three
months ended June 30, 2009, the Company recorded a charge to operations of
$33,000. During the nine months ended June 30, 2009, the Company recorded a
charge to operations of $99,000.
4. Accounts Receivable
The Company also sells goods to
some of its customers and assumes the credit risk. The Company has a receivable
in dispute for which the Company has provided an estimated allowance for
doubtful accounts, however, future events may change that estimate. Accounts
receivable, as presented in the balance sheet at June 30, 2009 and September 30,
2008 is presented below:
|
|
June 30, 2009
|
|
|
September 30
,
2008
|
|
Outstanding accounts
receivable
|
$
|
910,802
|
|
$
|
988,467
|
|
Less: allowance for doubtful debts
|
|
(400,232
|
)
|
|
(544,176
|
)
|
|
$
|
510,570
|
|
$
|
444,291
|
|
Changes to the allowance for
doubtful debts were $0 and $335,030 for the three months ended June 30, 2009 and
2008, respectively.
5. Due from Factor
The Company uses a factor for
credit administration and cash flow purposes. Under the factoring agreement, the
factor purchases a portion of the Companys domestic wholesale sales invoices
and assumes most of the credit risks with respect to such accounts for a charge
of 0.75% of the gross invoice amount. The Company can draw cash advances from
the factor based on a pre-determined percentage, which is 75% of eligible
outstanding accounts receivable. The factor holds as security substantially all
assets of the Company and charges interest at a rate of prime plus 1.0% on the
outstanding advances. Effective October 27, 2008, the interest charge was
increased to prime plus 2%. At March 31, 2008, the Company had cash account in
the amount of $400,000 with the factor to be used as collateral for the loans
advanced. On May 5, 2008 the cash collateral was reduced to $300,000. The
Company is liable to the factor for merchandise disputes and customer claims on
receivables sold to the factor. The factoring agreement expired on March 4,
2009, but was automatically renewed for one additional year.
At times, our customers place
orders that exceed the credit that they have available from the factor. We
evaluate those orders to consider if the customer is worthy of additional credit
based on our past experience with the customer. If we decide to sell merchandise
to the customer on credit, we take the credit risk for the amounts that are
above their approved credit limit with the factor. As of June 30, 2009, the
amount of Due from Factor for which we bear the credit risk is $123,837.
For the three months ended June
30, 2009 and 2008, the Company paid a total of approximately $97,066 and
$30,338, respectively, of interest to the factor which is reported as a
component of interest expense in the consolidated statements of income. For the
nine months ended June 30, 2009, 2009 and 2008, the Company paid a total of
approximately $218,816 and $35,267, respectively, of interest to the factor
which is reported as a component of interest expense in the consolidated
statements of income.
Due from factor, net of reserve
for chargebacks and estimated sales returns as presented in the balance sheet at
June 30, 2009 and September 30, 2008 is summarized below:
|
|
June 30 , 2009
|
|
|
September 30, 2008
|
|
Outstanding factored receivables
|
$
|
5,260,588
|
|
$
|
3,126,405
|
|
Cash collateral reserve
|
|
302,249
|
|
|
303,426
|
|
|
|
|
|
|
|
|
|
|
5,562,837
|
|
|
3,429,831
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(3,008,894
|
)
|
|
(1,689,387
|
)
|
Reserves for chargeback and sales returns
|
|
(347,690
|
)
|
|
(328,988
|
)
|
|
|
|
|
|
|
|
|
$
|
2,206,253
|
|
$
|
1,411,456
|
|
6. Inventory
Inventory consists of the
following at June 30, 2009 and September 30, 2008:
|
|
June 30, 2009
|
|
|
September 30, 2008
|
|
Finished goods
|
$
|
1,180,829
|
|
$
|
1,006,116
|
|
Work-in-process
|
|
105,910
|
|
|
156,697
|
|
Raw materials
|
|
176,697
|
|
|
141,594
|
|
|
$
|
1,463,436
|
|
$
|
1,304,407
|
|
7. Property and Equipment
A summary of property and
equipment at June 30, 2009 and September 30, 2008 is as follows:
|
|
June 30, 2009
|
|
|
September 30, 2008
|
|
Machinery and equipment
|
$
|
167,486
|
|
$
|
167,486
|
|
Computer hardware and software
|
|
251,313
|
|
|
301,949
|
|
Furniture and fixtures
|
|
76,699
|
|
|
76,699
|
|
Leasehold improvements
|
|
149,583
|
|
|
149,583
|
|
|
|
645,081
|
|
|
695,717
|
|
Less accumulated depreciation and amortization
|
|
(202,888
|
)
|
|
(107,725
|
)
|
|
$
|
442,193
|
|
$
|
587,992
|
|
Depreciation and amortization
expense for the three months ended June 30, 2009 and 2008 was $32,333 and
$26,862, respectively. Depreciation and amortization expense for the nine months
ended June 30, 2009 and 2008 was $95,163 and $62,686, respectively.
8. Asset Purchase
On June 18, 2008, the Company
purchased certain assets, including trademarks and office equipment, originally
belonging to a company in foreclosure directly from the financial institution
holding a security interest in the foreclosed assets. The Company obtained a
release of all claims which the financial institution had in any intellectual
property and customer information which it purchased.
The Company purchased the following
assets:
|
(a)
|
certain computers, office equipment and
furniture;
|
|
|
|
|
(b)
|
all intangible property, trademarks (or rights or claims
therein), copyrights, artwork, designs, graphics, patterns, markers,
blocks and designs which were formerly used in marketing apparel products
under the Scrapbook , Scrapbook Originals and Crafty Couture
labels;
|
|
|
|
|
(c)
|
all open and unshipped orders relating to Scrapbook and
Crafty Couture apparel products, all customer lists, and information
regarding customer requirements and
specifications.
|
The Company paid $1,200,000 as
consideration for both the purchase of the purchased assets and the release of
all claims or rights to the three trademarks, Scrapbook, Scrapbook Originals
and Crafty Couture. The purchase price was allocated as follows:
Office equipment and furniture
|
$
|
22,765
|
|
Trademarks and intangible assets
|
|
1,177,235
|
|
Total Purchase price
|
$
|
1,200,000
|
|
The Company engaged an
independent firm of appraisers to perform a valuation of the purchased assets
and determined that the price paid represented a fair price and that no
adjustment needs to be made.
Employment of Kelly Kaneda
The Company subsequently hired
Kelly Kaneda, the originator of the Scrapbook label at a salary of $150,000 per
year for the first 12 months, increasing by $25,000 per year for each of three
additional years. In addition, Mr. Kaneda shall receive a commission of one and
one-half percent (1.5%) on the net sales of the Scrapbook Division. Net sales
shall be defined as gross sales less discounts, markdowns, returns, losses for
uncollected accounts, and other allowances actually taken by customers.
9. Related Party Transactions
Craig Soller, the brother of the
Companys Chief Executive Officer, Stephen Soller, is a consultant to the
Company. See Note 3 for transactions involving Craig Soller.
Effective May 21, 2009, the
Company appointed Dru Narwani and Charles Shaker to our board of directors and
to our audit committee. Dru Narwani has been a consultant to the Company and
received 500,000 stock options as a consultant. See note 3 for transactions
involving Dru Narwani. We have not been party to any other transaction with
either of Dru Narwani or Charles Shaker, since the beginning of
our last fiscal year, or any currently proposed transaction with either of Dru
Narwani or Charles Shaker, in which we were or will be a participant and where
the amount involved exceeds the lesser of $120,000 or one percent of the average
of our total assets at year-end for the last two completed fiscal years. Charles
Shaker is a representative of Providence Wealth Management Ltd., from whom we
have borrowed $1,000,000 under the terms of a Convertible Loan Agreement dated
for reference January 15, 2009.
Convertible Notes Payable
On March 3, 2008 the Company
entered into a Revolving Loan Agreement with two of the shareholders of the
Company, Sinecure Holdings, Inc. and Capella Investments, Inc. (changed to Peter
Hough, an individual). The loan allows the Company to borrow and repay, on a
revolving basis, up to an outstanding amount of $750,000. The outstanding
principal balance of the Loan bears interest, payable monthly, at a rate of 8%
per annum. The loan is secured by a lien on the assets of the Company, except
for factored receivables.
The Loan was due to be repaid in
full by November 30, 2008. As consideration for the loan, the Company agreed to
pay 68,180 of its Common shares as loan fees. At March 31, 2008, $500,000 was
advanced and the Company recorded an expense of $25,000 included in operating
expenses equivalent to the issuance of 45,454 shares of the Companys common
stock at the fair market value of $0.55 per share, the closing price of the
Companys common shares on the first advance date of February 26, 2008. The
Company drew a further advance on April 10, 2008 and recorded an expense in
general and administrative expenses of $23,863 equivalent to the issuance of
22,726 shares of its common stock at the fair market value of $1.05, the closing
price of the Companys common stock on April 10, 2008.
At any time after August 31,
2008, if there was an outstanding amount on the Loan, the lenders may convert,
by written notice, either a portion or the total amount of the outstanding loan
to common shares of the Company at a price per share equal to the lesser of:
|
a)
|
the average closing bid for the five (5) trading days
immediately preceding the first advance date of February 26, 2008;
or,
|
|
|
|
|
b)
|
the average closing bid price for the five (5) trading
days immediately preceding the notice of intent to
convert.
|
On April 9, 2009 the Company
agreed to convert $375,000 plus accrued interest to April 30, 2009 into common
shares of the Company at a conversion price of $0.10 per share. In addition, the
Company agreed to issue one warrant to purchase one Common share for every two
shares to be issued at an exercise price of $0.25 per warrant exercisable for
twelve months from issuance. The conversion was effective April 30, 2009 and the
Company issued 4,025,000 shares of Common stock and 2,12,5000 warrants.
The Loan was modified on June 15,
2009 to conform to a new financing and now bears interest at 9% per annum,
compounded and payable bi-annually, on the outstanding principal, and repayable
on or before April 30, 2011. The note is now convertible into common shares at
$.10 per share ( 3,7500,000 shares of stock) and when converted the company will
issue warrants equal to one half of the shares converted or a maximum of
1,875,000 warrants exercisable at $.15 per share for a period of 24 months.
These features gave rise to the assignment of value to the warrant and the
beneficial conversion feature equal to $219,992 which is accounted for as
discount on the note and a credit to additional paid in capital. The value of
the warrants were determined by the Black Scholes option pricing method using
the current stock price , exercise price of the warrants, volatility of 210% and
a risk free interest rate of 1.1% . The Beneficial conversion feature value was
set at its intrinsic value after consideration of the relative value of the
warrants and the notes. The discount is being amortized on the interest method
over the life of the loan.
Convertible Revolving Loan Agreement Payable to
Shareholder
On January 15, 2009 the Company
entered into a revolving loan agreement with Providence Wealth Management Ltd, a
British Virgin Islands Company (Providence), whereby Providence agreed to loan
the Company the aggregate principal amount of $1,000,000 for general corporate
purposes. The loan is issued as follows:
|
(i)
|
The first advance of $700,000 on the date of execution of
the loan agreement;
|
|
|
|
|
(ii)
|
subject to the fulfillment of certain conditions, by
advance of up to an additional US$300,000; and bearing interest at 9% per
annum on the outstanding principal, and repayable on or before July 31,
2009.
|
The first advance of $700,000
occurred on January 16, 2009 and a second advance of $300,000 occurred on
January 27, 2009.
On June 12, 2008 the Company had
entered into a revolving loan agreement dated effective March 3, 2008, with
Sinecure Holdings Limited, a British Virgin Islands company, and Capella
Investments Inc., a Nevada company, whereby Sinecure and Capella agreed to loan
us the aggregate principal amount of US$750,000 for general corporate purposes,
above. Also on June 12, 2008, we entered into a security agreement dated
effective March 3, 2008, with Sinecure and Capella, whereby we agreed to create
a security interest by way of priority security interest in our present and
after-acquired personal property and such other collateral described in the
Security Agreement in favor of Sinecure and Capella. On January 16, 2009 we
entered into a pari passu agreement with Providence, Sinecure and Capella,
whereby Panglobal, Providence, Sinecure and Capella agree that all security
interests issued will have equal priority and that the creation, registration,
filing and existence of the security interests will not constitute an event of
default under either of the two security agreements.
In connection with the Providence
loan agreement, the Company entered into a security agreement dated to be
effective back to March 3, 2008, with Providence, whereby the Company agreed to
create a security interest by way of priority security interest in our present
and after-acquired personal property and other collateral described in the
security agreement in favor of Providence.
The Providence loan may be
converted at any time after the first advance and before the maturity date into
common shares of the Company at a conversion price of $0.10 per share. In
addition, the Company had agreed to issue one warrant to purchase one Common
share for every two shares to be issued at an exercise price of $0.25 per
warrant exercisable for twelve months from issuance. On April 9, 2009,
Providence offered to convert $187,500 of the loan plus accrued interest to
April 30, 2009 into common shares of the Company. The conversion was effective
April 30, 2009 and the Company issued 2,120,000 shares of Common stock and
1,060,000 warrants.
The terms of the Loan were
modified on June 15, 2009 to conform to a new financing and now bears interest
at 9% per annum, compounded and payable bi-annually, on the outstanding
principal, and repayable on or before April 30, 2011. In note is now convertible
into common shares at $.10 per share (8,125,000 shares of stock ) and when
converted the company will issue warrants equal to one half of the shares
converted or a maximum of 4,062,000 warrants exercisable at $.15 per share for a
period of 24 months. These features gave rise to the assignment of value to the
warrant and the beneficial conversion feature equal to $570,986 which is
accounted for as discount on the note and a credit to additional paid in
capital. The value of the warrants were determined by the Black Scholes option
pricing method using the current stock price , exercise price of the warrants,
volatility of 210% and an risk free interest rate of 1.1% . The Beneficial
conversion feature value was set at its intrinsic value after consideration of
the relative value of the warrants and the notes. The discount is being
amortized on the interest method over the life of the loan.
Convertible Loan Agreement and Subscription Agreements
On June 15, 2009, the Company
entered into a convertible loan agreement, dated for reference April 9, 2009,
with 15 new lenders, whereby the lenders agreed to loan the Company the
aggregate principal amount of US$1,000,000 bearing interest at 9% per annum,
compounded and payable bi-annually, on the outstanding principal, and repayable
on or before April 30, 2011. At the same time, the remaining outstanding balance
of US$1,187,500 under loan agreements with Sinecure Holdings Limited, Peter
Hough and Providence Wealth Management Ltd., (see above)
was conformed from the terms of those previous loan agreements
to the same terms as the June 15, 2009 convertible loan agreement under the Pari
Passu and Loan Modification Agreement described below.
Interest on all of the loans may be paid in cash or shares of
our common stock, or any combination thereof, at our discretion. If interest is
paid in shares, the conversion price will be US$0.15 in value of interest per
share.
At any time on or before April 30, 2011, any of the lenders may
give us written notice and convert all or a portion of the loan into units,
consisting of one share of our common stock and one common share purchase
warrant, at a price per unit of US$0.10 for a potential total of conversion
10,000,0000 shares. Each common share purchase warrant is exercisable into one
share of our common stock at a price of US$0.15 per share for a period of 24
months. These features gave rise to the assignment of values to the warrant and
the beneficial conversion feature equal to $567,755 which is accounted for as a
discount on the note and a credit to additional paid in capital. The value of
the warrants were determined by the Black Scholes option pricing method using
the current stock price , exercise price of the warrants, volatility of 210% and
an risk free interest rate of 1.1% . The Beneficial conversion feature value was
set at its intrinsic value after consideration of the relative value of the
warrants and the notes. The discount is being amortized on the interest method
over the life of the loan.
Pari Passu and Loan Modification Agreement
On June 15, 2009, the Company entered into a pari passu and
loan modification agreement, dated for reference April 9, 2009, with Providence
Wealth Management Ltd., Sinecure Holdings Limited, Peter Hough, an individual,
and Chelsea Capital Corporation (representing the 15 new lenders described
above), whereby it was agreed that:
(a) US$1,187,500, representing the
aggregate balance of the outstanding loans to the company pursuant to: (i) the
loan agreement dated effective March 4, 2008 with Sinecure Holdings Limited and
Capella Investments Inc. (Capella Investments subsequently transferred all its
interest under such loan agreement to Peter Hough), and (ii) the loan agreement
dated January 16, 2009 with Providence Wealth Management Ltd., would be
converted from the terms of the such previous loan agreements to the terms of
the convertible loan agreement described above; and
(b) all security interests created
pursuant to: (i) the security agreement dated for reference April 9, 2009 for
the benefit of Chelsea Capital; (ii) the security agreement dated March 4, 2008
for the benefit of Sinecure Holdings and Peter Hough; and (iii) the security
agreement dated January 16, 2009 for the benefit of Providence Wealth
Management, will have equal priority and that the creation, registration, filing
and existence of the security interests will not constitute an event of default
under any of such security agreements.
Conversion of Accounts Payable to Common Shares
On April 9, 2009 the Company agreed to convert an amount of
$150,000 owed to one of the Companys apparel vendors into common shares of the
Company at a conversion price of $0.10 per share. In addition, the Company
agreed to issue one warrant to purchase one Common share for every two shares to
be issued at an exercise price of $0.25 per warrant exercisable for twelve
months. The conversion is effective April 30, 2009 and the Company authorized
the issuance of 1,500,000 shares of Common stock and 750,000 warrants.
10. Consulting Agreement for Sosik
On August 20, 2007 the Company
signed a consulting agreement with Lolly Factory, LLC and its sole shareholder
(Consultant) to provide sales and merchandising consulting services for the
Sosik apparel division through December 31, 2010. Consulting fees totaling
$452,125 were payable between September 2007 and June 2008 and have been fully
paid. In addition, under the consulting agreement the Consultant shall earn a
3.5%
(reduced to 2.6% in March 2009) commission on the Sosik
divisions net sales. The Consultant also earned 100,000 of our common shares
payable each month from September, 2007 to June, 2008, up to an aggregate of
1,000,000 common shares which shares were deemed to be earned and vested each
month. The Company recorded sales commission expense of $174,564 for the three
months ended June 30, 2009.
The Consultant and the Company have established sales targets
totaling $30.0 million for calendar year 2008, $45.0 million for calendar year
2009 and $60.0 million for calendar year 2010. The Consultant can earn up to
1,500,000 additional common shares of Panglobal Brands Inc. according to the
following schedule:
|
(i)
|
500,000 shares upon meeting the sales target for calendar
year 2008;
|
|
|
|
|
(ii)
|
500,000 shares upon meeting the sales target for calendar
year 2009; and,
|
|
|
|
|
(iii)
|
500,000 shares upon meeting the sales target for calendar
year 2010.
|
The sales target for calendar
2008 was not met and the Company had not accrued an expense for issuing shares
for meeting the sales target for 2008 and at June 30, 2009 has not accrued an
expense for issuing shares for meeting the sales target for 2009. On August 19,
the Company and Lolly Factory LLC agreed to terminate the consulting Agreement
(see subsequent events).
11. Common Stock
Prior to December 15, 2006, the
Companys Articles of Incorporation authorized the issuance of 100,000,000
shares of the Companys common stock with a par value of $0.0001 per share. On
February 2, 2007 the Company increased the number of its authorized shares of
common stock to 600,000,000 shares. The Company does not have any preferred
stock authorized.
On February 2, 2007, the Company
effected a six-for-one forward split of its outstanding common stock. All common
share amounts referred to herein are presented on a post-split basis. All
options referred to herein were issued on a post-split basis.
Mynks initial capitalization
consisted of cash of $497,700 in exchange for the issuance of 10,000,000 shares
of Mynk common stock (equivalent to 2,884,612 shares of Panglobal common
stock).
On May 11, 2007, pursuant to a
Share Exchange Agreement dated as of February 15, 2007 (the Share Exchange
Agreement) by and among Panglobal, the shareholders of Mynk Corporation
(Selling Shareholders) and Mynk, Panglobal issued 3,749,995 shares of its
common stock in exchange for all of the issued and outstanding shares of Mynk,
issued 975,000 shares of it common stock in payment of $390,000 of outstanding
loans to Mynk, and agreed to reimburse a shareholder of Mynk up to $100,000 for
outstanding amounts due (the Exchange). Previously, on February 3, 2006, Mynk
had issued 10,000,000 shares of its common stock to its founders for $497,700 in
cash, and 3,000,000 shares of its common stock valued at $149,310, as loan fees
on June 20, 2006, for a total of 13,000,000 shares, which constituted all of the
issued and outstanding shares of Mynk prior to the Exchange. The share exchange
was conducted on the basis of 0.2884615 common shares of Panglobal for every one
common share of Mynk.
The Company raised $4,000,000 in
a private placement selling 8,000,000 of its common shares at a price of $0.50
per share which officially closed on July 10, 2008; but was reflected at June
30, 2008 as cash had been received by the Company at quarter-end.
The Company issued 560,000 shares
pursuant to the exemption from registration under the United States Securities
Act of 1933 provided by Section 4(2), Section 4(6) and/or Rule 506 of Regulation
D promulgated under the 1933 Act to four (4) investors who are accredited
investors within the respective meanings ascribed to that term in Rule 501(a)
under the 1933 Act.
The Company issued 7,440,000
shares to eighteen (18) non U.S. persons (as that term is defined in Regulation
S of the Securities Act of 1933) in an offshore transaction relying on
Regulation S and/or Section 4(2) of the Securities Act of 1933.
On February 6, 2009, the Company
raised $370,000 in a private placement selling 3,700,000 units consisting of
3,700,000 common shares at a price of $0.10 per share plus 1,850,000 warrants to
purchase common shares at a price of $0.25 per share. The warrants are
exercisable for twelve months. The Company issued 3,700,000 shares to four (4)
non U.S. persons (as that term is defined in Regulation S of the Securities Act
of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2)
of the Securities Act of 1933.
12. Commitments and Contingencies
The Companys executive and head
office moved on February 15, 2008 to 2853 E. Pico Blvd., Los Angeles, CA 90023.
The Company has signed a three year lease for the new head office measuring
18,200 square feet at a monthly rental of $11,500. The lease began on January 1,
2008 and the Company moved into the new premises on February 15, 2008. Total
rent expense including sales showrooms for the three months ended June 30, 2009
and 2008 was $94,428 and $92,991, respectively. Total rent expense including
sales showrooms for the nine months ended June 30, 2009 and 2008 was $185,549
and $143,334, respectively.
The table below sets forth the
Companys lease obligations through 2013.
Year ending September 30,
|
|
2009
|
$
|
85,953
|
|
2010
|
|
353,528
|
|
2011
|
|
222,609
|
|
2012
|
|
123,027
|
|
2013
|
|
10,278
|
|
|
|
|
|
|
$
|
795,395
|
|
The Company is periodically
subject to various pending and threatened legal actions that arise in the normal
course of business. The Companys management believes that the impact of any
such litigation will not have a material adverse impact on the Companys
financial position or results of operations. On September 19, 2008, Mynk
Corporation, our wholly-owned subsidiary, sued Delias Inc., a customer, in the
Superior Court of the State of California, for goods shipped, but unpaid, in the
amount of $604,081.
13. Income Taxes
Potential benefits of income tax
losses are not recognized in the accounts until realization is more likely than
not. The Company has adopted SFAS No. 109 Accounting for Income Taxes as of
its inception. Pursuant to SFAS No. 109 the Company is required to compute tax
asset benefits for net operating losses carried forward. The potential benefits
of net operating losses have not been recognized in these consolidated financial
statements because the Company cannot be assured it is more likely than not it
will utilize the net operating losses carried forward in future years.
The deferred tax benefit is
composed of the following:
|
|
June 30,2009
|
|
|
September 30, 2008
|
|
Deferred tax benefit: Federal
|
$
|
4,913,000
|
|
$
|
4,913,000
|
|
Deferred tax benefit: State
|
|
1,276,000
|
|
|
1,276,000
|
|
Total benefit of NOL carry
forward
|
|
6,189,000
|
|
|
6,189,000
|
|
Valuation allowance
|
|
(6,189,000
|
)
|
|
(6,189,000
|
)
|
Total
|
$
|
--
|
|
$
|
--
|
|
As of June 30, 2009 unused net
operating losses equal to $13,379,000 are available for 17 years to offset
future years federal and state taxable income. SFAS 109 requires that the tax
benefit of such NOLs be recorded using current tax rates as an asset to the
extent management assesses the utilization of such NOLs to be more likely than
not. Based upon the Company's short term historical operating performance, the
Company provided a full valuation allowance against the deferred tax asset.
14. Subsequent Events
On July 31, 2009 Jacques Ninio resigned as a director of the
Company.
On August 19, 2009 the Company and Lolly Factory LLC agreed to
terminate the Consulting Agreement. As an inducement to for early termination,
the Company agreed to:
|
a)
|
Compensate Lolly Factory LLC for 2009 commissions earned
for the difference between the original 3.5% commission rate and the
revised commission rate of 2.6% instituted this year. The company agreed
to pay 50% of the difference, which amounts to $42,940 in Common shares of
the Company at a valuation of $0.20 per share. The amount of $42,940 will
be charged to expense in the period ending September 30, 2009 and the
Company will issue 214,700 shares to Lolly Factory LLC.
|
|
|
|
|
b)
|
Compensate Lolly Factory LLC in Common shares of the
company based upon the original sales targets set for 2008 and 2009. For
the calendar year 2008, Lolly Factory LLC had approximately $12.5 million
in net sales versus a target of $30.0 million and the Company agreed to
pro-rata compensate Lolly Factory LLC 207,500 shares and will record an
expense of $18,675 for the period ending September 30, 2009. For the
calendar year 2009, the Company will calculate the net sales attributed to
Lolly Factory LLC and pro rate the number of shares due based upon a
target of $45.0 for the full year. Through June 30, 2009, Lolly Factory
LLC has approximately $7.7 million in net sales and the Company will issue
85,000 shares and record an expense of $7,650 in the period ending
September 30, 2009.
|
The date through which subsequent events have been evaluated is
September 21, 2009, which is the date the financial statements were issued.
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes for quarter
ended June 30, 2009 and the factors that could affect our future financial
condition and results of operations. Historical results may not be indicative of
future performance.
Corporate Overview and History
We
were incorporated on March 2, 2005, under the laws of the State of Delaware,
under the name EZ English Online Inc. Since incorporation, we were engaged in
the development of an online teacher training course to teach English as a
second language.
On
July 3, 2006, our common stock was approved for quotation on the OTC Bulletin
Board.
On
February 2, 2007, we affected a forward stock split of our authorized and issued
and outstanding shares on a six-for-one basis. The forward split resulted in the
increase of our authorized capital from 100,000,000 shares of common stock with
a par value of $0.0001 to 600,000,000 shares of common stock with a par value of
$0.0001.
On
February 2, 2007, we completed a merger with our wholly owned subsidiary
Panglobal Brands Inc. As a result, we changed our name from EZ English Online
Inc. to Panglobal Brands Inc. Our subsidiary was incorporated on January 22,
2007, specifically for the purpose of the merger. The six-for-one forward stock
split, merger and name change became effective with our listing on NASDAQs OTC
Bulletin Board on February 6, 2007 and our trading symbol was changed to PNGB.
On
May 11, 2007, we acquired all of the issued and outstanding shares of Mynk
Corporation. Mynk is now our wholly-owned, operating subsidiary. With the
acquisition of Mynk, we changed our business focus to that of our newly acquired
subsidiary and are now engaged in the business of the design, production and
sale of clothing and accessories. We intend to acquire and create brands for the
contemporary apparel market in the U.S. and international markets.
Our Current Business
Business Strategy
Our
strategy is to build a series of apparel brands, consisting of mainly womens
apparel, and to build brand recognition by marketing our products to fashion
conscious, affluent consumers who shop in high-end boutiques and department
stores and who want to wear and be seen in the latest and most fashionable
clothing and accessories. We plan to update our product offerings continually to
be seen as a trend setter in fashionable clothing and accessories. We also are
targeting the junior market and design, have manufactured and sell junior denim,
t-shirts, dresses and other apparel. Lastly, based upon our branded products, we
expect to be offered the opportunity to manufacture private label womens
apparel including dresses, skirts and knit and woven tops.
We
operate all of our apparel businesses through our wholly-owned subsidiary, Mynk
Corporation.
Our
divisions are aggregated into three major consumer market product groupings:
Sosik, Scrapbook and Contemporary.
The
major consumer divisions are as follows:
SOSIK - Sosik designs, merchandises and
sells junior t-shirts, dresses, skirts and knit and woven tops and other apparel
manufactured in Asia. Junior apparel includes clothing for girls ages 14-22 as
well as products for children ages 6-14. Sales of Sosik include products that
will be sold under private labels and commenced in October, 2007 and shipments
commenced in January 2008. Approximately 70% of our revenue for our fiscal year
ended September 30, 2008 and 57% for the three months ended June 30, 2009
related to Sosik. Customers include Charlotte Russe, Forever 21, Wet Seal, Ross,
J.C. Penney, and Burlington Coat Factory.
23
SCRAPBOOK - Scrapbook, Scrapbook
Originals and Crafty Couture trademarks were acquired June 18, 2008. The
Scrapbook labels are aimed at junior (teen and early 20s) higher-end
contemporary markets and are known for mix and match prints and comfortable knit
fabrics. Scrapbook products can be found at better department stores and
boutiques. Major customers include Nordstroms, Dillards, Macys,
Anthropologie, Forever 21 and Hot Topic. The Crafty Couture label is lower
priced and aimed at a younger market, early through late teens.
The
following four divisions have been consolidated into the Contemporary Group.
TEA AND HONEY - Tea and Honey designs,
merchandises and sells womens mid-priced contemporary dresses. Tea and Honey is
a more casual look for women ages 22-35 with a vintage feel easily convertible
for wear by the working woman by day and for evening wear, as well. Tea and
Honey products commenced sales in June 2008. Retail customers include Macys,
Anthropologie and boutiques. Competition includes Velvet, Ella Moss and A Common
Thread.
HAVEN and PRIVATE LABEL - Based upon
our branded products, we started offering Haven lower priced dresses with
success and are beginning to be offered the opportunity by major department
stores to design, merchandise and manufacture private label womens apparel
including dresses, skirts and knit and woven tops. Our Haven shipments commenced
July, 2008 and include customers such as Nordsrom, Bloomingdales and Wet
Seal..
HAUTEUR MYNK - Hauteur Mynk is a
trademarked brand name selling premium denim jeans, skirts, dresses and shorts.
Mynk had sales during the fiscal year, but is currently dormant and only accepts
orders on current inventory. The Company decided that the premium denim market
was saturated with brands and decided to place Hauteur Mynk on hold.
In
all of our divisions, we purchase finished goods from numerous contract
manufacturers and to a lesser extent raw materials directly from numerous
textile mills and yarn producers and converters. We have not experienced
difficulty in obtaining finished goods or raw materials essential to our
business in any of our apparel business divisions.
We
outsource our warehousing and shipping functions to a third party warehousing
company designed to ship apparel products for multiple companies.
We
maintain a company website at www.panglobalbrand.com where examples of our
products can be seen.
Consulting Agreement for Sosik Division
On
August 20, 2007 we signed a consulting agreement with Lolly Factory, Inc. and
its sole shareholder,, the Consultant, to provide sales and merchandising
consulting services for the Sosik and Juniors apparel divisions through December
31, 2010. Consulting fees totaling $452,125 were payable between September 2007
and June 2008 and have been fully paid at September 30, 2008. The Consultant
also earned 100,000 of our common shares payable each month from September 2007
to June 2008, up to an aggregate of 1,000,000 common shares which shares were
deemed to be earned and vested each month. In addition, under the consulting
agreement, as amended, the Consultant would earn a 2.60% commission on the
Sosik/Junior divisions net sales. We recorded sales commission expense of
$174,564 for the three months ended June 30, 2009.
We
and the Consultant established sales targets totaling $30.0 million for calendar
year 2008, $45.0 million for calendar year 2009 and $60.0 million for calendar
year 2010. Pursuant to the Consulting Agreement, the Consultant could have
earned up to 1,500,000 additional common shares of Panglobal Brands Inc.
according to the following schedule:
|
(i)
|
500,000 shares upon meeting the sales target for calendar
year 2008;
|
|
|
|
|
(ii)
|
500,000 shares upon meeting the sales target for calendar
year 2009; and,
|
|
|
|
|
(iii)
|
500,000 shares upon meeting the sales target for calendar
year 2010.
|
24
The
sales target for calendar year 2008 was not met, and, we did not accrue an
expense for shares payable to the Consultant for that year. At June 30, 2009 we
had not accrued an expense for shares payable for meeting the sales target for
2009.
On
August 19, 2009 the Company and Lolly Factory LLC agreed to terminate the
Consulting Agreement. As an inducement for early termination, the Company agreed
to
|
a)
|
Compensate Lolly Factory LLC for 2009 commissions earned
for the difference between the original 3.5% commission rate and the
revised commission rate of 2.6% instituted this year. The company agreed
to pay 50% of the difference, which amounts to $42,940 in Common shares of
the Company at a valuation of $0.20 per share. The amount of $42,940 will
be charged to expense in the period ending September 30, 2009 and the
Company will issue 214,700 shares to Lolly Factory LLC.
|
|
|
|
|
b)
|
Compensate Lolly Factory LLC in Common shares of the
company based upon the original sales targets set for 2008 and 2009. For
the calendar year 2008, Lolly Factory LLC had approximately $12.5 million
in net sales versus a target of $30.0 million and the Company agreed to
pro-rata compensate Lolly Factory LLC 207,500 shares and will record an
expense of $18,675 for the period ending September 30, 2009. For the
calendar year 2009, the Company will calculate the net sales attributed to
Lolly Factory LLC and pro rate the number of shares due based upon a
target of $45.0 for the full year. Through June 30, 2009, Lolly Factory
LLC has approximately $7.7 million in net sales and the Company will issue
85,000 shares and record an expense of $7,650 in the period ending
September 30, 2009.
|
Manufacturing
We
outsource all of our manufacturing to third parties on an order-by-order basis.
These contract manufacturers are found in Asia, Mexico and the United States and
they will manufacture our garments on an order-by-order basis. We believe that
we will be able to meet our production needs in this way. Although the various
fabrics that we intend to use in the manufacture of our products will be of the
high quality, they are available from many suppliers in the United States and
abroad.
Employees
As
of August 14, 2009, we have 48 full-time employees: three (3) are executive,
nine (9) are design staff, fifteen (15) are production staff, ten (10) are
sewing staff, three (3) are sales staff, five (5) are customer service and
shipping staff and three (3) are accounting/administration staff. None of our
employees are subject to a collective bargaining agreement, and we believe that
our relations with our employees are good.
Quality Control
We
intend to establish a quality control program to ensure that our products meet
our high quality standards. We intend to monitor the quality of our fabrics
prior to the production of garments and inspect prototypes of each product
before production runs commence. We also plan to perform random on-site quality
control checks during and after production before the garments leave the
contractor. We also plan to conduct final random inspections when the garments
are received in our distribution centers. We believe that our policy of
inspecting our products at our distribution centers and at the vendors
facilities will be important to maintain the quality, consistency and reputation
of our products.
Competition
The
apparel industry is intensely competitive and fragmented. We compete against
other small companies like ours, as well as large companies that have a similar
business and large marketing companies, importers and distributors that sell
products similar to or competitive with ours.
We
believe that our competitive strengths consist of the detailing of the design,
the quality of the fabric and the superiority of the fit.
25
Government Regulation and Supervision
Our
operations are subject to the effects of international treaties and regulations
such as the North American Free Trade Agreement (NAFTA). We are also subject to
the effects of international trade agreements and embargoes by entities such as
the World Trade Organization. Generally, these international trade agreements
benefit our business rather than burden it because they tend to reduce trade
quotas, duties, taxes and similar impositions. However, these trade agreements
may also impose restrictions that could have an adverse impact on our business,
by limiting the countries from whom we can purchase our fabric or other
component materials, or limiting the countries where we might market and sell
our products.
Labelling
and advertising of our products is subject to regulation by the Federal Trade
Commission. We believe that we are in compliance with these regulations.
Information Systems
We
believe that high levels of automation and technology are essential to maintain
our competitive position and support our strategic objectives and we plan to
invest in computer hardware, system applications and networks to provide
increased efficiencies and enhanced controls.
Trademarks
We
own numerous trademarks for all of our brands including Sosik, Scrapbook,
Scrapbook Originals, Crafty Couture, Tea and Honey, Haven, Nela and Hauteur Mynk
and have applications pending for the balance of our branded apparel
products.
Marketing
We
market our products directly through our sales staff as well as through
showrooms which carry multiple lines of apparel products. In addition we attend
industry trade shows.
Financial Condition, Liquidity and Capital Resources
Cash Flows
The
following is a summary of our cash flows for the periods set forth below:
|
|
Nine Months Ended June 30
|
|
|
|
|
|
|
|
|
|
Percent Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Net Cash provided by/(used) in Operating
|
|
|
|
$
|
|
|
|
|
|
Activities
|
$
|
(2,129,337
|
)
|
|
(5,687,409
|
)
|
|
(62.6%)
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash used in Investing Activities
|
|
(3,363
|
)
|
|
(1,557,193
|
)
|
|
(99.78%)
|
|
Net Cash provided by/(used) in Financing
|
|
|
|
|
|
|
|
|
|
Activities
|
|
2,400,912
|
|
|
7,143,818
|
|
|
(66.4%)
|
|
Net Increase(decrease) in Cash
|
$
|
268,212
|
|
$
|
(100,784
|
)
|
|
---
|
|
Assets
At
June 30, 2009, our total assets were $6,337,018 compared to our assets of
$5,157,255 as at September 30, 2008. The increase of $1,179,763 results mainly
from the increases in our inventory and in our due from factor.
Our
total current assets totaled $4,589,198 at June 30, 2009 and $3,257,508 at
September 30, 2008. The increase in our current assets is primarily due to an
increase in our inventory and in our due from factor. Our net sales increased to
$20,214,494 for the nine months ended June 30, 2009 compared to sales of
$8,405,346 for the nine months ended June 30, 2008.
26
Liabilities and Working Capital
The
following is a summary of our working capital at June 30, 2009, September 30,
2008 and the percent increase or decrease between those dates:
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
June 30,
|
|
|
September
|
|
|
Increase
|
|
|
|
2009
|
|
|
30, 2008
|
|
|
(Decrease)
|
|
Current Assets
|
$
|
4,589,198
|
|
$
|
3,257,508
|
|
|
40.9%
|
|
Current Liabilities
|
|
4,505,885
|
|
|
4,783,083
|
|
|
(5.8%)
|
|
Working Capital (Deficit)
|
$
|
83,313
|
|
$
|
(1,525,575
|
)
|
|
---
|
|
The
increase in our working capital deficit by $83,313 is primarily due to a
discount of $1,298,346 taken to the notes payable based upon a valuation of the
beneficial conversion of the notes to Common stock of the Company at a price
less than the market value of the stock on June 15, 2009 and the
re-classification of the balance of the notes to long-term as the notes are now
due in April, 2011..
Cash Requirements and Additional Funding
Our
estimated cash requirements for the next 12 months are as follows:
EXPENSE
|
|
COST
|
|
Design and development
|
$
|
2,800,000
|
|
Selling and Shipping
|
$
|
2,400,000
|
|
General and administrative (excludes
non-cash compensation)
|
$
|
1,800,000
|
|
TOTAL
|
$
|
7,000,000
|
|
As
of June 30, 2009, we had $268,212 in cash. We estimate that we will require
$7,000,000 to carry out our planned operations over the next 12 months. We
expect that most of those expenses will be paid by the money we receive from our
net sales. However, the current weakness of the U.S. and world economies could
have harmful effects on our business. This year, we expect consumers to spend
less money on clothing than they have spent in recent years. Competition for
these limited expenditures will likely become more intense. If consumers spend
less and do not choose to spend their limited funds on our clothes, we will earn
less revenue and we will not be able to fund our future operations through
revenues from sales.
If
we are unable to pay for our operations with our revenues, we will need to raise
money by the sale of additional equity or debt securities or by borrowing
money.
There
can be no assurance that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonable
terms. If we are not able to obtain the additional financing on a timely basis,
we will not be able to meet our other obligations as they become due and we will
be forced to scale down or perhaps even cease the operation of our business.
There
is substantial doubt about our ability to continue as a going concern as the
continuation of our business is dependent upon a combination of our ability to
obtain further long-term financing, the successful and sufficient market
acceptance of any product offerings that we may introduce, the continuing
successful development of our product offerings, and, finally, our ability to
achieve a profitable level of operations. At this time, we have a backlog for
shipments of our products sales orders in excess $5.0 million for shipments
through November 2009. The issuance of additional equity securities by us could
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, would increase our liabilities and future cash commitments.
Debt
On
March 3, 2008, we entered into a Revolving Loan Agreement with two of our
shareholders. The loan allows us to borrow and repay, on a revolving basis, up
to an outstanding amount of $750,000. The outstanding principal balance of the
Loan bears interest, payable monthly, at a rate of 8% per annum. The Loan was
due to be
27
repaid in full by November 30, 2008. At June 30, 2009, we had
an outstanding balance of $750,000 on the loan which may be called or converted
into shares at any time. On April 9, 2009 we agreed to convert $375,000 plus
accrued interest to April 30, 2009 into our common stock at a conversion price
of $0.10 per share. In addition, we agreed to issue one warrant to purchase one
Common share for every two shares to be issued at an exercise price of $0.25 per
warrant exercisable for twelve months. The conversion is effective April 30,
2009 and we authorized the issuance of 4,025,000 shares of Common stock and
2,12,5000 warrants.
On
January 16, 2009 we entered into a revolving loan agreement with Providence
Wealth Management Ltd, a British Virgin Islands company, whereby Providence
agreed to loan us the aggregate principal amount of US$1,000,000 for general
corporate purposes. The first advance of $700,000 occurred on January 16, 2009
and a second advance of $300,000 occurred on January 27, 2009. The loan may be
converted at any time after the first advance and before the maturity date into
our companys shares of common stock at a conversion price of $0.10 per share.
In addition, we agreed to issue one warrant to purchase one Common share for
every two shares to be issued at an exercise price of $0.25 per warrant
exercisable for twelve months. On April 9, 2009, the borrower converted $187,500
of the loan plus accrued interest to April 30, 2009 into our common shares.
On
June 15, 2009, the Company entered into a convertible loan agreement, dated for
reference April 9, 2009, with 15 new lenders, whereby the lenders agreed to loan
the Company the aggregate principal amount of US$1,000,000 bearing interest at
9% per annum, compounded and payable bi-annually, on the outstanding principal,
and repayable on or before April 30, 2011. At the same time, the remaining
outstanding balance of US$1,187,500 under loan agreements with Sinecure Holdings
Limited, Peter Hough and Providence Wealth Management Ltd., (see above) was
conformed from the terms of those previous loan agreements to the same terms as
the June 15. 2009 convertible loan agreement under the Pari Passu and Loan
Modification Agreement described below.
The Nine Months Ended June 30, 2009 Compared to the Nine
Months Ended June 30, 2008
Revenue
Net
sales for the nine months ended June 30, 2009 totaled $20,212,494 versus
$8,405,346 for 2008. Sales of Sosik apparel totaled $10,830,000, sales of
Scrapbook apparel totaled $6,745,000 and the remainder of the sales were Tea and
Honey, and Haven dresses. During the year ended September 30, 2007, the only
product sold was Hauteur Mynk Jeans, all of our other brands commenced shipping
from January of 2008 onwards. Gross profit was $5,107,621 (25.3%) and 1,748,338
(20.8%) for the nine months ended June 30, 2009 and 2008, respectively. At this
time, we have a backlog of sales orders in excess $4.5 million for shipments
through November 2009. With the addition of Scrapbook, our sales mix is
changing. Approximately 38% of these orders are for Sosik products including
skirts and knit and woven tops, 34% are for Scrapbook apparel, and the balance
is for contemporary brands. Our Sosik products are sold through in-house sales
staff and we have corporate sales showrooms in Los Angeles and New York. Our
Scrapbook apparel is sold through in-house sales staff and independent sales
showrooms in Chicago, Dallas and Miami. Our Haven/Tea and Honey products are
sold through contract outside sales showrooms in Los Angeles earning sales
commissions of 10-12%.
Expenses
The
major components of our operating expenses are outlined in the table below:
|
|
Nine Months Ended June 30
|
|
|
|
|
|
|
|
|
|
Percent Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
Design & Development
|
$
|
2,214,211
|
|
$
|
2,580,354
|
|
|
(14.2)%
|
|
Selling & Shipping
|
|
2,119,729
|
|
|
1,613,190
|
|
|
31.4%
|
|
General and Administrative
|
|
3,023,214
|
|
|
4,146,940
|
|
|
(27.1)%
|
|
Depreciation & Amortization
|
|
95,163
|
|
|
62,686
|
|
|
51.8%
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
$
|
7,452,316
|
|
$
|
8,403,170
|
|
|
(11.3)%
|
|
28
The
decrease in our total expenses for the nine months ended June 30, 2009 was due
to a reduction of $1,094,408 in non-cash stock compensation expense
For
the nine months ended June 30, 2009, our design and development expenses totaled
$2,214,211, of which $1,133,000 was for design expenses and $1,081,000 was for
production and development expenses. We paid total salaries of $1,470,000.
Purchases of sample fabric and garments totaled $338,000. Contract labor and
consulting totaled $184,000 and manufacturing and design supplies totaled
$140,000. For the nine months ended June 30, 20008 we paid total salaries of
$1,753,000. Purchases of sample fabric and garments totaled $521,000. Contract
labor and consulting totaled $338,000 and manufacturing and design supplies
totaled $69,000.
For
the nine months ended June 30, 2009, our selling and shipping expense totaled
$2,119,729 compared to $1,613,190 for the nine months ended June 30, 20008 due
to the increase in sales volume. During the nine months ended June 30, 2009,
travel and trade show expenses totaled $218,000, sales showroom expense totaled
$211,000, sales salaries totaled $392,000 and sales commissions totaled
$681,000. Included in sales commission expenses for the nine months ended June
30, 2009 was $300,000 paid to Lolly Factory, Inc. Selling expenses for the nine
months ended June 30, 2008 consisted of travel and trade show expenses totaling
$134,000, sales showroom expense totaled $148,000, sales salaries totaled
$367,000 and sales consulting totaled $368,175. Included in sales consulting
expenses for the nine months ended June 30, 2008 was $360,675 paid to Lolly
Factory, Inc. The Scrapbook division commenced operations in the month of June,
2008
Our
general and administrative expenses consist of accounting, information
technology, website development, marketing and promotion, travel, meals and
entertainment, rent, insurances, office maintenance, communication expenses
(cellular, internet, fax, and telephone), office supplies, and courier and
postage costs.
For
the nine months ended June 30, 2009, our general and administrative expenses
(including non-cash compensation costs of $784,003) totaled $3,023,214. Key
components included salaries for executive, accounting and customer service
totaling $496,000, payroll taxes of $184,000, professional (accounting and
legal) fees of $340,000, postage and delivery of $127,000, insurance, including
health, liability and directors & officers liability of $186,000 and rent
of $105,000. Also in general and administrative expenses is factor fees of
$241,000 and provision for doubtful debts of $89,000. Not included in general
and administrative expenses is $95,163 in depreciation expense. For the nine
months ended June 30,, 2008 general and administrative expenses totaled
$4,146,940, of which $1,878,411 was non-cash compensation expenses. Key
components included salaries of $513,000, payroll taxes of $229,000, postage and
delivery of $182,000 insurance $120,000, rent of $96,600, bad debt expense of
$335,000 and professional fees of $281,000.
For
the nine months ended June 30, 2009 interest expense amounted to $480,011. This
is comprised of $218,818 of factor interest, $86,013 of interest on notes and
$175,180 of non-cash interest based amortizing the discount on notes payable due
to the beneficial conversion feature of the notes.
The Three Months Ended June 30, 2009 Compared to the
Three Months Ended June 30, 2008
Revenue
Net
sales for the three months ended June 30, 2009 totaled $8,585,235 versus
$5,321,794 for 2008. Sales of Sosik apparel totaled $4,897,000, sales of
Scrapbook apparel totaled $2,332,000 and the remainder of the sales were Tea and
Honey, and Haven dresses. During the three months ended June 30, 2008 sales of
Sosik apparel totaled $3,828,525, sales of Scrapbook apparel totaled $1,125,227
and the remainder of the sales were Nela and Tea and Honey dresses, private
label and Hauteur Mynk denim jeans. Gross profit for the three months ended June
30, 2009 and 2008 amounted to $2,029,741 or23.6% and $1,053,153
or19.8%respectively. At this time, we have a backlog of sales orders in excess
$4.5F million for shipments through November 2009. Our Sosik products are sold
through in-house sales staff and we have corporate sales showrooms in Los
Angeles and New York. Our Scrapbook apparel is sold through in-house sales staff
and independent sales showrooms in Chicago, Dallas and Miami. Our Haven/Tea and
Honey products are sold through contract outside sales showrooms in Los Angeles
earning sales commissions of 10-12%.
29
Expenses
The
major components of our operating expenses are outlined in the table below:
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
Percent Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
Design & Development
|
$
|
707,971
|
|
$
|
784,967
|
|
|
(9.8)%
|
|
Selling & Shipping
|
|
781,854
|
|
|
708,711
|
|
|
10.3%
|
|
General and Administrative
|
|
1,109,118
|
|
|
1,890,168
|
|
|
(41.3)%
|
|
Depreciation & Amortization
|
|
32,333
|
|
|
26,862
|
|
|
20.4%
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
$
|
2,631,276
|
|
$
|
3,410,708
|
|
|
(22.8)%
|
|
The
overall decrease of $779,000 for the three months ended June 30, 2009 was due to
the decrease in non-cash compensation expenses by $428,000 and a $300,000 bad
debt expense taken at June 30, 2008. Further, the Scrapbook division, only had
expenses for the month of June 20008.
For
the three months ended June 30, 2009 design and development expenses totaled
$707,971, of which $386,000 was for design expenses and $322,000 was for
production and development expenses. Staffing in these departments has been
reduced and duties re-assigned, such that staff work across divisional lines.
Salaries totaled $415,000. Purchases of sample fabric and garments totaled
$117,000. Contract labor and consulting totaled $100,000 and manufacturing and
design supplies totaled $44,000. For the three months ended June 30 design and
development expenses totaled $784,967. Salaries totaled $628,000. Purchases of
sample fabric and garments totaled $49,000. Contract labor and consulting
totaled $158,000 and manufacturing and design supplies totaled $20,000.
For
the three months ended June 30, 2009 selling and shipping expense totaled
$781,854 compared to $708,711 for the three months ended June 30, 20008 due to
the increase in sales volume. During the three months ended June 30, 2009,
travel and trade show expenses totaled $56,000, sales showroom expense totaled
$68,000, sales salaries totaled $96,000 and sales commissions totaled $362,000.
Included in sales commission expenses for the three months ended June 30, 2009
was $175,000 paid to Lolly Factory, Inc. Selling expenses for the three months
ended June 30, 2008 consisted of travel and trade show expenses totaling
$27,000, sales showroom expense totaled $56,000, sales salaries totaled $150,000
and sales commissions totaled $176,000. Included in sales consulting expenses
for the three months ended March 31, 2008 was $89,375 paid to Lolly Factory,
Inc. Scrapbook was in operation for the month of June only.
Our
general and administrative expenses consist of accounting, information
technology, website development, marketing and promotion, travel, meals and
entertainment, rent, insurances, office maintenance, communication expenses
(cellular, internet, fax, and telephone), office supplies, and courier and
postage costs.
For
the three months ended June 30, 2009 general and administrative expenses
(including non-cash compensation costs of $382,972) totaled $1,109,118. Key
components included salaries for executive, accounting and customer service
totaling $165,000, payroll taxes of $49,000, professional (accounting and legal)
fees of $75,000, postage and delivery of $47,000, insurance, including health,
liability and directors & officers liability of $55,000 and rent of
$35,000. Also included in general and administrative expenses are factor fees of
$118,000 and consulting expenses of $55,000. Not included in general and
administrative expenses is $32,333 in depreciation expense. For the three months
ended June 30, 2008 general and administrative expenses totaled $1,890,168, of
which $815,612 was non-cash compensation expenses. Key components included
salaries of $200,000, payroll taxes of $83,000, postage and delivery of $63,000,
insurances of $56,000, rent of $35,000 and professional fees of $120,000. Also
included in general and administrative expenses was bad debt expense of
$335,000.
For
the three months ended June 30, 2009 interest expense amounted to $309,434. This
is comprised of $97,077 of factor interest, $37,187 of interest on notes and
$175,180 of non-cash interest based amortizing the discount on notes payable due
to the beneficial conversion feature of the notes.
30
Off Balance-Sheet Arrangements
We
Company uses a factor for credit administration and cash flow purposes. Under
the factoring agreement, the factor purchases a portion of the Companys
domestic wholesale sales invoices and assumes most of the credit risks with
respect to such accounts for a charge of 0.75% of the gross invoice amount. The
Company can draw cash advances from the factor based on a pre-determined
percentage, which is 75% of eligible outstanding accounts receivable. The factor
holds as security substantially all assets of the Company and charges interest
at a rate of prime plus 1.0% on the outstanding advances. Effective October 27,
2008, the interest charge was increased to prime plus 2%. At March 31, 2008, the
Company had cash account in the amount of $400,000 with the factor to be used as
collateral for the loans advanced. On May 5, 2008 the cash collateral was
reduced to $300,000. The Company is liable to the factor for merchandise
disputes and customer claims on receivables sold to the factor. The factoring
agreement expired on March 4, 2009, but automatically renewed unless cancelled
by either side.
At
times, our customers place orders that exceed the credit that they have
available from the factor. We evaluate those orders to consider if the customer
is worthy of additional credit based on our past experience with the customer.
If we decide to sell merchandise to the customer on credit, we take the credit
risk for the amounts that are above their approved credit limit with the factor.
As of June 30, 2009, the amount of Due from Factor for which we bear the credit
risk is $123,837.
For
the three months ended June 30, 2009 and 2008, the Company paid a total of
approximately $97,066 and $30,338, respectively, of interest to the factor which
is reported as a component of interest expense in the consolidated statements of
income. For the nine months ended June 30, 2009, 2009 and 2008, the Company paid
a total of approximately $218,816 and $35,267, respectively, of interest to the
factor which is reported as a component of interest expense in the consolidated
statements of income.
Due
from factor, net of reserve for chargebacks and estimated sales returns as
presented in the balance sheet at June 30, 2009 and September 30, 2008 is
summarized below:
|
|
June 30 , 2009
|
|
|
September 30, 2008
|
|
Outstanding factored
receivables
|
$
|
5,260,588
|
|
$
|
3,126,405
|
|
Cash collateral reserve
|
|
302,249
|
|
|
303,426
|
|
|
|
|
|
|
|
|
|
|
5,562,837
|
|
|
3,429,831
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(3,008,894
|
)
|
|
(1,689,387
|
)
|
Reserves for chargeback and
sales returns
|
|
(347,690
|
)
|
|
(328,988
|
)
|
|
|
|
|
|
|
|
|
$
|
2,206,253
|
|
$
|
1,411,456
|
|
Critical Accounting Policies
Our
consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles used in the United
States. Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by managements
application of accounting policies. We believe that understanding the basis and
nature of the estimates and assumptions involved with the following aspects of
our consolidated financial statements is critical to an understanding of our
financials.
Inventory
is valued at the lower of cost or market, cost being determined by the first-in,
first-out method. We continually evaluate our inventories by assessing slow
moving current product as well as prior seasons inventory. Market value of
non-current inventory is estimated based on historical sales trends for each
category of inventory of our companys individual product lines, the impact of
market trends, an evaluation of economic conditions and the value of current
orders relating to the future sales of this type of inventory.
31
Revenue
from product sales is recognized as title passes to the customer upon shipment.
Sales returns and allowances for the three months ended June 30 totaled
$795,541, approximately 9.2% of sales. We have accrued an additional $347,000 as
of June 30, 2009 for estimated chargebacks and sales returns.
Accounts Receivable
The
Company extends credit to customers whose sales invoices have not been sold to
our factor based upon an evaluation of the customers financial condition and
credit history and generally require no collateral. Management performs regular
evaluations concerning the ability of our customers to satisfy their obligations
and records a provision for doubtful accounts based on these evaluations. Based
on historical losses, existing economic conditions and collection practices, our
allowance for doubtful accounts has been estimated to be $400,232 at June 30,
2009. The Companys credit losses for the periods presented have not
significantly exceeded managements estimates.
Inventory
Inventories
are valued at the lower of cost or market, with cost being determined by the
first-in, first-out method. The Company continually evaluates its inventories by
assessing slow-moving product and records mark-downs as appropriate. At June 30,
2009, inventories consisted of finished goods, work-in-process and raw
materials.
Property and Equipment
Property
and equipment are recorded at cost. Expenditures for major renewals and
improvements that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. When assets are retired or sold, the property accounts and related
accumulated depreciation and amortization accounts are relieved, and any
resulting gain or loss is included in operations.
Depreciation
is computed on the straight-line method based on the estimated useful lives of
the assets of five years. Leasehold improvements are amortized over the
remaining life of the related lease, which has been determined to be shorter
than the useful life of the asset.
Stock-Based Compensation
Effective
February 3, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS No. 123R), a revision to SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123R requires that we
measure the cost of employee services received in exchange for equity awards
based on the grant date fair value of the awards, with the cost to be recognized
as compensation expense in our financial statements over the period of benefit,
which is generally the vesting period of the awards. Accordingly, we recognize
compensation cost for equity-based compensation for all new or modified grants
issued after February 3, 2006 (Inception).
The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, and EITF 00-18, Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, whereas the value of the stock compensation is based upon
the measurement date as determined at either (a) the date at which a performance
commitment is reached or (b) at the date at which the necessary performance to
earn the equity instruments is complete.
Recent Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS No. 157), which establishes a formal
framework for measuring fair value under generally accepted accounting
principles. SFAS No. 157 defines and codifies the many definitions of fair value
included among various other authoritative literature, clarifies and, in some
instances, expands on the guidance for
32
implementing fair value measurements, and increases the level
of disclosure required for fair value measurements. Although SFAS No. 157
applies to and amends the provisions of existing FASB and AICPA pronouncements,
it does not, of itself, require any new fair value measurements, nor does it
establish valuation standards. SFAS No. 157 applies to all other accounting
pronouncements requiring or permitting fair value measurements, except for: SFAS
No. 123R, share-based payment and related pronouncements, the practicability
exceptions to fair value determinations allowed by various other authoritative
pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with
software revenue recognition. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company adopted SFAS No. 157 on October 1, 2008
The adoption of SFAS No. 157 did not have a material impact on the Companys
consolidated financial position or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159), which provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS No. 159 is
to reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the companys choice to use fair value on
its earnings. SFAS No. 159 also requires companies to display the fair value of
those assets and liabilities for which the company has chosen to use fair value
on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in SFAS No. 157 and SFAS No.
107. SFAS No. 159 is effective as of the beginning of a companys first fiscal
year beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the company makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157. The Company is currently assessing the potential
effect of SFAS No. 159 on its consolidated financial statements and has not
elected to adopt SFAS 159 at this time. The Company adopted SFAS No. 159 on
October 1, 2008 The adoption of SFAS No. 159 did not have a material impact on
the Companys consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141(revised 2007),
Business
Combinations
, and SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements
. SFAS No. 141R improves reporting by creating greater
consistency in the accounting and financial reporting of business combinations,
resulting in more complete, comparable, and relevant information for investors
and other users of financial statements. SFAS No. 141R requires the acquiring
entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS No. 160 improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report non-controlling (minority) interests in
subsidiaries in the same wayas equity in the consolidated financial statements.
Moreover, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and non-controlling interests by
requiring they be treated as equity transactions. The two statements are
effective for fiscal years beginning after December 15, 2008 and management is
currently evaluating the impact that the adoption of these statements may have
on our consolidated financial statements.
In
March 2008, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133,
(SFAS 161). SFAS 161 is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entitys derivative
instruments and hedging activities and their effects on the entitys financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments
33
within the scope of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133). SFAS 161 also applies to
non-derivative hedging instruments and all hedged items designated and
qualifying under SFAS 133. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. SFAS 161 encourages, but does not
require, comparative disclosures for periods prior to its initial adoption. We
will adopt SFAS 161 on November 15, 2008 and are currently evaluating the
potential impact on our consolidated financial statements when implemented.
In
April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3,
Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under FASB
Statement No. 142, Goodwill and Other Intangible Assets. This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. Early adoption is prohibited.
We are currently evaluating the impact, if any, that FSP 142-3 will have on our
consolidated financial statements.
As
a result of the recent credit crisis, on October 10, 2008, the FASB issued FSP
No. FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That
is Not Active. This FSP clarifies the application of SFAS No. 157 in a market
that is not active. The FSP addresses how management should consider measuring
fair value when relevant observable date does not exist. The FSP also provides
guidance on how observable market information in a market that is not active
should be considered when measuring fair value, as well as how the use of market
quotes should be considered when assessing the relevance of observable and
unobservable data available to measure fair value. This FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate in
accordance with SFAS No. 154, Accounting Changes and Error Corrections.
Adoption of this standard had no effect on our results of operations, cash flows
or financial position. Management does not believe that any other recently
issued, but not yet effective, accounting standards, if currently adopted, would
have a material effect on our consolidated financial statements.
Adoption of New Accounting Policies
Effective
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes (FIN 48). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The adoption
of the provisions of FIN 48 did not have a material effect on our consolidated
financial statements. As of September 30, 2008, no liability for unrecognized
tax benefits was required to be recorded.
We
currently files or have in the past filed income tax returns in Canada and the
United States. We are subject to tax examinations by tax authorities for tax
years ending in 2006 and subsequently.
Our
policy is to record interest and penalties on uncertain tax provisions as income
tax expense. As of June 30, 2009, we have not accrued interest or penalties
related to uncertain tax positions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable
34
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.
As
required by SEC Rule 13a-15(b), our management carried out an evaluation, with
the participation of our Chief Executive and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective at the reasonable
assurance level.
Management
found the following deficiencies in our disclosure controls and procedures:
There
is not adequate division or segregation of duties in our accounting department
that has three staff members, which includes the Chief Financial Officer.
Changes in Internal Control over Financial Reporting
We
have made the following changes in our internal controls over financial
reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting:
To
compensate for the inadequate segregation of duties, during the quarter, we
instituted a system of sign-offs and checks and balances within the accounting
department. More specifically, the Chief Financial Officer and Chief Executive
Officer has a series of written sign-offs to ensure that a multiple members of
management have reviewed and agreed to financial transactions before they are
recorded. We recognize that there is still an inadequate division of duties and
that we continue to have the weakness stated above.
We
intend to determine how to address our weaknesses in the future. At this time,
we do not know when we will take further action to address out weaknesses, what
measures we will take or how much it will cost.
Certifications
Certifications
with respect to disclosure controls and procedures and internal control over
financial reporting under Rules 13a-14(a) or 15d-14(a) of the Exchange Act are
attached to this Quarterly Report on Form 10-Q.
35
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other
than as described below, we know of no material, existing or pending legal
proceedings against our company, nor are we involved as a plaintiff in any
material proceeding or pending litigation. There are no proceedings in which any
of our directors, officers or affiliates, or any registered or beneficial
stockholder, is an adverse party or has a material interest adverse to our
interest. The outcome of open unresolved legal proceedings is presently
indeterminable. Any settlement resulting from resolution of these contingencies
will be accounted for in the period of settlement. We do not believe the
potential outcome from these legal proceedings will significantly impact our
financial position, operations or cash flows.
On
September 19, 2008 Mynk Corporation, our wholly-owned subsidiary, sued Delias
Inc., a customer, in the Superior Court of the State of California, for goods
shipped, but unpaid, in the amount of $604,081.
Elk
Brands Manufacturing Company, Inc. was suing Mynk Corporation, our wholly-owned
subsidiary, for an alleged payment owing of approximately $70,800, which amount
was previously accrued and is included in Accounts Payable and Accrued Expenses.
The claim has now been settled on February 2, 2009, with Mynk paying $40,000 to
Elk Brands in four monthly payments of $10,000 each commencing February 28, 2009
and ending May 31, 2009.
ITEM 1A. RISK FACTORS
Risks Related to our Business
Our continued operations depend on current fashion trends.
If our products and designs are not considered fashionable or desirable by
enough consumers, then our business could be adversely affected.
The
acceptance by consumers of our products and design is important to our success
and competitive position, and the inability to continue to develop and offer
fashionable and desirable products to consumers could harm our business. We
cannot be certain that our high-fashion clothing and accessories will be
considered fashionable and desirable by enough consumers to make our operations
profitable. There are no assurances that our future designs will be successful,
and any unsuccessful designs could adversely affect our business. If we are
unable to respond to changing consumer demands in a timely and appropriate
manner, we may fail to establish or maintain our brand name and brand image.
Even if we react appropriately to changes in consumer preferences, consumers may
consider our brand image to be outdated or associate our brand with styles that
are no longer popular. Should trends veer away from our style of products and
designs, our business could be adversely affected.
We may be unable to achieve or sustain growth or manage our
future growth, which may have a material adverse effect on our future operating
results.
We
cannot provide any assurances that our business plan will be successful and that
we will achieve profitable operations. Our future success will depend upon
various factors, including the strength of our brand image, the market success
of our current and future products, competitive conditions and our ability to
manage increased revenues, if any, or implement our growth strategy. In
addition, we anticipate significantly expanding our infrastructure and adding
personnel in connection with our anticipated growth, which we expect will cause
our selling, general and administrative expenses to increase in absolute dollars
and which may cause our selling, general and administrative expenses to increase
as a percentage of revenue. Because these expenses are generally fixed,
particularly in the short-term, operating results may be adversely impacted if
we do not achieve our anticipated growth.
Future
growth may place a significant strain on our management and operations. If we
experience growth in our operations, our operational, administrative, financial
and legal procedures and controls may need to be expanded. As a result, we may
need to train and manage an increasing number of employees, which could distract
our management team from our business. Our future success will depend
substantially on the ability of our
36
management team to manage our anticipated growth. If we are
unable to anticipate or manage our growth effectively, our operating results
could be adversely affected.
We face intense competition, including competition from
companies with significantly greater resources than ours, and if we are unable
to compete effectively with these companies, our business could be harmed.
We
face intense competition in the apparel industry from other, more established
companies. A number of our competitors have significantly greater financial,
technological, engineering, manufacturing, marketing and distribution resources
than we do. Their greater capabilities in these areas may enable them to better
withstand periodic downturns in the apparel industry, compete more effectively
on the basis of price and production and to develop new products in less time.
In addition, new companies may enter the markets in which we compete, further
increasing competition in the apparel industry.
We
believe that our ability to compete successfully depends on a number of factors,
including the style and quality of our products and the strength of our brand
name, as well as many factors beyond our control. We may not be able to compete
successfully in the future, and increased competition may result in price
reductions, reduced profit margins, loss of market share and an inability to
generate cash flows that are sufficient to maintain or expand our development
and marketing of new products, which would adversely impact the trading price of
our common stock.
Our business could suffer if our manufacturers do not meet
our demand or delivery schedules.
Although
we design and market our products, we outsource manufacturing to third party
manufacturers. Outsourcing the manufacturing component of our business is common
in the apparel industry and we compete with other companies for the production
capacity of our manufacturers. Because we are a small enterprise and many of the
companies with which we compete have greater financial and other resources than
we have, they may have an advantage in the competition for production capacity.
There is no assurance that the manufacturing capacity we require will be
available to us, or that if available it will be available on terms that are
acceptable to us. If we cannot produce a sufficient quantity of our products to
meet demand or delivery schedules, our customers might reduce demand, reduce the
purchase price they are willing to pay for our products or replace our product
with the product of a competitor, any of which could have a material adverse
effect on our financial condition and operations.
Government regulation and supervision could restrict our
business and decrease our profitability.
Any
negative changes to international trade agreements and regulations such as the
North American Free Trade Agreement or any agreements affecting international
trade such as those made by the World Trade Organization which result in a rise
in trade quotas, duties, taxes and similar impositions or which has the result
of limiting the countries from whom we can purchase our fabric or other
component materials, or limiting the countries where we might market and sell
our products, could decrease our profitability.
Increases in the price of raw materials or their reduced
availability could increase our cost of sales and decrease our profitability.
The
principal fabrics used in our business are cotton, synthetics, wools and blends.
The prices we pay for these fabrics are dependent on the market price for raw
materials used to produce them, primarily cotton. The price and availability of
cotton may fluctuate significantly, depending on a variety of factors, including
crop yields, weather, supply conditions, government regulation, economic climate
and other unpredictable factors. Any raw material price increases could increase
our cost of sales and decrease our profitability unless we are able to pass
higher prices on to our customers. Moreover, any decrease in the availability of
cotton could impair our ability to meet our production requirements in a timely
manner.
If we are unable to enforce our intellectual property rights
or otherwise protect our intellectual property, then our business would likely
suffer.
Our
success depends to a significant degree upon our ability to protect and preserve
any intellectual property we develop or acquire, including copyrights,
trademarks, patents, service marks, trade dress, trade secrets and similar
intellectual property. We rely on the intellectual property, patent, trademark
and copyright laws of the
37
United States and other countries to protect our proprietary
rights. However, we may be unable to prevent third parties from using our
intellectual property without our authorization, particularly in those countries
where the laws do not protect our proprietary rights as fully as in the United
States. The use of our intellectual property or similar intellectual property by
others could reduce or eliminate any competitive advantage we may develop,
causing us to lose sales or otherwise harm our business. We may need to bring
legal claims to enforce or protect such intellectual property rights. Any
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources. In addition, notwithstanding the rights we
have secured in our intellectual property, other persons may bring claims
against us that we have infringed on their intellectual property rights or
claims that our intellectual property right interests are not valid. Any claims
against us, with or without merit, could be time consuming and costly to defend
or litigate and therefore could have an adverse affect on our business. If any
of these risks arise, our business would likely suffer.
The recent weakening of economic conditions in the U.S. and
around the world could have harmful effects on our business. If these harmful
effects cause us to scale down our operations, then our share price will likely
decrease. If these harmful effects cause us to cease our operations, then our
shareholders will likely lose their entire investment in our company.
The
recent weakening of economic conditions in the U.S. and around the world,
including in the financial services and real estate industries, could have
harmful effects on our business. Weakening economic conditions generally lead to
less money being spent on clothing across the industry as a whole. Competition
for these limited resources will likely become more intense. If consumers spend
less and do not choose to spend their limited funds on our clothes, we will earn
less revenue and we will not be able to fund our future operations through
revenues from sales.
If
we cannot fund all of our future operations through revenue, we may choose to
raise money through sales of our equity securities. However, many investors have
recently seen large decreases in the value of various investments due to
declining share prices across many economic sectors. Because of this and other
market factors, if we choose to raise funds through the sale of our equity
securities, potential investors may be less likely to buy our equity securities
or we may be need to sell our equity securities at low prices, resulting in
fewer proceeds. This would make it difficult for us to raise adequate amounts to
fund our operations through the sale of our equity securities.
If
we are unable to fund all of our operations through revenues or the sale of our
equity securities, then we may choose to borrow money to pay for some of our
operations. A tightening of credit conditions has also been experienced in the
economy recently. Because of the recent credit crisis, it is possible that we
would not be able to borrow adequate amounts to fund our operations on terms and
at rates of interest we find acceptable and in the best interests of our
company.
If
we cannot fund our planned operations from revenue, the sale of our equity
securities or through incurring debt on acceptable terms, then we will likely
have to scale down or cease our operations. If we scale down our operations, our
share price would likely decrease and if we cease our operations, shareholders
will likely lose their entire investment in our company.
The recent weakening of economic conditions in the U.S. and
around the world could have harmful effects on the operations of our customers
and suppliers and the confidence of end consumers, all of which could cause our
operations to suffer and our revenues to decrease.
Some
of our customers or suppliers could experience serious cash flow problems due to
the current economic situation. If our customers or suppliers attempt increase
their prices, pass through increased costs, alter payment terms or seek other
relief, our business may suffer from decreased sales to final consumers or
increased costs to us. If any of our vendors or suppliers go out of business, we
may not be able to replace them with other companies of the same quality and
level of service. If the quality of our products and promptness of delivery
deteriorates as a result, our revenue will likely decrease as retailers and
consumers would be less likely to choose our products out of those available to
them.
38
We
do not expect that the difficult economic conditions are likely to improve
significantly in the near future, and further deterioration of the economy, and
even consumer fear that the economy will deteriorate further, could intensify
the adverse effects of these difficult market conditions.
We have a high concentration of sales to a number of key
department stores across all of our divisions. Loss of one of these key
customers would take time to replace and have a short term adverse impact on our
results of operations.
During
the three months ended June 30, 2009 sales to three customers accounted for
22.0%, 19.7% and 12.4% of our net sales. The acceptance by consumers of our
products and design is important to our success and competitive position, and
the loss of one of these key customers would have a short-term adverse impact on
our results from operations.
Risks Related to Our Company
We lack an operating history and have losses which we expect
to continue into the future. We have incurred a loss from operations and
negative cash flows from operations that raise substantial doubt about our
ability to continue as a going concern. There is no assurance our future
operations will result in profitable revenues. If we cannot generate sufficient
revenues to operate profitably, we may suspend or cease operations.
Our
inception date was February 3, 2006. We have a very short operating history upon
which an evaluation of our future success or failure cannot be made. As of June
30, 2009, our accumulated losses since inception amount to $17,228,628. In its
audit report dated January 8, 2009, our auditors stated that we have incurred a
loss from operations and negative cash flows from operations which raise
substantial doubt about our ability to continue as a going concern.
We
will continue to incur expenses and may incur operating losses in the future. We
cannot guarantee that we will be successful in becoming or remaining profitable
in the future. Failure to become and remain profitable would cause us to go out
of business.
Our management found the following deficiencies in our
disclosure controls and procedures
There
is not adequate division or segregation of duties in our accounting department
that has three staff members, which includes the Chief Financial Officer. To
compensate for the inadequate segregation of duties, we have instituted a system
of sign-offs and checks and balances within the accounting department. Further,
we are in the process of implementing a series of closing procedures and
checklists which must be signed-off and verified.
Risks Related to Our Securities
Our stock price is highly volatile and stockholders may be
unable to sell their shares, or may be forced to sell them at a loss.
The
trading price of our common stock has fluctuated significantly since our
incorporation (March 2, 2005), and is likely to remain volatile in the future.
The trading price of our common stock could be subject to wide fluctuations in
response to many events or factors, including the following:
-
quarterly variations in our operating results;
-
changes in financial estimates by securities analysts;
-
changes in market valuations or financial results of apparel companies;
-
announcements by us or our competitors of new products, or significant
acquisitions, strategic partnerships or joint ventures;
-
any deviation from projected growth rates in revenues;
-
any loss of a major customer or a major customer order;
39
-
additions or departures of key management or design personnel;
-
any deviations in our net revenue or in losses from levels expected by
securities analysts;
-
activities of short sellers and risk arbitrageurs; and,
-
future sales of our common stock.
The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and that have often been unrelated to the operating performance of these
companies. Any such fluctuations may adversely affect the market price of our
common stock, regardless of our actual operating performance. As a result,
stockholders may be unable to sell their shares, or may be forced to sell them
at a loss.
The U.S. Securities and Exchange Commission imposes
additional sales practice requirements on brokers who deal in our shares which
are penny stocks, some brokers may be unwilling to trade them. This means that
you may have difficulty reselling your shares and this may cause the price of
the shares to decline.
Our
shares are classified as penny stocks and are covered by Section 15(g) of the
Securities Exchange Act of 1934 and the Rules which impose additional sales
practice requirements on brokers/dealers who sell our securities in this
offering or in the aftermarket. For sales of our securities, the broker/dealer
must make a special suitability determination and receive from you a written
agreement prior to making a sale for you. Because of the imposition of the
foregoing additional sales practices, it is possible that brokers will not want
to make a market in our shares. This could prevent you from reselling your
shares and may cause the price of the shares to decline.
We do not intend to pay dividends and there will be less
ways in which you can make a gain on any investment in our company.
We
have never paid any cash dividends and currently do not intend to pay any
dividends for the foreseeable future. To the extent that we require additional
funding currently not provided for in our financing plan, our funding sources
may likely prohibit the payment of a dividend. Because we do not intend to
declare dividends, any gain on an investment in our company will need to come
through appreciation of the stocks price.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On
February 6, 2009, we raised $370,000 in a private placement selling 3,700,000
units consisting of 3,700,000 common shares at a price of $0.10 per share plus
1,850,000 warrants to purchase common shares at a price of $0.25 per share. The
warrants are exercisable for twelve months.
We
issued 3,700,000 shares to four (4) non U.S. persons (as that term is defined in
Regulation S of the Securities Act of 1933) in an offshore transaction relying
on Regulation S and/or Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
40
ITEM 5. OTHER INFORMATION
Convertible Loan Agreement and Subscription
Agreements
On
June 15, 2009, the Company entered into a convertible loan agreement, dated for
reference April 9, 2009, with 15 new lenders, whereby the lenders agreed to loan
the Company the aggregate principal amount of US$1,000,000 bearing interest at
9% per annum, compounded and payable bi-annually, on the outstanding principal,
and repayable on or before April 30, 2011. At the same time, the remaining
outstanding balance of US$1,187,500 under loan agreements with Sinecure Holdings
Limited, Peter Hough and Providence Wealth Management Ltd., (see above) was
conformed from the terms of those previous loan agreements to the same terms as
the June 15. 2009 convertible loan agreement under the Pari Passu and Loan
Modification Agreement described below.
Interest
on all of the loans may be paid in cash or shares of our common stock, or any
combination thereof, at our discretion. If interest is paid in shares, the
conversion price will be US$0.15 in value of interest per share.
At
any time on or before April 30, 2011, any of the lenders may give us written
notice and convert all or a portion of the loan into units, consisting of one
share of our common stock and one common share purchase warrant, at a price per
unit of US$0.10. Each common share purchase warrant is exercisable into one
share of our common stock at a price of US$0.15 per share for a period of 24
months.
Pari Passu and Loan Modification Agreement
On
June 15, 2009, the Company entered into a pari passu and loan modification
agreement, dated for reference April 9, 2009, with Providence Wealth Management
Ltd., Sinecure Holdings Limited, Peter Hough, an individual, and Chelsea Capital
Corporation (representing the 15 new lenders described above), whereby it was
agreed that:
(a) US$1,187,500, representing the
aggregate balance of the outstanding loans to the company pursuant to: (i) the
loan agreement dated effective March 4, 2008 with Sinecure Holdings Limited and
Capella Investments Inc. (Capella Investments subsequently transferred all its
interest under such loan agreement to Peter Hough), and (ii) the loan agreement
dated January 16, 2009 with Providence Wealth Management Ltd., would be
converted from the terms of the such previous loan agreements to the terms of
the convertible loan agreement described above; and
(b) all security interests created
pursuant to: (i) the security agreement dated for reference April 9, 2009 for
the benefit of Chelsea Capital; (ii) the security agreement dated March 4, 2008
for the benefit of Sinecure Holdings and Peter Hough; and (iii) the security
agreement dated January 16, 2009 for the benefit of Providence Wealth
Management, will have equal priority and that the creation, registration, filing
and existence of the security interests will not constitute an event of default
under any of such security agreements.
Changes in Directors and Officers
On
May 21, 2009 we appointed Dru Narwani and Charles Shaker as Directors of the
Company. On July 31, 2009, Jacques Ninio resigned as a Director of the Company.
Subsequent
events note regarding Changes in Directors and Officers: On August 20, 2009, we
announced the resignation of Stephen Soller as our Chief Executive Officer and
the appointment of Charles Lesser as Chief Executive Officer effective August
17, 2009. There were no disagreements between Mr. Soller and our company. Mr.
Soller remains on our board of directors along with Dru Narwani and Charles
Shaker. Charles Lesser is now our CEO and our CFO.
41
ITEM 6. EXHIBITS.
Exhibits required by Item 601 of Regulation S-B
Exhibit
Number
|
Description
|
(3)
|
Articles of Incorporation and Bylaws
|
3.1
|
Articles of Incorporation of Panglobal Brands Inc.
(formerly EZ English Online) (attached as an exhibit to our Form SB-2
filed January 3, 2006).
|
3.2
|
Bylaws of Panglobal Brands Inc. (formerly EZ English
Online) (attached as an exhibit to our Form SB-2 filed January 3, 2006).
|
3.3
|
Articles of Incorporation of Mynk Corp. (attached as an
exhibit to our Form SB- 2 filed February 3, 2006).
|
3.4
|
Bylaws of Mynk Corp. (attached as an exhibit to our Form
SB-2 filed February 3, 2006).
|
3.5
|
Certificate of Amendment (attached as an exhibit to our
Current Report on Form 8-K filed on February 6, 2007).
|
3.6
|
Certificate of Ownership (attached as an exhibit to our
Current Report on Form 8-K filed on February 6, 2007).
|
(10)
|
Material Contracts
|
10.1
|
PayPal User Agreement (attached as an exhibit to our Form
SB-2 filed February 3, 2006).
|
10.2
|
Affiliated Stock Purchase Agreement dated December 12,
2006 (attached as an exhibit to our Current Report on Form 8-K filed on
December 13, 2006).
|
10.3
|
Share Exchange Agreement between Panglobal Brands Inc.
and Mynk Corporation, dated February 15, 2007 (attached as an exhibit to
our Current Report on Form 8-K filed on February 20, 2007).
|
10.4
|
Consulting Agreement between our company, Lolly Factory,
LLC and Mark Cywinski dated September 16, 2007 (attached as an exhibit to
our Form 8-K filed September 27, 2006).
|
10.5
|
Lease Agreement with RFS Investments LLC, dated January
11, 2007 (attached as an exhibit to our Current Report on Form 8-K filed
on February 20, 2007).
|
10.6
|
Lease Agreement with YMI Jeanswear (attached as an
exhibit to our Annual Report on Form 10-KSB filed on January 15, 2008)
|
10.7
|
Lease Agreement with Jamison California Market Center,
L.P. (attached as an exhibit to our Annual Report on Form 10-KSB filed on
January 15, 2008)
|
10.8
|
Lease Agreement with Steven Goldstein (attached as an
exhibit to our Annual Report on Form 10-KSB filed on January 15, 2008)
|
10.9
|
Lease Agreement with TR 39th St. Land Corp. (attached as
an exhibit to our Annual Report on Form 10- KSB filed on January 15, 2008)
|
10.10
|
Loan Agreement dated January 16, 2009 with Providence
Wealth Management Ltd (attached as an exhibit to our current report on
Form 8-K filed on January 22, 2009)
|
10.11
|
Security Agreement dated January 16, 2009 with Providence
Wealth Management Ltd (attached as an exhibit to our current report on
Form 8-K filed on January 22, 2009)
|
10.12
|
Pari Passu Agreement dated January 16, 2009 with
Providence Wealth Management, Sinecure Holdings Limited and Capella
Investments Inc Ltd (attached as an exhibit to our current report on Form
8-K filed on January 22, 2009)
|
10.13
|
Loan Agreement dated March 4, 2008 with Sinecure Holdings
Limited and Capella Investments Inc Ltd (attached as an exhibit to our
current report on Form 8-K filed on January 22, 2009)
|
10.14
|
Security Agreement dated March 4, 2008 with Sinecure
Holdings Limited and Capella Investments Inc Ltd. (attached as an exhibit
to our current report on Form 8-K filed on January 22, 2009)
|
16
|
Letter re change in certifying accountant
|
16.1
|
Grobstein Horwath & Company LLP resignation dated
January 8, 2009.(attached as an exhibit to our current report on Form 8-K
filed on February 3, 2009)
|
16.2
|
Letter of Grobstein Horwath & Company LLP, dated
January 30, 2009 (attached as an exhibit to our current report on Form 8-K
filed on February 3, 2009)
|
42
* filed hereto
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PANGLOBAL BRANDS INC.
By: /s/ Charles A. Lesser
Charles A. Lesser
Chief
Executive Officer, Chief Financial Officer
(Principal Executive Officer,
Principal Financial Officer and Principal Accounting Officer)
Dated:
September 21, 2009
Panglobal Brands (CE) (USOTC:PNGB)
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