See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and September 30, 2006
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), and 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.
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. The Company is considered a
development stage company as defined in Statement of Financial Accounting
Standards No. 7, Accounting and Reporting by Development Stage Enterprises, as
it had not yet commenced any material revenue-generating operations, did not
have any material cash flows from operations, and was dependent on debt and
equity funding to finance its operations. The Company has elected September 30
as its fiscal year-end.
Basis of Presentation
On May 11, 2007, Mynk completed a
transaction with Panglobal, whereby Mynk became a wholly-owned subsidiary of
Panglobal (see Note 3). Panglobal was a development stage company and had
terminated its prior operations by that date and was essentially a shell company
seeking a new business opportunity. For financial reporting purposes, Mynk was
considered the accounting acquirer in the merger and the merger was accounted
for as a reverse merger. The determination to account for this transaction as a
reverse merger was based on the fact that the shareholders and officers of Mynk
acquired effective control of Panglobal at the conclusion of the transactions
described herein, through control of the Board of Directors and ownership of
approximately 43% of the issued and outstanding shares of common stock of
Panglobal. Additional factors that Panglobal considered in arriving at this
determination included that through a series of planned and interdependent
transactions beginning in December 2006, as disclosed in Panglobals prior
filings with the Securities and Exchange Commission, Panglobal and its
controlling shareholder (who owned approximately 79% of the outstanding common
shares in December 2006) terminated Panglobals prior business operations,
changed its name, appointed new officers and directors, entered into a series of
stock-based transactions funded by Panglobals controlling shareholder to
facilitate the acquisition and operations of Mynk, and raised approximately
$4,750,000 of equity capital from investors to fund the business operations of
Mynk as a wholly-owned subsidiary of Panglobal.
- 25 -
The controlling shareholder of
Panglobal returned 18,975,000 shares of common stock to the Company for
cancellation immediately prior to the closing of the transaction on May 10,
2007. Of the 11,396,550 shares of common stock retained by the Panglobal
shareholders on May 11, 2007 upon the closing of the transaction, 5,025,000
shares were owned by the controlling shareholder, resulting in the other public
shareholders owning 6,371,550 shares. Of such 5,025,000 shares, 2,025,000 shares
were subject to purchase and escrow agreements transferring such shares to new
management at June 30, 2007, and the Company expects that most of the remaining
3,000,000 shares will also be transferred to new management subsequent to
September 30, 2007.
Accordingly, the historical
financial statements presented herein are those of Mynk and do not include the
historical financial results of Panglobal, except for the period subsequent to
May 11, 2007. The stockholders equity section of Panglobal has been
retroactively restated for all periods presented to reflect the accounting
effect of the reverse merger transaction. All costs associated with the reverse
merger transaction were expensed as incurred.
2.
|
Business Operations and Summary of Significant
Accounting Policies
|
Going Concern and Plan of Operations
The Companys 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. The Company is in the development stage and has not
generated any material revenues from operations to date, 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 develop additional sources
of capital, and ultimately achieve profitable operations. As of September 30,
2007, the Company had an accumulated deficit of $4,758,107 and had incurred a
net loss of $3,924,871 and used net cash in operating activities of $3,599,653
for the year ended September 30, 2007. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
At September 30, 2007, the
Company had not yet commenced any material revenue-generating operations.
Principal activity through September 30, 2007 related to the Companys
formation, capital raising efforts and initial product design and development
activities. These activities are beginning to generate prospective sales and
significant shipments of apparel products will commence January, 2008. As such,
the Company has yet to generate any material cash flows from operations, and is
essentially dependent on debt and equity funding from both related and unrelated
parties to finance its operations.
Prior to February 28, 2007, the
Companys cash requirements were funded by advances from Mynks founders. On
February 27, 2007, the Company completed an initial closing of its private
placement (see Note 3), selling 9,426,894 shares of common stock at a price of
$0.45 per share and receiving net proceeds of $4,220,203. On February 28, 2007,
the Company completed a second closing of its private placement, selling
1,183,332 shares of common stock at a price of $0.45 per share and receiving net
proceeds of $532,499.
On October 23, 2007, the Company
closed a private placement of 2,871,759 units for gross proceeds of $2,153,819.
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.
Principles of Consolidation
The accompanying consolidated
financial statements include the financial statements of Panglobal and its
wholly-owned subsidiary, Mynk. All intercompany balances and transactions have
been eliminated in consolidation.
- 26 -
Inventories
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 September 30,
2007, inventories consisted of finished goods, work-in-process and raw
materials.
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. For the year ended September 30, 2007
and the period from February 3, 2006 (inception) to September 30, 2006, the
Company recognized sales returns of $ 456,367 and $0, respectively. Management
has evaluated the effects of estimating and accruing for sales returns in the
current and prior periods and determined the impact to be immaterial at this
time.
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.
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.
For federal income tax purposes,
substantially all expenses must be deferred until the Company commences business
operations and then they may be written off over a 60-month period. These
expenses will not be deducted for tax purposes and will represent a deferred tax
asset. 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.
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.
- 27 -
Adoption of New Accounting Policies
In December 2006, the FASB issued
FSP EITF 00-19-2, Accounting for Registration Payment Arrangements (EITF
00-19-2), which addresses an issuers accounting for registration payment
arrangements. EITF 00-19-2 specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB No. 5, Accounting for Contingencies. EITF
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. EITF 00-19-2 is effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to the date of issuance of EITF 00-19-2.
For registration payment arrangements and financial instruments subject to those
arrangements that were entered into prior to the issuance of EITF 00-19-2, EITF
00-19-2 is effective for financial statements issued for fiscal years beginning
after December 15, 2006, and interim periods within those fiscal years. Early
adoption of EITF 00-19-2 for interim or annual periods for which financial
statements or interim reports have not been issued is permitted. The Company
adopted EITF 00-19-2 effective December 31, 2006.
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 derecognition, 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 Company’s 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 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
September 30, 2007, the Company has no accrued interest or penalties related to
uncertain tax positions.
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 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 is currently
assessing the potential effect of SFAS No. 157 on its consolidated financial
statements.
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
- 28 -
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.
Management does not believe that
any other recently issued, but not yet effective, accounting standards, if
currently adopted, would have a material effect on the Company's financial
statements.
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 2,884,612 shares of common stock
issued to the founders of Mynk in conjunction with the closing of the reverse
merger transaction on May 11, 2007 have been presented as outstanding for all
periods presented.
Design and Development
Design and development costs related to the development of new
products are expensed as incurred.
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.
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.
Fair Value of Financial Instruments
The carrying amounts of cash and
cash equivalents, prepaid expenses, accounts payable, accrued expenses and due
to stockholder 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.
- 29 -
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 year ended September 30, 2007 and the period from February 3, 2006 (inception)
to September 30, 2006 amounted to $3,004 and $0, respectively.
Shipping and Handling Costs
The Company records shipping
and handling costs billed to customers as a component of revenue, and shipping
and handling costs incurred by the Company for inbound and outbound freight
are recorded as a component of cost of sales. Total shipping and handling costs
included as a component of cost of sales amounted to approximately $121,719
and $ 0 for the year ended September 30, 2007 and the period from February 3,
2006 (inception) to September 30, 2006, respectively.
3.
|
Share Exchange Agreement and Private
Placement
|
As a result of the sale of the
10,610,226 shares of common stock in late February 2007 at a per share price of
$0.45, and the acquisition of Mynk by Panglobal effective May 11, 2007, the
Company has determined that the grant date fair value charge to operations for
all stock options and other similar stock-based compensation that is amortizable
over future periods should begin on May 11, 2007, since that is the date on
which acquisition occurred and the period of benefit therefore began. Since the
Companys common stock traded on a very limited and sporadic basis prior to May
11, 2007, the Company has also determined that the best indicator of fair value
of the Companys common stock on May 11, 2007 was the $0.45 per share cash price
paid by the investors in the recent private placement, who owned approximately
40% of the issued and outstanding shares of common on May 11, 2007. These
determinations affected the accounting for the stock-based transactions noted
below through September 30, 2007.
Share Exchange Agreement
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. As a result of the Exchange, Mynk became a wholly-owned
subsidiary of Panglobal.
The Company also agreed to file
with the Securities and Exchange Commission, within a reasonable time following
the closing of the Share Exchange Agreement, a registration statement on Form
SB-2 to effect the registration of half of the shares of the common stock that
were issued to Mynk shareholders pursuant to the Share Exchange Agreement. There
is no specified filing deadline or financial penalty if the Company fails to
file the registration statement.
Pursuant to the Exchange,
Panglobal issued to the Selling Shareholders 3,749,995 shares of its common
stock. Panglobal had a total of 26,731,771 shares of common stock issued and
outstanding after giving effect to the Exchange and the 10,610,226 shares of
common stock issued in the Companys two private placements.
As a result of the Exchange and
the shares of common stock issued in the two private placements, on May 11,
2007, the stockholders of the Company immediately prior to the Exchange owned
11,396,550 shares of common stock, equivalent to approximately 43% of the issued
and outstanding shares of the Companys common stock, and the Company is now
controlled by the former stockholders of Mynk.
Private Placements
On February 27, 2007, in
anticipation of the Exchange, the Company sold an aggregate of 9,426,894 shares
of its common stock to fifty accredited investors in an initial closing of its
private placement at a per share price of $0.45, resulting in aggregate gross
proceeds to the Company of $4,242,103. Net cash proceeds to the Company, after
the deduction of all private placement offering costs and expenses of $21,900,
were $4,220,203.
- 30 -
On February 28, 2007, the Company
sold an aggregate of 1,183,332 shares of its common stock to nine accredited
investors in a second closing of the private placement at a per share price of
$0.45, resulting in aggregate gross proceeds to the Company of $532,499. Net
cash proceeds to the Company were also $532,499.
Stephen Soller, the Companys
Chief Executive Officer, purchased 291,666 shares in the private placement for
$131,250. Craig Soller, the brother of Stephen Soller and a consultant to the
Company, purchased 244,444 shares of common stock in the private placement for
$110,000. Three Mynk shareholders also purchased an aggregate of 299,999 shares
in the private placement for $134,500.
Stock Options
On January 18, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to Felix Wasser, the Companys Chief Financial Officer, a stock option
to purchase an aggregate of 250,000 shares of common stock, exercisable for a
period of five years at $0.30 per share, with one quarter vesting every six
months through January 18, 2009. The fair value of this option, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $97,500
($0.39 per share), and was being charged to operations ratably from May 11, 2007
through January 18, 2009. During the year ended September 30, 2007, the Company
recorded a charge to operations of $15,844 with respect to this option. Felix
Wasser resigned as an officer of the Company on August 21, 2007 and no further
charges to operations were recorded. Vesting has ceased and the 250,000 options
have been cancelled.
On February 12, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to Stephen Soller, the Companys Chief Executive Officer, stock options
to purchase an aggregate of 1,800,000 shares of common stock, exercisable for a
period of five years at $0.30 per share, with one-sixth vesting every six months
through February 12, 2010. The fair value of this option, as calculated pursuant
to the Black-Scholes option-pricing model, was determined to be $702,000 ($0.39
per share), and is being charged to operations ratably from May 11, 2007 through
February 12, 2010. During the year ended September 30, 2007, the Company
recorded a charge to operations of $95,727 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 - $0.45; exercise price - $0.30; expected life 4.67
4.75 years; expected volatility - 125%; expected dividend yield - 0%; risk-free
interest rate 5.0% .
On February 12, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to two consultants stock options to purchase an aggregate of 375,000
shares of common stock exercisable for a period of five years at $0.45 per
share, with one-third of the options vesting annually on each of February 11,
2008, February 11, 2009 and February 11, 2010. The fair value of these options,
as calculated pursuant to the Black-Scholes option-pricing model, was initially
determined to be $142,500 ($0.38 per share). The fair value of such options is
being charged to operations ratably from May 11, 2007 through February 11, 2010.
In accordance with EITF 96-18, options granted to consultants are valued each
reporting period to determine the amount to be recorded as an expense in the
respective period. On September 30,, 2007, the fair value of these options, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $281,250 ($0.75 per share), which resulted in a charge to operations of
$43,802 during the year ended September 30, 2007. As the options 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 options to exercise 250,000 shares of common stock
have been canceled at that time. Accordingly, there will be no further non-cash
compensation expenses charged relating to those 250,000 options subsequent to
September 30, 2007.
On February 12, 2007, the fair
value of the aforementioned stock options was calculated using the following
Black-Scholes input variables: stock price on date of grant - $0.45; exercise
price - $0.45; expected life 4.75 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% . On September 30, 2007, the
fair value of the aforementioned stock options was calculated using the
following Black-Scholes input variables: stock price of grant - $1.02; exercise
price - $0.45; expected life 4.625 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0%
- 31 -
On August 7, 2007, the Company
granted a consultant a stock option to purchase 100,000 shares of common stock
exercisable for a period of one year at $0.45 per share, all of which were fully
vested upon issuance, for past services through June 2007. The fair value of
this option, as calculated pursuant to the Black-Scholes option-pricing model,
was determined to be $69,000 ($0.69 per share), and was charged to operations at
June 30, 2007. For presentation purposes, these options have been treated as
granted and exercisable as of June 30, 2007 and were recorded at that date. At
August 7, 2007, the fair value of the aforementioned stock options was
calculated using the following Black-Scholes input variables: stock price of
grant - $1.00; exercise price - $0.45; expected life 1 year; expected
volatility - 125%; expected dividend yield - 0%; risk-free interest rate 5.0%
.
During the period from February
3, 2006 (Inception) through September 30, 2006, the Company did not issue any
stock options.
A summary of stock option activity for the year ended September
30, 2007 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2006
|
|
---
|
|
$
|
---
|
|
|
---
|
|
Granted
|
|
2,525,000
|
|
|
0.328
|
|
|
4.59
|
|
Exercised
|
|
---
|
|
|
---
|
|
|
---
|
|
Cancelled
|
|
(187,500
|
)
|
|
0.30
|
|
|
|
|
Options outstanding at September 30, 2007
|
|
2,337,500
|
|
$
|
0.331
|
|
|
4.48
|
|
Options exercisable at September 30,
2007
|
|
462,500
|
|
$
|
0.333
|
|
|
1.00
|
|
The aggregate intrinsic value of stock options outstanding at
September 30, 2007 was $1,180,000.
Share Purchase Agreements
In anticipation of the closing of
the Exchange and Private Placements, additional compensatory transactions were
entered into pursuant to various Share Purchase Agreements between Jacques
Ninio, the controlling shareholder of Panglobal at that time, and the Chief
Executive Officer and certain other consultants. Since these transactions were
intended to benefit the Company and were entered into by an affiliate of the
Company, the Company has recorded these transactions on its financial statements
as follows:
On February 12, 2007, Stephen
Soller, the Companys Chief Executive Officer, purchased 519,250 shares of
common stock from two former founding shareholders of Mynk at a price of $0.325
per share. The fair value of this transaction was determined to be in excess of
the purchase price by $64,904 ($0.125 per share), reflecting the difference
between the $0.325 purchase price and the $0.45 private placement price, and was
charged to operations on May 11, 2007.
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 year ended September 30, 2007,
the Company recorded a charge to operations of $243,000
- 32 -
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 September 30, 2007, the fair value of the transaction,
as calculated pursuant to the Black-Scholes option-pricing model, was determined
to be $191,250 ($0.85 per share), which resulted in a charge to operations of
$26,949 during the year ended September 30, 2007. 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 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% .
The Company uses a factor for credit
administration purposes. Under the factoring agreement, the factor purchases
substantially all of the Company’s accounts receivable for the factoring
charge of 1% of the gross invoice amount of each account receivable. In cases
where the factor approves the customer’s credit, the account is sold without
recourse and the factor assumes all credit risk. In those cases where the factor
does not approve the customer’s credit, the Company bears the credit risk.
The Company is also contingently liable to the factor for merchandise disputes,
customer claims, and other charge-backs on receivables sold to the factor. For
the year ended September 30, 2007, the Company paid a total of $9,997 to the
factor. At September 30, 2007, due from factor totaled $175,084 net of a reserve
of $117,035 for potential returns or chargebacks.
5.
|
Inventories
|
|
|
|
Inventories consist of the following at September 30,
2007:
|
Finished goods
|
$
|
135,546
|
|
Work-in-process
|
|
15,896
|
|
Raw materials
|
|
158,258
|
|
|
$
|
309,700
|
|
Inventory at the year ended September
30, 2006 amounted to $0.
- 33 -
6.
|
Property and Equipment
|
|
|
|
A summary of property and equipment at September 30, 2007
is as follows:
|
Machinery and equipment
|
$
|
128,585
|
|
Computer Software
|
|
56,669
|
|
Furniture and fixtures
|
|
18,815
|
|
Leasehold improvements
|
|
19,688
|
|
|
|
223,757
|
|
Less accumulated depreciation and amortization
|
|
(12,827
|
)
|
|
$
|
210,930
|
|
Property and Equipment at the
year ended September 30, 2006 amounted to $0. Depreciation and amortization
expense for the year ended September 30, 2007 and the period from February 3,
2006 (inception) to September 30, 2006 was $12,827 and $0, respectively.
The note payable at September 30,
2007 of $10,000 is unsecured, non-interest-bearing and due on demand.
8.
|
Related Party
Transactions
|
From February 3, 2006 (inception)
through May 11, 2006, Mynks founding stockholders periodically made advances to
the Company to meet various financing and operating requirements. All such loans
and advances have been unsecured, non-interest-bearing and due on demand. At
September 30, 2006, notes payable to such related parties totaled $300,000. All
such loans and advances were repaid in full by May 11, 2007.
During the year ended September
30, 2007, the Company paid $107,573, to an accounting firm owned by the
Companys Chief Financial Officer at that time for professional services.
During the period from February
3, 2006 (Inception) to June 30, 2006, certain stockholders of Mynk agreed to
provide advances as described above in exchange for the issuance to them of
3,000,000 shares of Mynk common stock. The Company valued such shares at the
price per share paid by the founding Mynk stockholders (see Note 10), resulting
in a charge to operations for loan fees paid in common stock of $149,310 during
the period from February 3, 2006 (Inception) to June 30, 2006.
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.
9.
|
Consulting Agreement for
Sosik
|
On August 20, 2007 the Company
signed a consulting agreement with Lolly Factory, Inc. and its sole shareholder
(Consultant) to provide sales and merchandising consulting services for the
Sosik and Juniors apparel divisions through December 31, 2010. Consulting fees
totaling $452,125 are payable between September 2007 and June 2008. For the year
ended September 30, 2007 $90,425 in consulting fees were paid. In addition,
under the consulting agreement the Consultant shall earn a 3.5% commission on
the Sosik/Junior divisions net sales. Consultant also earns 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 are deemed to be earned and
vested each month. We recorded an expense to operations in the amount of $85,000
for 100,000 common shares earned for September, 2007.
- 34 -
Consultant and Panglobal Brands
Inc. 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. 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.
|
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.
11.
|
Commitments and
Contingencies
|
The Company leases a facility in
which the corporate offices are located under a month-to-month lease. No future
minimum fixed annual rent payments are required under the operating lease.
Minimum rent is expensed as incurred. Total rent expense for the year ended
September 30, 2007 was $65,846. There was no rent expense for the period from
February 3, 2006 (Inception) to September 30, 2006.
The Companys executive and
head office described above is located at 5608 South Soto Street, Huntington
Park, CA 90255. The Company has also signed a three year lease for a new head
office measuring 18,200 square feet at a monthly rental of $11,500 and located
at 2853 E. Pico Blvd., Los Angeles, CA 90023. The lease begins on January 1,
2008 and the Company plans to move into the new premises in late January 2007.
Commencing October 1, 2007, the
company leased 499 square feet at a monthly rental of $1,122 for three years as
a showroom for our Sosik division at California Market Center, 110 East Ninth
Street, Suite A0823, Los Angeles, CA 90079.
Commencing November 1, 2007, the
Company leased 2,609 square feet at a monthly rental of $9,131 for 5 years as a
showroom for our Nela/Mynk/Tea and Honey divisions at 250 West 39
th
Street, New York, New York.
- 35 -
Commencing December 1, 2007, the
Company leased 1,337 square feet at a monthly rental of $6,127 for 3 years,
eight months as a showroom for our Sosik division at 530 7
th
Avenue
27
th
Floor, New York, New York.
The table below sets forth the Companys lease obligations
through 2012.
Year ending
September 30,
|
|
|
|
|
|
|
|
2008
|
$
|
306,299
|
|
2009
|
$
|
342,406
|
|
2010
|
$
|
353,528
|
|
2011
|
$
|
222,609
|
|
2012
|
$
|
123,027
|
|
thereafter
|
$
|
10,278
|
|
|
|
|
|
|
$
|
1,358,147
|
|
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.
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 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 Provision for income taxes is composed of the following:
|
2007
|
2006
|
Deferred
Tax Benefit: Federal
|
$1,392,000
|
$280,000
|
Deferred Tax
Benefit: State
|
$361,000
|
$73,000
|
Total
Benefit of NOL carryforward
|
$1,753,000
|
$353,000
|
Valuation
Allowance
|
($1,753,000)
|
($353,000)
|
Total
|
$0
|
$0
|
As of September 30, 2007 unused net operating losses of
approximately $3,966,515 are available 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.
As a result of recording a charge
to operations of $149,310 on June 20, 2006 for the cost associated with the
issuance of 865,383 shares of the Companys common stock for loan fees (see
Notes 9 and 10), the previously issued financial statements of Mynk as of
September 30, 2006, and for the period from February 3, 2006 (Inception) to
September 30, 2006, have been restated.
As a result of the restatement,
for the period from February 3, 2006 (Inception) to September 30, 2006, net loss
increased by $149,310, to $833,236 ($0.26 per share) from $683,926 ($0.21 per
share). Cash flows from
- 36 -
operating activities did not change during the period from
February 3, 2006 (Inception) to September 30, 2006. As of September 30, 2006,
there was no change in assets, liabilities or total stockholders deficiency.
Commencing October 1, 2007, the
Company leased 499 square feet for three years as a showroom for our Sosik
division at California Market Center, 110 East Ninth Street, Suite A0823, Los
Angeles, CA 90079.
Commencing November 1, 2007, the
Company leased 2,609 square feet for 5 years as a showroom for our Nela/Mynk/Tea
and Honey divisions at 250 West 39
th
Street, New York, New York.
Commencing December 1, 2007, the
Company leased 1,337 square feet for 3 years, eight months as a showroom for our
Sosik division at 530 7
th
Avenue 27
th
Floor, New York, New
York.
On October 22, 2007, the Company
employed a new Chief Financial Officer. As part of the agreed compensation,
250,000 restricted shares in the common stock of the Company will be transferred
by a third party, will be subject to an escrow agreement and will vest 100,000
shares on June 30, 2008, 75,000 shares on December 31, 2008, and 75,000 shares
on June 30, 2009. In addition the Company agreed to grant 480,000 options to
purchase the Companys common stock at an exercise price of $0.75 per share
vesting equally over 48 months beginning January 1, 2008; and 660,000 Incentive
Stock Options to purchase the Companys common stock at an exercise price of
$0.75 per share vesting 132,000 options on December 1, 2007 and 11,000 options
per month for 48 months commencing January 1, 2008.