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 December 31,
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 February 18, 2010 the Company had 49,016,710 shares of
common stock issued and outstanding.
2
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 39 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.
3
ITEM 1. FINANCIAL STATEMENTS
|
Panglobal Brands Inc.
December 31, 2009
F-1
PANGLOBAL BRANDS INC.
AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
December
|
|
|
|
September
|
|
|
|
31,
|
|
|
|
30,
|
|
|
|
2009
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
8,082
|
|
|
$
|
16,932
|
|
Accounts receivable, net of allowance of $650,000 as of
December 31, 2009 and September 30, 2009
|
|
213,905
|
|
|
|
221,661
|
|
Due from factor, net
|
|
775,556
|
|
|
|
867,748
|
|
Inventory
|
|
678,555
|
|
|
|
821,467
|
|
Prepaid expenses and other current assets
|
|
202,223
|
|
|
|
128,722
|
|
Total
current assets
|
|
1,878,321
|
|
|
|
2,056,530
|
|
|
|
|
|
|
|
|
|
Property and equipment
,
net
|
|
394,697
|
|
|
|
428,030
|
|
Trademarks, net
|
|
1,128,185
|
|
|
|
1,177,235
|
|
Deposits
|
|
69,013
|
|
|
|
75,193
|
|
Total
assets
|
$
|
3,470,216
|
|
|
$
|
3,736,988
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
3,870,440
|
|
|
$
|
3,667,085
|
|
Note payable to shareholder
|
|
290,000
|
|
|
|
---
|
|
Total
current liabilities
|
|
4,160,440
|
|
|
|
3,667,085
|
|
|
|
|
|
|
|
|
|
Convertible notes payable to shareholders-long term
|
|
1,251,480
|
|
|
|
1,070,317
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit :
|
|
|
|
|
|
|
|
Common stock $0.0001 par value, 600,000,000 shares authorized,
49,016,710
and 49,016,710 shares issued and outstanding at December 31, 2009
and September 30, 2009, respectively
|
|
4,903
|
|
|
|
4,903
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
18,505,799
|
|
|
|
18,373,670
|
|
Accumulated deficit
|
|
(20,452,406
|
)
|
|
|
(19,378,987
|
)
|
Total
stockholders deficit
|
|
(1,941,704
|
)
|
|
|
(1,000,414
|
)
|
Total
liabilities and stockholders deficit
|
$
|
3,470,216
|
|
|
$
|
3,736,988
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
PANGLOBAL BRANDS INC.
AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
3,529,821 $
|
|
|
|
6,452,464
|
|
Cost of sales
|
|
2,306,555
|
|
|
|
4,936,651
|
|
Gross profit
|
|
1,223,266
|
|
|
|
1,515,813
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Design and development
|
|
644,143
|
|
|
|
818,284
|
|
Selling and shipping
|
|
461,653
|
|
|
|
769,765
|
|
General and administrative, including
$132,129 and $196,535 of stock-based
compensation for the year ended
December 31, 2009 and 2008,
respectively;
|
|
825,041
|
|
|
|
871,484
|
|
Depreciation and amortization
|
|
82,590
|
|
|
|
30,498
|
|
Total costs and expenses
|
|
2,013,427
|
|
|
|
2,490,031
|
|
Net Loss from operations
|
|
(790,161
|
)
|
|
|
(974,218
|
)
|
Interest income
|
|
22
|
|
|
|
3
|
|
Interest expense
|
|
(283,280
|
)
|
|
|
(74,770
|
)
|
|
|
(283,258
|
)
|
|
|
(74,767
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,073,419
|
)
|
|
$
|
(1,048,985
|
)
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Weighted average number of common shares
outstanding - basic and diluted
|
|
49,016,710
|
|
|
|
37,671710
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
PANGLOBAL BRANDS INC.
AND
SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
|
Paid-in
|
|
|
|
Accumulated
|
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Deficit
|
|
|
|
Deficit
|
|
Balance, October 1, 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
|
|
|
|
762,049
|
|
|
|
---
|
|
|
|
762,665
|
|
Conversion of Accounts Payable
|
|
1,500,000
|
|
|
|
150
|
|
|
|
149,850
|
|
|
|
---
|
|
|
|
150,000
|
|
Stock-based compensation
|
|
---
|
|
|
|
---
|
|
|
|
991,969
|
|
|
|
---
|
|
|
|
991,969
|
|
Discount on notes payable due to beneficial conversion and
warrants
|
|
---
|
|
|
|
---
|
|
|
|
1,358,733
|
|
|
|
---
|
|
|
|
1,358,733
|
|
Net loss for the year ended September 30, 2009
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(5,007,953
|
)
|
|
|
(5,007,953
|
)
|
Balance, September 30, 2009
|
|
49,016,710
|
|
|
$
|
4,903
|
|
|
$
|
18,373,670
|
|
|
$
|
(19,378,987
|
)
|
|
$
|
(1,000,414
|
)
|
Stock-based compensation
|
|
---
|
|
|
|
---
|
|
|
|
132,129
|
|
|
|
---
|
|
|
|
132,219
|
|
Net loss for the three months ended December 31, 2009
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,073,419
|
)
|
|
|
(1,073,419
|
)
|
Balance, December 31, 2009
|
|
49,016,710
|
|
|
$
|
4,903
|
|
|
$
|
18,505,799
|
|
|
$
|
(20,452,406
|
)
|
|
$
|
(1,941,704
|
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
PANGLOBAL BRANDS INC.
AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three Months
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,073,419
|
)
|
|
$
|
(1,048,985
|
)
|
Adjustments to reconcile net loss to net
|
|
|
|
|
|
|
|
cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
33,540
|
|
|
|
30,498
|
|
Amortization of trademark
|
|
49,050
|
|
|
|
---
|
|
Bad debt expense (recovery)
|
|
---
|
|
|
|
(1,592
|
)
|
Provision for sales returns
|
|
(65,000
|
)
|
|
|
179,104
|
|
Stock-based compensation
|
|
132,129
|
|
|
|
196,535
|
|
Amortization of beneficial conversion
|
|
181,163
|
|
|
|
---
|
|
Cancellation of website development contract
|
|
---
|
|
|
|
53,999
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
|
Accounts receivable
|
|
7,756
|
|
|
|
(36,261
|
)
|
Due from factor
|
|
157,192
|
|
|
|
(31,762
|
)
|
Inventory
|
|
142,912
|
|
|
|
118,984
|
|
Prepaid expenses and other current assets
|
|
(73,501
|
)
|
|
|
(13,304
|
)
|
Deposits
|
|
6,180
|
|
|
|
6128
|
|
Increase (decrease) in -
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
203,148
|
|
|
|
655,210
|
|
Net cash (used in) provided by operating activities
|
|
(298,850
|
)
|
|
|
108,554
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Increase in bank overdraft
|
|
---
|
|
|
|
62,967
|
|
Proceeds from shareholder notes
|
|
290,000
|
|
|
|
---
|
|
Net cash provided by financing activities
|
|
290,000
|
|
|
|
62,967
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
(8,850
|
)
|
|
|
171,521
|
|
Cash and cash equivalents at beginning of period
|
|
16,932
|
|
|
|
(171,521
|
)
|
Cash and cash equivalents at end of period
|
$
|
8,082
|
|
|
$
|
---
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
PANGLOBAL BRANDS INC.
AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
|
|
Three
|
|
|
|
Three
|
|
|
|
Months
|
|
|
|
Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and
financing activities:
|
|
|
|
|
|
|
|
Discount of notes payable due to beneficial
conversion feature
|
$
|
181,163
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
|
|
Cash paid for -
|
|
|
|
|
|
|
|
Interest
|
$
|
53,377
|
|
|
$
|
74,770
|
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
---
|
|
|
$
|
---
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
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 has one segment and
sells its apparel products through a network of wholesale accounts.
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 December 31, 2009, the
results of operations for the three months ended December 31, 2009 and the cash
flows for the three months ended December 31, 2009.
Operating results for the three
months ended December 31, 2009 are not necessarily indicative of the results to
be expected for the full fiscal year ending September 30, 2010.
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. The Company has incurred
substantial losses from operations and has negative working capital, a
stockholders deficit at December 31, 2009, and has incurred negative cash
flows from operating activities. In addition, the Company has been 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 and
continue to raise capital through debt or equity financing, to which there is no
guarantee. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
F-7
The Company has undertaken a number
of specific steps to achieve profitable operations in the future. These actions
include elimination of highly compensated individuals, streamlining operations,
termination of the agreement with Lolly Factory LLC, reduction of personnel
costs by reducing headcount and consolidating operations, deciding to eliminate
the contemporary dress product group in 2010, concentrating on higher margin
lines of business, better margin customers and reducing returns and allowances
by examining allowances offered, etc. In addition, management will continue
to search for additional debt and equity financing.
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. Significant estimates include depreciation and the allowance for
doubtful accounts and factor receivables, asset impairment, valuation of
warrants and options, inventory valuation, and the determination of revenue and
costs. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The fair value of the financial
instruments disclosed herein is not necessarily representative of the amount
that could be realized or settled, nor does the fair value amount consider the
tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts receivable, due from factor, accounts payable and accrued expenses, the Company estimates that the carrying amounts approximate fair value because of the nature of the assets and short- term maturities of the obligations. The carrying value of short-term and long-term convertible notes is net of the value of the warrants and the value of the beneficial conversion feature.
The following schedule details the convertible notes payable, discount on notes due to the beneficial conversion and warrant discount and amortization of the discount at December 31, 2009:
Convertible Notes
|
Sinecure/Capella
|
Providence Wealth
January, 15, 2009
|
Providence Wealth
June 15, 2009
|
Totals
|
Face Value of Notes
|
$375,000
|
$812,500
|
$ 1,000,000
|
$2,187,500
|
Discount on notes payable due to Beneficial Conversion discount and warrant
|
($219,992)
|
($570,986)
|
($567,755)
|
($1,358,733)
|
Accumulated Amortization of Beneficial Conversion
|
$68,439
|
$177,637
|
$176,637
|
$422,713
|
Value per Balance Sheet
|
$223,447
|
$419,151
|
$608,882
|
$1,251,480
|
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 $650,000 at December 31, 2009 and
September 30, 2009.
F-8
Concentration of Credit Risks
During the three months ended
December 31, 2009 sales to three customers accounted for 30.9%, 22.8% and 9.5%
of the Companys net sales. During the three months ended December 31, 2009,
purchases from one supplier totaled $584,000, or 25% of the cost of sales.
During the three months ended December 31, 2008 sales to three customers
accounted for 23%, 13% and 12% of the Companys net sales. During the three
months ended December 31, 2008, purchases from one supplier totaled
approximately $1,354,000, or 27% of the cost of sales.
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 December 31, 2009
and September 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
Trademarks and intangibles are tested for impairment but had not been amortized.
Effective October 1, 2009 the company decided to amortize the trademarks over a period of 72 months. 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 losses incurred for the three months
ended December 31, 2009 and 2008 and has concluded that there is no impairment
of long lived assets or intangibles at December 31, 2009 and 2008.
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.
F-9
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 December 31, 2009 and 2008 amounted to $2,460 and $500,
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 $24,469 and
$54,594 for the three months ended December 31, 2009 and 2008, respectively.
Stock-Based Compensation
The Company grants stock options
to employees and stock options and warrants to non-employees in non-capital
raising transactions for services and for financing costs. All grants are
recorded at fair value at the grant date. The Company utilizes the Black-Scholes
option pricing model to determine fair value. The resulting amount is charged to
expense on the straight-line basis over the period in which the Company expects
to receive benefit, which is generally the vesting period.
Income Taxes
The Company accounts for income
taxes using an asset and liability approach whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applicable to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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.
The Company recognizes a tax
benefit associated with an uncertain tax position when, in managements
judgment, it is more likely than not that the position will be sustained upon
examination by a taxing authority. For a tax position that meets the
more-likely-than-not recognition threshold, the Company initially and
subsequently measures the tax benefit as the largest amount that it judges to
have a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority. The liability associated with unrecognized tax benefits
is adjusted periodically due to changing circumstances, such as the progress of
tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as considered appropriate
by management.
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 loans continues to be
convertible to common shares and are not repaid at December 31, 2009, but the
conversion is anti-dilutive.
F-10
New Accounting Pronouncements
Effective July 1, 2009, the FASB
ASC became the single official source of authoritative, nongovernmental U.S.
GAAP. The historical U.S. GAAP hierarchy was eliminated and the ASC became the
only level of authoritative U.S. GAAP, other than guidance issued by the SEC.
The Companys accounting policies were not affected by the conversion to ASC.
However, references to specific accounting standards in the notes to our
consolidated financial statements have been changed to refer to the appropriate
section of the ASC.
In April 2008, the FASB issued a
pronouncement on what now is codified as FASB ASC Topic 350,
Intangibles
Goodwill and Other
. This pronouncement amends the factors to be considered
in determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between the
useful life of an intangible asset and the period of expected cash flows used to
measure its fair value. This Company adopted this pronouncement on October 1,
2009. The adoption of this standard did not have a material effect on the
Companys consolidated financial statements.
In June 2008, the FASB amended
FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entitys Own Equity to clarify
how to determine whether certain instruments or features were indexed to an
entity's own stock under ASC Topic 815. The amendment applies to any
freestanding financial instrument (or embedded feature) that has all of the
characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815. The Company adopted this
pronouncement on October 1, 2009. The adoption of this standard did not have a
material effect on its financial statements for the quarter ending December 31,
2009.
In April 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance. This pronouncement will be effective
for the Company for any business combinations that occur on or after October 1,
2009
In April 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after June
15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.
In December 2007, the FASB issued
ASC 805
Business Combinations
and 810
Consolidation
(ASC
810), which require that ownership interests in subsidiaries held by parties
other than the parent, and the amount of consolidated net income, be clearly
identified, labeled and presented in the consolidated financial statements. ASC
805 and ASC 810 also require that once a subsidiary is deconsolidated, any
retained non-controlling equity investment in the former subsidiary be initially
measured at fair value. Sufficient disclosures are required to clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
are applied prospectively. The Company adopted ASC 805 and ASC 810 on October 1, 2009. The adoption of this standard did not have a material effect on the
Companys consolidated financial statements.
In May 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. FASB ASC Topic
855 provides guidance on the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The Company has evaluated subsequent
events for the period from December 31, 2009, the date of these financial
statements, through February 22, 2010, which represents the date these financial
statements are filed with the SEC.
F-11
In June 2009, the FASB issued ASC
Topic 810-10, "
Amendments to FASB Interpretation No. 46(R)
" (ASC
810-10). ASC 810-10 is intended to (1) address the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, as a result of the elimination of the qualifying
special-purpose entity concept in ASC 860-20, and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provided timely and useful information about an enterprise's involvement
in a variable interest entity. This statement will be effective for the Company
on October 1, 2010. The Company does not expect the adoption of 810-10 to have a
material impact on its results of operations, financial condition or cash
flows.
Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force),
and the United States Securities and Exchange Commission did not or are not
believed to have a material impact on the Company's present or future
consolidated financial statements.
3. Private Placements
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 was 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 -210%; 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 was 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% .
F-12
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 December 31, 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 three months ended December 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
Number
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
|
|
of
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at October 1, 2008
|
|
4,160,0000
|
|
|
$
|
0.540
|
|
|
|
4.00
|
|
|
Granted
|
|
---
|
|
|
|
--
|
|
|
|
---
|
|
|
Exercised
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Cancelled
|
|
---
|
|
|
|
0.652
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
4,160,000
|
|
|
$
|
0.540
|
|
|
|
4.00
|
|
|
Options exercisable at December 31, 2008
|
|
1,425,667
|
|
|
$
|
0.436
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
Number
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
|
|
of
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
|
Price
|
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at October 1, 2009
|
|
5,675,000
|
|
|
$
|
0.360
|
|
|
|
3.52
|
|
|
Granted
|
|
---
|
|
|
|
--
|
|
|
|
---
|
|
|
Exercised
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Cancelled
|
|
190,000
|
|
|
|
0.652
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
5,485,000
|
|
|
$
|
0.343
|
|
|
|
3.30
|
|
|
Options exercisable at December 31, 2009
|
|
4,526,000
|
|
|
$
|
0.289
|
|
|
|
2.25
|
|
The weighted-average grant-date
fair value of options granted during the three months ended December 31, 2009
and 2008 was $0.00 and $0.00, respectively.
The aggregate intrinsic value of stock
options outstanding at September 30, 2009 was $0.
Share Purchase Agreements
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. 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 December 31, 2009, the fair value of the transaction, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $0.08
per share.. 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.
F-13
On October 23, 2007, Charles
Lesser, the Companys Chief Financial Officer and Chief Executive Officer
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 was being charged to
operations ratably from November 1, 2007 through June 30, 2009.
4. Accounts Receivable
|
Accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
September 30
,
|
|
|
|
|
2009
|
|
|
|
2009
|
|
|
Outstanding accounts receivable
|
$
|
863,905
|
|
|
$
|
871,661
|
|
|
Less: allowance for doubtful
|
|
(650,000
|
)
|
|
|
(650,000
|
)
|
|
accounts
|
|
|
|
|
|
|
|
|
|
$
|
213,905
|
|
|
$
|
221,661
|
|
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 2.0% on the
outstanding advances. The Company maintains a cash collateral account in the
amount of $302,635 with the factor to be used as collateral for the loans
advanced. The Company is liable to the factor for merchandise disputes and
customer claims on receivables sold to the factor. The factoring agreement
expires on March 4, 2010, but is automatically renewed for one 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 December 31, 2009 and
2008, the amount of Due from Factor for which we bear the credit risk was
$61,702 and $355,249.
For the three months ended
December 31, 2009 and 2008, the Company paid a total of approximately $53,377
and $58,376, 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 is summarized
below:
F-14
|
|
|
December 31 ,
|
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
|
2009
|
|
|
Outstanding factored receivables
|
$
|
1,884,070
|
|
|
$
|
2,451,702
|
|
|
Cash collateral reserve
|
|
302,635
|
|
|
|
303,426
|
|
|
|
|
2,186,705
|
|
|
|
2,755,128
|
|
|
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(1,161,149
|
)
|
|
|
(1,572,380
|
)
|
|
Reserves for chargebacks and sales returns
|
|
(250,000
|
)
|
|
|
(315,000
|
)
|
|
|
$
|
775,556
|
|
|
$
|
867,748
|
|
6. Inventory
Inventory consists of the following:
|
|
|
December 31, 2009
|
|
|
|
September 30, 2009
|
|
|
Finished goods
|
$
|
543,075
|
|
|
$
|
631,478
|
|
|
Work-in-process
|
|
85,596
|
|
|
|
81,281
|
|
|
Raw materials
|
|
49,884
|
|
|
|
108,708
|
|
|
|
$
|
678,555
|
|
|
$
|
821,467
|
|
7. Property and Equipment
A summary of property and equipment consists of the following:
|
|
|
December 31,
|
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
|
2009
|
|
|
Machinery and equipment
|
$
|
172,025
|
|
|
$
|
172,025
|
|
|
Computer hardware and software
|
|
257,934
|
|
|
|
257,727
|
|
|
Furniture and fixtures
|
|
82,189
|
|
|
|
82,189
|
|
|
Leasehold improvements
|
|
151,988
|
|
|
|
151,988
|
|
|
|
|
664,136
|
|
|
|
663,929
|
|
|
Less accumulated depreciation and amortization
|
|
(269,439
|
)
|
|
|
(235,899
|
)
|
|
|
$
|
394,697
|
|
|
$
|
428,030
|
|
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:
F-15
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. On October 1, 2009, the company decided to amortize
the trademarks and intangible assets over a period of 72 months.
At December 31, 2009 the value of the trademarks and intangible
assets is as follows:
Purchase price of trademarks and intangible
assets
|
$ 1,177,235
|
|
|
|
|
|
|
|
Less: Accumulated Amortization
|
(49,050)
|
|
Value of trademarks and intangible assets,
net
|
$ 1,128,185
|
|
Amortization expense on the trademarks and intangible assets
for the three months ended December 31, 2009 and 2008 was $49,050 and $0,
respectively.
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 an owner 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 and is one of the 15 lenders of a convertible loan agreement
dated June 15, 2009.
Convertible Notes Payable
Effective 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:
F-16
|
(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 2,125,000 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 ( 3,750,000 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 $0.15 per share for a period of 24 months.
These features gave rise to the assignment of the beneficial conversion feature
equal to $203,746 and the warrant amounting to $16,246 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,
|
|
|
|
|
(iii)
|
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.
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.
F-17
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. The 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
beneficial conversion feature equal to $535,493 and a warrant value of $35,493
which is accounted for as discount on the note and a credit to additional paid
in capital. In addition, a loss on extinguishment of debt of $32,939 was
credited 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 10,000,000 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 $533,878 and a warrant value of $33,877 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.
The three loans that were
modified on June 15, 2009 are repayable on or before April 30, 2011. The notes
are now convertible into common shares at $.10 per share and when converted the
company will issue warrants equal to one half of the shares converted
exercisable at $0.15 per share for a period of 24 months. These features gave
rise to the assignment of value to the warrants and the beneficial conversion
feature equal to $1,358,733 which is accounted for as discount on the notes 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.
F-18
The following schedule details the convertible notes payable,
discount on notes due to the beneficial conversion and warrant discount and
amortization of the discount at December 31, 2009:
Convertible Notes
|
Sinecure/Capella
|
Providence Wealth
January, 15, 2009
|
Providence Wealth
June 15, 2009
|
Totals
|
Face Value of Notes
|
$375,000
|
$812,500
|
$ 1,000,000
|
$2,187,500
|
Discount on notes payable due to Beneficial Conversion discount and
warrant
|
($219,992)
|
($570,986)
|
($567,755)
|
($1,358,733)
|
Accumulated Amortization of Beneficial Conversion
|
$68,439
|
$177,637
|
$176,637
|
$422,713
|
Value per Balance Sheet
|
$223,447
|
$419,151
|
$608,882
|
$1,251,480
|
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.
F-19
Short Term Loan Payable to Shareholder
On November 24, 2009, we entered
into a loan agreement with Providence Wealth Management Ltd., a company
incorporated under the laws of the British Virgin Islands, whereby Providence
agreed to loan our company the aggregate principal amount of US$290,000 bearing
interest 9% per annum calculated and compounded monthly, payable in full 30 days
after advance, unless sooner prepaid or accelerated upon. As of February 22,
2010, the loan has not been repaid. As of December 31, 2009 the company recorded
interest in the amount of $2,646.
As security for the Loan, we
entered into a Trade-Mark Assignment Agreement dated November 24, 2009, with
Providence whereby we will assign to Providence all of our right, title and
interest to the Scrapbook trademark as a secured charge behind Merchant
Factors Inc.
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. 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 had not accrued an
expense for issuing shares 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 to for early termination, the Company :
|
(a)
|
Compensated 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 $52,778 in Common shares of
the Company at a valuation of $0.20 per share. The amount of $52, 778 was
charged to expense and the Company will issue a total of 263,900 shares to
Lolly Factory LLC. As of December 31, 2009 the Company had not yet issued
the Common shares to Lolly Factory LLC.
|
|
|
|
|
(b)
|
Compensated 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 recorded an
expense of $18,675. For the calendar year 2009, Lolly Factory LLC had
approximately $10.2 million in net sales versus a target of $45.0 million
and the company agreed to pro-rata compensate Lolly Factory LLC 114,500
shares and recorded an expense of $10,300. As of December 31, 2009 the
Company had not yet issued the Common shares to Lolly Factory
LLC.
|
11. 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 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
F-20
February 15, 2008. Total rent expense including sales showrooms
for the three months ended December 31, 2009 and 2008 was $62,767 and $98,749,
respectively.
The table below sets forth the
Companys lease obligations through 2012.
Year ending
|
|
|
Lease
|
|
September 30,
|
|
|
Obligation
|
|
2010
|
|
$
|
185,554
|
|
2011
|
|
|
126,859
|
|
2012
|
|
|
24,396
|
|
|
|
$
|
336,809
|
|
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.
12. 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 Accounting Standards Codification (ASC) 740 as of
its inception. Pursuant to ASC 740, 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 resulting
primarily from net operating losses is composed of the following:
|
|
December 31, 2009
|
|
|
|
September 30, 2009
|
|
Deferred tax benefit: Federal
|
$
|
6,434,000
|
|
|
$
|
4,913,000
|
|
Deferred tax benefit: State
|
|
1,673,000
|
|
|
|
1,276,000
|
|
Total benefit of NOL carry forward
|
|
8,107,000
|
|
|
|
6,189,000
|
|
Valuation allowance
|
|
(8,107,000
|
)
|
|
|
(6,189,000
|
)
|
Total
|
$
|
---
|
|
|
$
|
---
|
|
As of December 31, 2009 unused
net operating losses equal to $18,587,000 are available for 16 years to offset
future years federal and state taxable income. ASC 740 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.
The difference between the (benefit) provision for income taxes
and the expected income tax (benefit) provision determined by applying the
statutory Federal and state income tax rates to pre-tax accounting loss for the
years ended September 30, 2009 and 2008 are as follows:
|
2009
|
|
2008
|
|
Federal statutory rate
|
(34.0%)
|
|
(34.0%)
|
|
State taxes net of Federal benefit
|
(6.0%)
|
|
(6.0%)
|
|
Valuation allowance
|
40.0%
|
|
40.0%
|
|
|
0%
|
|
0%
|
|
The Company is required to file
Federal and California income tax returns. All periods subsequent to September
30, 2008 are subject to examination by the taxing authorities. The company
believes that its income tax filing positions and deductions will be sustained
on audit and does not anticipate any adjustments that will result in a material
change. Therefore, no reserves for uncertain tax positions have been recorded
pursuant to FASB ASC Topic 740 Income Taxes. In addition, the company does not
anticipate that the total amount of unrecognized tax benefit related to any
particular tax position will change significantly within the next twelve months.
The companys policy for recording interest and penalties if any, associated
with tax authority audits, is to record such items as a component of income
taxes.
F-21
13. Subsequent events
Based upon insufficient sales,
the Company has decided to cease producing two of its contemporary product
lines. Tea and Honey dresses will cease production January 1, 2010 and Haven
dresses will cease production by June 30, 2010. Carrying amounts of assets
relating to these product lines as of December 31, 2009 are as follows:
|
|
Haven
|
|
|
|
Tea and Honey
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
83,038
|
|
|
$
|
38,558
|
|
Due from factor, net
|
$
|
132,476
|
|
|
$
|
15,658
|
|
Inventory
|
$
|
103,952
|
|
|
$
|
54,674
|
|
On January 17, 2010 Stephen Soller
and Dru Narwani resigned as directors of the Company.
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. On January 26, 2010 the Company and Delias agreed to a
monetary settlement which has been accounted for in accounts receivable and
signed a confidentiality agreement.
On January 29, 2010, we entered
into a loan agreement with Charles Lesser, an officer of the Company, whereby
Mr. Lesser agreed to loan our company the aggregate principal amount of
US$260,000 bearing interest 9% per annum calculated and compounded monthly,
payable in full 30 days after advance, unless sooner prepaid or accelerated
upon.
As security for the Loan, we
entered into a Security Agreement January 29, 2010, with Charles Lesser whereby
we granted a security interest in the trademarks Crafty Couture and Crafty by
Scrapbook behinds the interest of Merchant Factors Inc.
4
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 year ended September 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.
The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. 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 39 of this quarterly report on Form 10-Q.
Our interim financial statements
are stated in United States Dollars and are prepared in accordance with United
States Generally Accepted Accounting Principles.
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. Our principal
offices are located 2853 E. Pico Blvd. Los Angeles, CA 90023, and our telephone
number is (323) 266 -6500.
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 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.
5
Our brands are aggregated into
three major consumer market product groupings: Sosik, Scrapbook and
Contemporary.
The major consumer product groups 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 52% of our revenue for our fiscal year
ended September 30, 2009 related to Sosik. Customers include Charlotte Russe,
Forever 21, Wet Seal, Ross, J.C. Penney, and Tillys.
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, Forever 21
and Hot Topic. The Crafty Couture label is lower priced and aimed at a younger
market, specifically early through late teens.
The following three product lines 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. We have decided to cease producing
new styles of Tea and Honey effective January 1, 2010 and all sales subsequent
to that date will relate to sales of existing products
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 Nordstrom, Bloomingdales and Macys.
HAUTEUR MYNK - Hauteur Mynk is a
trademarked brand name which sold selling premium denim jeans, skirts, dresses
and shorts. Hauteur Mynk had sales during the prior fiscal year, but is
currently dormant and current inventory has been depleted. . The Company decided
that the premium denim market was saturated with brands and decided to place
Hauteur Mynk on hold.
In each of our product groups, 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 product groups.
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 Product Group
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. We and the Consultant
established sales targets totalling $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:
6
|
(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 had not accrued an
expense for issuing shares 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 to for early termination, the Company :
|
(a)
|
Compensated 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 $52,778 in Common shares of
the Company at a valuation of $0.20 per share. The amount of $52,778 was
charged to expense and the Company will issue a total of 263,900 shares to
Lolly Factory LLC. As of December 31, 2009 the Company had not yet issued
the Common shares to Lolly Factory LLC.
|
|
|
|
|
(b)
|
Compensated 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 recorded an
expense of $18,675. For the calendar year 2009, Lolly Factory LLC had
approximately $10.2 million in net sales versus a target of $45.0 million
and the Company agreed to pro-rata compensate Lolly Factory LLC 114,500
shares and recorded an expense of $10,300. As of December 31, 2009 the
Company had not yet issued the Common shares to Lolly Factory
LLC.
|
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 February 24, 2010, we have
48 full-time employees: two (2) are executive, nine (9) are design staff,
fourteen (14) are production staff, thirteen (13) are sewing staff, three (3)
are sales staff, four (4) 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.
7
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.
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, Crafty by Scrapbook Tea and Honey, Haven, Nela 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
At December 31, 2009, we had negative
working capital of ($2,2812,119).
At December 31, 2009, our total assets were
$3,470,216.
At December 31, 2009, our total liabilities
were $5,411,920.
Cash Flows
The following is a summary of our cash flows
for the periods set forth below:
8
|
|
Three
|
|
|
|
Three
|
|
|
|
Months
|
|
|
|
Months
|
|
|
|
ended
|
|
|
|
ended
|
|
|
|
December
|
|
|
|
December
|
|
|
|
31, 2009
|
|
|
|
31, 2008
|
|
|
|
|
|
|
|
|
|
Net Cash provided by(used in) Operating
Activities
|
$
|
(298,850
|
)
|
|
$
|
108,554
|
|
|
|
|
|
|
|
|
|
Net Cash provided by in Financing
Activities
|
|
290,000
|
|
|
|
62,967
|
|
|
|
|
|
|
|
|
|
Net Increase (decrease) in Cash
|
$
|
(8,850
|
)
|
|
$
|
171,521
|
|
Assets
Our current assets totaled
$1,878,321 and $2,056,530 at December 31, 2009 and September 30, 2009,
respectively. Total assets were $ 3,470,216 and $3,736,988 at December 31 , 2009
and September 30, 2009, respectively. The decrease in current assets is
primarily due to the decrease in inventory and management of factor collections
resulting in a lower amount of funds due from the factor.
Liabilities and Working Capital
The following is a summary of our working
capital at December 31, 2009 and September 30, 2009:
|
|
December
|
|
|
|
September
|
|
|
|
31, 2009
|
|
|
|
30, 2009
|
|
Current Assets
|
$
|
1,878,321
|
|
|
$
|
2,056,530
|
|
Current Liabilities
|
|
4,160,440
|
|
|
|
3,667,085
|
|
Working Deficit
|
$
|
(2,282,119
|
)
|
|
$
|
(1,610,555
|
)
|
Our current liabilities totalled
$4,160,440 and $3,667,085 at December 31, 2009 and September 30, 2009,
respectively. We had negative working capital of ($2,282,119) at December 31,
2009 . Current assets decreased as inventory was decreased and due from factor
decreased based on strong collections but we were unable to decrease current
liabilities and a short term loan was necessary to fund losses.
Cash Requirements and Additional Funding
Our estimated cash requirements for
the next 12 months are as follows:
Expense
|
|
Cost
|
|
Design and development
|
$
|
2,400,000
|
|
Selling and Shipping
|
|
2,000,000
|
|
General and administrative (excludes
non-cash compensation)
|
|
1,800,000
|
|
TOTAL
|
$
|
6,200,000
|
|
As of December 31, 2009, we had
$8,082 in cash. As a result of our plans to reduce costs, we estimate that we
will require $6,200,000 to carry out our planned operations over the next 12
months. We have been able to decrease our future operating expenses by
consolidating staff positions, by terminating our agreement with Lolly Factory
LLC, and by dropping the Haven and Tea and Honey product lines. In addition, we
need to decrease our Accounts Payable by $1.0 million with our product vendors.
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. Further, we have $3.7 million in accounts payable and accrued expenses,
and vendors are beginning to shorten credit terms and demand paydown of accounts
payable, which we may be unable to do without significant profitability or
injection of new equity or debt capital.
9
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 $8.0 million for shipments through June 2010. 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 repaid in full by November 30,
2008. 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 2,125,000
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, 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.
On November 24, 2009, we entered
into a loan agreement with Providence Wealth Management Ltd., a company
incorporated under the laws of the British Virgin Islands, whereby Providence
agreed to loan our company the aggregate principal amount of US$290,000 bearing
interest 9% per annum calculated and compounded monthly, payable in full 30 days
after advance, unless sooner prepaid or accelerated upon. As of February 12,
2010, the loan has not been repaid.
10
As security for the Loan, we
entered into a Trade-Mark Assignment Agreement dated November 24, 2009, with
Providence whereby we will assign to Providence all of our right, title and
interest to the Scrapbook trademark as a secured charge behind Merchant
Factors Inc.
On January 29, 2010, we entered
into a loan agreement with Charles Lesser, an officer of the Company, whereby
Mr. Lesser agreed to loan our company the aggregate principal amount of
US$260,000 bearing interest 9% per annum calculated and compounded monthly,
payable in full 30 days after advance, unless sooner prepaid or accelerated
upon.
As security for the Loan, we
entered into a Security Agreement January 29, 2010, with Charles Lesser whereby
we granted a security interest in the trademarks Crafty Couture and Crafty by
Scrapbook behind the interest of Merchant Factors Inc.
The Three Months Ended December 31, 2009 Compared to the
Three Months Ended December 31, 2008
Revenue
Net sales for the three months
ended December 31, 2009 totaled $3,529,821 versus $6,452,464 for 2008. Sales of
Sosik apparel totaled $834,956, sales of Scrapbook apparel totaled $2,046,288
and the remainder of the sales were Tea and Honey, and Haven dresses. During the
year ended December 31, 20008, sales of Sosik apparel totaled $3,180,000 and
sales of Scrapbook totaled $2,664,000. Most of the decrease in December 31, 2009
sales relate to sales of Sosik apparel and the termination of the agreement with
Lolly Factory LLC. Gross profit was $1,223,266 (34.6%) and 1,515,813 (23.5%) for
the three months ended December 31, 2009 and 2008, respectively. At this time,
we have a backlog of sales orders in excess $8.0 million for shipments through
June, 2010. With the addition of Scrapbook and the re-introduction of Crafty
Couture, our sales mix is changing. Approximately 37% of these orders are for
Sosik products including skirts and knit and woven tops, 15% are for Scrapbook
apparel, 42% is for Crafty Couture 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,
Atlanta and Miami. Our Haven/Tea and Honey contemporary products are sold
through contract outside sales showrooms earning sales commissions of 10-12%.
Expenses
The major components of our
operating expenses are outlined in the table below:
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
Three Months
|
|
|
|
Percent
|
|
|
|
December 31,
|
|
|
|
ended December
|
|
|
|
Increase/
|
|
|
|
2009
|
|
|
|
31, 2008
|
|
|
|
Decrease
|
|
Design & Development
|
$
|
644,143
|
|
|
$
|
818,284
|
|
|
|
(21.3
|
)%
|
Selling & Shipping
|
|
461,653
|
|
|
|
769,765
|
|
|
|
(40.0%
|
)
|
General and Administrative
|
|
825,041
|
|
|
|
871,484
|
|
|
|
(5.3%
|
)
|
Depreciation & Amortization
|
|
82,950
|
|
|
|
30,498
|
|
|
|
171%
|
|
Total Expenses
|
$
|
2,013,427
|
|
|
$
|
2,490,031
|
|
|
|
(19.4
|
)%
|
The decrease in our total
expenses for the three months ended December 31, 2009 was due to a reduction of
$300,000 in selling expenses due to restructuring of the entire sales force and
$170,000 due to a re-organization of the design and development functions.
For the three months ended
December 31, 2009, our design and development expenses totaled $644,143, of
which $239,000 was for design expenses and $405,000 was for production and
development expenses. Major expense categories included salaries, samples,
contract labor and supplies. We paid total salaries of $460,000.
11
Purchases of sample fabric and garments totaled $51,000.
Contract labor and consulting totaled $93,000 and manufacturing and design
supplies totaled $24,000. For the three months ended December 31, 2008 we paid
total salaries of $567,000. Purchases of sample fabric and garments totaled
$118,000. Contract labor and consulting totaled $8,000 and manufacturing and
design supplies totaled $65,000.
For the three months ended
December 31, 2009, our selling and shipping expense totalled $461,653 compared
to $769,765 for the year three months ended December 31, 2008 due to the
decrease in sales commissions due to volume and a re-structuring of the sales
function including the termination of the agreement with Lolly Factory LLC.
Major expense categories include travel and trade show expenses, showroom
expenses, salaries and sales commissions. During the three months ended December
31, 2009, travel and trade show expenses totalled $17,000, sales showroom
expense total led $45,000, sales salaries total led $76,000 and sales
commissions totalled $153,000. Included in sales commission expenses for the
three months ended December 31, 2009 was $38,800 paid to Lolly Factory, Inc.
Selling expenses for the three months ended December 31, 2008 consisted of
travel and trade show expenses totalling $93,000, sales showroom expense total
led $71,000, sales salaries totalled $177,000 and sales commissions totalled
$202,000. Included in sales consulting expenses for the three months ended
December 30, 2008 was $62,500 paid to Lolly Factory, Inc.
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
December 31, 2009, our general and administrative expenses (including non-cash
compensation costs of $132,219) totalled $825,041. Key components included
salaries for executive, accounting and customer service totalling $210,000,
payroll taxes of $61,000, professional (accounting and legal) fees of $130,000
due to a lawsuit, postage and delivery of $29,000, insurance, including health,
liability and directors & officers liability of $73,000 and rent of
$37,000. Subsequent to December 31, 2009 executive salaries have been reduced.
Also in general and administrative expenses are factor fees of $50,000 and
director and consulting fees of $17,000. Not included in general and
administrative expenses is $33,540 in depreciation expense and $49,050
amortization of trademarks. For the three months ended December 31, 2008 general
and administrative expenses totalled $871,484 of which $196,535 was non-cash
compensation expenses. Key components included salaries of $160,000, payroll
taxes of $67,000, postage and delivery of $35,500 insurance $59,000, rent of
$34,500 and professional fees of $123,100.
Interest expense for the year
three months ended December 31, 2009 amounted to $283,280. This is comprised of
$53,000 of factor interest, $49,000 of interest on notes and $181,163 of
non-cash interest amortizing the discount on notes payable due to the beneficial
conversion feature of the notes. For the three months ended December 31, 2008
interest expense was $$74,770, of which $58,000 related to factor interest.
Off Balance-Sheet Arrangements
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 2.0% on the
outstanding advances. The Company maintains a cash collateral account in the
amount of $302,635 with the factor to be used as collateral for the loans
advanced. The Company is liable to the factor for merchandise disputes and
customer claims on receivables sold to the factor. The factoring agreement
expires on March 4, 2010, but is automatically renewed for one 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 December 31, 2009 and
2008, the amount of Due from Factor for which we bear the credit risk was
$61,702 and $355,249.
12
For the three months ended
December 31, 2009 and 2008, the Company paid a total of approximately $53,377
and $58,376, 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 is summarized
below:
|
|
December 31 ,
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
|
2009
|
|
Outstanding factored receivables
|
$
|
1,884,070
|
|
|
$
|
2,451,702
|
|
Cash collateral reserve
|
|
302,635
|
|
|
|
303,426
|
|
|
|
2,186,705
|
|
|
|
2,755,128
|
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(1,161,149
|
)
|
|
|
(1,572,380
|
)
|
Reserves for chargebacks and sales returns
|
|
(250,000
|
)
|
|
|
(315,000
|
)
|
|
$
|
775,556
|
|
|
$
|
867,748
|
|
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.
Revenues
Revenue from product sales is
recognized as title passes to the customer upon shipment. Sales returns and
allowances for the three months ended December 31, 2009 totaled $495,728,
approximately 14% of sales. We have accrued an additional $250,000 as of
December 31, 2009 for estimated chargebacks and sales returns.
Stock-Based Compensation
The cost of employee services
received in exchange for equity awards are 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.
The Company accounts for stock
option and warrant grants issued and vesting to non-employees based on the fair
value of the stock compensation at 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.
Concentration of Credit Risks
During the three months ended
December 31, 2009 sales to three customers accounted for 30.9%, 22.8% and 9.5%
of the Companys net sales. During the three months ended December 31, 2009,
purchases from one supplier totaled $584,000, or 25% of the cost of sales.
During the three months ended December 31, 2008 sales to three customers
accounted for 23%, 13% and 12% of the Companys net sales. During the three
months ended December 31, 2008, purchases from one supplier totaled
approximately $1,354,000, or 27% of the cost of sales.
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 $650,000 at December 31, 2009.
13
Inventory
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 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. At December 31, 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.
Convertible Notes Payable
Three notes were modified on June
15, 2009 to conform to a new financing repayable on or before April 30, 2011.
The notes are now convertible into common shares at $.10 per share and when
converted the company will issue warrants equal to one half of the shares
converted exercisable at $0.15 per share for a period of 24 months. These
features gave rise to the assignment of value to the warrants and beneficial
conversion feature. which is accounted for as discount on the notes and an
increase 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.
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB ASC became the single official
source of authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP
hierarchy was eliminated and the ASC became the only level of authoritative U.S.
GAAP, other than guidance issued by the SEC. The Companys accounting policies
were not affected by the conversion to ASC. However, references to specific
accounting standards in the notes to our consolidated financial statements have
been changed to refer to the appropriate section of the ASC.
In April 2008, the FASB issued a
pronouncement on what now is codified as FASB ASC Topic 350,
Intangibles
Goodwill and Other
. This pronouncement amends the factors to be considered
in determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between the
useful life of an intangible asset and the period of expected cash flows used to
measure its fair value. This Company adopted this pronouncement on October 1,
2009. The adoption of this standard did not have a material effect on the
Companys consolidated financial statements.
In June 2008, the FASB amended
FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entitys Own Equity to clarify
how to determine whether certain instruments or features were indexed to an
entity's own stock under ASC Topic 815. The amendment applies to any
freestanding financial instrument (or embedded feature) that has all of the
characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815. The Company adopted this
pronouncement on October 1, 2009. The adoption of this standard did not have a
material effect on its financial statements for the quarter ending December 31,
2009.
14
In April 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 805
, Business
Combinations
. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance. This pronouncement will be effective
for the Company for any business combinations that occur on or after October 1,
2009
In April 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 825,
Financial
Instruments
. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after June
15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.
In December 2007, the FASB issued
ASC 805
Business Combinations
and 810
Consolidation
(ASC
810), which require that ownership interests in subsidiaries held by parties
other than the parent, and the amount of consolidated net income, be clearly
identified, labeled and presented in the consolidated financial statements. ASC
805 and ASC 810 also require that once a subsidiary is deconsolidated, any
retained non-controlling equity investment in the former subsidiary be initially
measured at fair value. Sufficient disclosures are required to clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
are applied prospectively. The Company adopted ASC 805 and ASC 810 on October 1, 2009. The adoption of this standard did not have a material effect on the
Companys consolidated financial statements.
In May 2009, the FASB issued a
pronouncement on what is now codified as FASB ASC Topic 855,
Subsequent
Events
. This pronouncement establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. FASB ASC Topic
855 provides guidance on the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The Company has evaluated subsequent
events for the period from December 31, 2009, the date of these financial
statements, through February 24, 2010, which represents the date these financial
statements are filed with the SEC.
In June 2009, the FASB issued ASC
Topic 810-10, "
Amendments to FASB Interpretation No. 46(R)
" (ASC
810-10). ASC 810-10 is intended to (1) address the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, as a result of the elimination of the qualifying
special-purpose entity concept in ASC 860-20, and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provided timely and useful information about an enterprise's involvement
in a variable interest entity. This statement will be effective for the Company
on October 1, 2010. The Company does not expect the adoption of 810-10 to have a
material impact on its results of operations, financial condition or cash
flows.
Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force),
and the United States Securities and Exchange Commission did not or are not
believed to have a material impact on the Company's present or future
consolidated financial statements.
15
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
Not applicable
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.
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over our financial
reporting. In order to evaluate the effectiveness of internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act,
management has conducted an assessment, including testing, using the criteria in
Internal Control Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our system of internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.
16
Management has used the framework
set forth in the report entitled Internal Control-Integrated Framework published
by the Committee of Sponsoring Organizations of the Treadway Commission, known
as COSO, to evaluate the effectiveness of our internal control over financial
reporting. Based on this assessment, management has concluded that our internal
control over financial reporting was not effective as of December 31, 2009 This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only managements report in
this annual report.
Certificates.
Certificates 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.
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. On January 26, 2010 the Company and Delias agreed to a
monetary settlement and signed a confidentiality agreement.
Much of the information included
in this annual report includes or is based upon estimates, projections or other
forward-looking statements. Such forward-looking statements include any
projections or estimates made by us and our management in connection with our
business operations. While these forward-looking statements, and any assumptions
upon which they are based, are made in good faith and reflect our current
judgment regarding the direction of our business, actual results will almost
always vary, sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. We undertake no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of such statements.
Such estimates, projections or
other forward-looking statements involve various risks and uncertainties as
outlined below. We caution readers of this annual report that important factors
in some cases have affected and, in the future, could materially affect actual
results and cause actual results to differ materially from the results expressed
in any such estimates, projections or other forward-looking statements. In
evaluating us, our business and any investment in our business, readers should
carefully consider the following 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.
17
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 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.
18
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
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.
We do not have sufficient funds to ensure that we can
continue our operations. If we do not obtain sufficient cash, we will go out of
business and our shareholders will lose their entire investment in our company.
We rely on proceeds from sales
and loans or the sales of equity in our Company to acquire funds. There is no
guarantee that we will be able to earn enough proceeds from sales or borrow
enough money or sell enough shares of our company to continue to pay for our
operations.
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.
19
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 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 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.
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.
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
December 31, 2009 sales to three customers accounted for 30.9%, 22.8% and 9.5%
of the Companys net sales. During the three months ended December 31, 2009,
purchases from one supplier totaled $584,000, or 25% of the cost of sales.
During the three months ended December 31, 2008 sales to three customers
accounted for 23%, 13% and 12% of the Companys net sales. During the three
months ended December 31, 2008, purchases from one supplier totaled
approximately $1,354,000, or 27% of the cost of sales.
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.
As of December 31, 2009, our
accumulated losses since inception amount to $20,452,406. In its audit report
dated February 12, 2010, our auditors stated that we have incurred losses from
operations and we have negative working capital, stockholders deficit and negative
cash flows from operations which raise substantial doubt about our ability to
continue as a going concern.
20
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 weaknesses in our
disclosure controls and procedures, which could result in accidental or
intentional misstatements. If any of these things happen, we and our investors
may lose money.
There is not adequate division or
segregation of duties in our accounting department that has three staff members,
which includes the Chief Financial Officer. Therefore our internal control over
financial reporting may not prevent accidental or intentional misstatements.
This could cause our financial reporting to be in error and to cause investors
to make decisions based on incorrect information. It could also cause us extra
expense in having the financial and disclosure documents redone and refilled. It
also could allow someone in the company to embezzle or improperly use funds. If
any of these things happen, then our company and our investors may lose money.
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;
-
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.
21
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.
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.
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.
Our management beneficially own approximately 15% of the
shares of common stock may be able to control matters requiring approval by our
stockholders. The interests of management could conflict with those of other
investors, which could cause investors to lose all or part of their investments
in our company.
As of December 31, 2009, our
directors and officers as a group beneficially owned approximately 11% of our
outstanding common stock. Therefore, our directors and officers may be able to
control matters requiring approval by our stockholders. Matters that require the
approval of our stockholders include the election of directors and the approval
of mergers or other business combination transactions. Our directors and
officers also have control over our management and affairs. As a result of such
control, certain transactions are effectively not possible without the approval
of our directors and officers, including, proxy contests, tender offers, open
market purchase programs or other transactions that could give our stockholders
the opportunity to realize a premium over the then-prevailing market prices for
their shares of our common stock. If the interests of our directors and officers
conflict with those of our investors, investors could lose some or all of the
potential benefit of their investment.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
|
None
22
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
Short Term Loan Payable to Shareholder
On November 24, 2009, we entered into a loan agreement with
Providence Wealth Management Ltd., a company incorporated under the laws of the
British Virgin Islands, whereby Providence agreed to loan our company the
aggregate principal amount of US$290,000 bearing interest 9% per annum
calculated and compounded monthly, payable in full 30 days after advance, unless
sooner prepaid or accelerated upon. As of February 22, 2010, the loan has not
been repaid. As of December 31, 2009 the company recorded interest in the amount
of $2,646.
As security for the Loan, we
entered into a Trade-Mark Assignment Agreement dated November 24, 2009, with
Providence whereby we will assign to Providence all of our right, title and
interest to the Scrapbook trademark as a secured charge behind Merchant
Factors Inc.
ITEM 4.
|
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM 5.
|
OTHER INFORMATION
|
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.
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. Charles Lesser is now our CEO and our CFO. There were no disagreements
between Mr. Soller and our company. Mr. Soller remained on our board of
directors along with Dru Narwani and Charles Shaker. On January 17, 2010 Stephen
Soller and Dru Narwani resigned as directors of the Company.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None
Exhibits required by Item 601 of Regulation S-K
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).
|
23
Exhibit
Number
|
Description
|
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 November 24, 2009 with Providence
Wealth Management Ltd. (attached as an
|
|
exhibit to our Current Report on Form 8-K filed on February
16, 2010)
|
10.11
|
Trade-Mark Assignment Agreement dated November
24, 2009 with Providence Wealth Management Ltd. (attached as an exhibit
to our Current Report on Form 8-K filed on February 16, 2010)
|
10.12
|
Guarantee dated February 15, 2010 with Mr. Charles
Lesser (attached as an exhibit to our Current Report on Form 8-K filed
on February 16, 2010)
|
(31)
|
Section 302 Certifications
|
31.1*
|
Certification under Sarbanes-Oxley
Act of 2002.
|
31.2*
|
Certification under Sarbanes-Oxley Act of 2002.
|
24
* filed hereto
25
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 Lesser
Charles Lesser
Chief Executive Officer and Financial Officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Dated: February 24, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Charles Lesser
Charles Lesser
Chief Executive Officer and Financial Officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Dated: February 24, 2010
By:
/s/ Charles Shaker
Charles Shaker
Director
Dated: February 24, 2010
Panglobal Brands (CE) (USOTC:PNGB)
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