UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
[ ] 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)
Check 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 is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 15, 2008, the Company had 37,630,530 shares of
common stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
- ii -
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. 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 the Companys or its 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 the Company believes that the expectations reflected
in the forward-looking statements are reasonable, it cannot guarantee future
results, levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results.
- iii -
PANGLOBAL BRANDS INC.
INDEX
- 1 -
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
September
|
|
|
|
June 30,
|
|
|
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,069,430
|
|
$
|
1,170,214
|
|
Accounts receivable, net of allowance of $335,030 and
$14,675 as of
|
|
633,999
|
|
|
29,975
|
|
June 30,
2008 and September 30, 2007, respectively
|
|
|
|
|
|
|
Due from factor, net
|
|
1,755,581
|
|
|
175,084
|
|
|
|
|
|
|
|
|
Inventory
|
|
1,439,153
|
|
|
309,700
|
|
Prepaid expenses and other current assets
|
|
160,791
|
|
|
51,004
|
|
Total
current assets
|
$
|
5,058,954
|
|
$
|
1,735,977
|
|
|
|
|
|
|
|
|
Property and equipment
,
net
|
|
523,959
|
|
|
210,930
|
|
Trademarks and intangible assets
|
|
1,177,235
|
|
|
|
|
Deposits
|
|
134,520
|
|
|
68,065
|
|
Total assets
|
$
|
6,894,668
|
|
$
|
2,014,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
2,891,527
|
|
|
396,988
|
|
Loan from officer
|
|
250,000
|
|
|
--
|
|
Convertible note payable to shareholders
|
|
750,000
|
|
|
10,000
|
|
Total current liabilities
|
$
|
3,891,527
|
|
$
|
406,988
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity :
|
|
|
|
|
|
|
Common stock, $0.0001 par value:
|
|
|
|
|
|
|
Authorized - 600,000,000 shares; issued and
outstanding 37,603,530 shares and
|
|
|
|
|
|
|
26,731,771 shares at June 30, 2008 and September 30, 2007,
respectively
|
|
10,960
|
|
|
2,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
14,436,224
|
|
|
6,363,418
|
|
Accumulated deficit
|
|
(11,444,043
|
)
|
|
(4,758,107
|
)
|
Total stockholders equity
|
|
3,003,141
|
|
|
1,607,984
|
|
Total
liabilities and stockholders equity
|
$
|
6,894,668
|
|
$
|
2,014,972
|
|
See accompanying notes to consolidated financial statements.
- 2 -
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
5,321,794
|
|
$
|
201,462
|
|
$
|
8,405,346
|
|
$
|
382,084
|
|
Cost of sales
|
|
4,268,641
|
|
|
590,264
|
|
|
6,657,008
|
|
|
1,006,442
|
|
Gross profit (loss)
|
|
1,053,153
|
|
|
(388,802
|
)
|
|
1,748,338
|
|
|
(624,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Design and development
|
|
784,967
|
|
|
152,211
|
|
|
2,580,354
|
|
|
229,481
|
|
Selling and shipping
|
|
708,711
|
|
|
88,972
|
|
|
1,613,190
|
|
|
326,391
|
|
General and administrative, including
|
|
|
|
|
|
|
|
|
|
|
|
|
$815,612 and $279,370 of stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2008 and 2007,
|
|
|
|
|
|
|
|
|
|
|
|
|
respectively; and $1,878,411 and $279,370
|
|
|
|
|
|
|
|
|
|
|
|
|
for the nine months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
and 2007, respectively
|
|
1,890,168
|
|
|
643,018
|
|
|
4,146,940
|
|
|
904,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
26,862
|
|
|
4,733
|
|
|
62,686
|
|
|
5,711
|
|
Total costs and expenses
|
|
3,410,708
|
|
|
888,934
|
|
|
8,403,170
|
|
|
1,466,440
|
|
|
|
(2,357,555
|
)
|
|
(1,277,736
|
)
|
|
(6,654,832
|
)
|
|
(2,090,798
|
)
|
Interest income
|
|
82
|
|
|
37,235
|
|
|
22,065
|
|
|
50,724
|
|
Interest (expense)
|
|
(44,679
|
)
|
|
----
|
|
|
(53,169
|
)
|
|
---
|
|
Interest income/(expense), net
|
|
(44,597
|
)
|
|
25
|
|
|
(31,104
|
)
|
|
50,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,402,152
|
)
|
$
|
(1,240,501
|
)
|
$
|
(6,685,936
|
)
|
$
|
(2,040,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
$
|
(0.23
|
)
|
$
|
(0.19
|
)
|
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding - basic and diluted
|
|
29,661,500
|
|
|
21,293,700
|
|
|
29,401,500
|
|
|
10,802,700
|
|
See accompanying notes to consolidated financial statements.
- 3 -
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deficit
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
|
|
(Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 (restated)
|
|
3,749,995
|
|
|
375
|
|
|
646,635
|
|
|
(833,236
|
)
|
|
(186,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to acquire in connection
|
|
11,396,550
|
|
|
1,140
|
|
|
(68,991
|
)
|
|
|
|
|
(67,851
|
)
|
with reverse merger transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to related parties for debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in connection with reverse merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transaction
|
|
975,000
|
|
|
97
|
|
|
389,903
|
|
|
|
|
|
390,000
|
|
Shares issued in private placement, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of offering costs of $21,900
|
|
10,610,226
|
|
|
1,061
|
|
|
4,751,641
|
|
|
|
|
|
4,752,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
644,230
|
|
|
|
|
|
644,230
|
|
Net loss for the year ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
(3,924,871
|
)
|
|
(3,924,871
|
)
|
Balance September 30, 2007
|
|
26,731,771
|
|
|
2,673
|
|
|
6,363,418
|
|
|
(4,758,107
|
)
|
|
1,607,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in private placement
|
|
10,871,759
|
|
|
8,287
|
|
|
6,145,531
|
|
|
|
|
|
6,153,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares to be issued as loan fees
|
|
|
|
|
|
|
|
48,863
|
|
|
|
|
|
48,863
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
1,878,412
|
|
|
|
|
|
1,878,412
|
|
Net loss for the nine months ended June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,685,936
|
)
|
30, 2008
|
|
|
|
|
|
|
|
|
|
|
(6,685,936
|
)
|
|
|
|
Balance, June 30, 2008
|
|
37,603,530
|
|
|
10,960
|
|
|
14,436,224
|
|
|
(11,444,043
|
)
|
|
3,003,141
|
|
See accompanying notes to consolidated financial statements.
- 4 -
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Nine
|
|
|
Nine
|
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
$
|
(6,685,936
|
)
|
$
|
(2,040,074
|
)
|
Adjustments to reconcile net loss to net
|
|
|
|
|
|
|
cash used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
62,686
|
|
|
5,511
|
|
Provision for bad debts
|
|
320,355
|
|
|
|
|
Provision for returns
|
|
(76,403
|
)
|
|
|
|
Stock-based compensation
|
|
1,878,412
|
|
|
279,370
|
|
Stock issued as loan fees
|
|
48,863
|
|
|
---
|
|
Loss on abandoned leasehold improvements
|
|
4,243
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
Accounts
receivable
|
|
(924,379
|
)
|
|
---
|
|
Due from factor
|
|
(1,504,094
|
)
|
|
(188,379
|
)
|
Inventory
|
|
(1,129,453
|
)
|
|
(400,393
|
)
|
Prepaid expenses and other current assets
|
|
(109,787
|
)
|
|
(5,737
|
)
|
Deposits
|
|
(66,455
|
)
|
|
(10,800
|
)
|
Increase (decrease) in -
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
2,494,539
|
|
|
200061
|
|
Net cash used in operating activities
|
|
(5,687,409
|
)
|
|
(2,160,241
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchase of office equipment
|
|
(379,958
|
)
|
|
(126,983
|
)
|
Purchase of trademarks and intangible
assets
|
|
(1,177,235
|
)
|
|
---
|
|
Net cash used in investing activities
|
|
(1,557,193
|
)
|
|
(126,983
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Gross proceeds from private placements
|
|
6,153,818
|
|
|
4,752,702
|
|
Loan from related party-officer
|
|
400,000
|
|
|
-
|
|
Proceeds from shareholder note
|
|
750,000
|
|
|
390,000
|
|
Repayment of related party loan
|
|
(160,000
|
)
|
|
(300,000
|
)
|
Net cash provided by financing activities
|
|
7,143,818
|
|
|
4,842,702
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash
|
|
(100,784
|
)
|
|
2,555,478
|
|
Cash and cash equivalents at beginning of period
|
|
1,170,214
|
|
|
150,922
|
|
Cash and cash equivalents at end of period
|
$
|
1,069,430
|
|
$
|
2,706,400
|
|
(continued)
- 5 -
PANGLOBAL BRANDS INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
|
|
Nine
|
|
|
Nine
|
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and
|
|
|
|
|
|
|
financing activities:
|
|
|
|
|
|
|
Liabilities assumed in connection with
reverse merger
|
$
|
---
|
|
$
|
67,851
|
|
|
|
|
|
|
|
|
Common stock issued in payment of debt
|
$
|
---
|
|
$
|
390,000
|
|
|
|
|
|
|
|
|
Common stock issued as loan fees
|
$
|
48,863
|
|
$
|
---
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for -
|
|
|
|
|
|
|
Interest
|
$
|
53,169
|
|
$
|
---
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
---
|
|
$
|
---
|
|
See accompanying notes to consolidated financial statements.
- 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), and effected a six-for-one forward split of its outstanding
common stock. All common share amounts referred to herein are presented on a
post-split basis. All options referred to herein were issued on a post-split
basis.
Mynk was incorporated in Nevada
on February 3, 2006 to engage in the business of design, manufacture and
distribution of clothing and accessories throughout the United States and
Canada.
Unless the context indicates otherwise, Panglobal and Mynk are
hereinafter referred to as the Company.
The Company sells its products
through a network of wholesale accounts. The Company was considered a
development stage company as defined in Statement of Financial Accounting
Standards No. 7, Accounting and Reporting by Development Stage Enterprises
until December 31, 2007, as it had not yet commenced any material
revenue-generating operations, did not have any material cash flows from
operations, and was dependent on debt and equity funding to finance its
operations. The Company recorded approximately $8.4 million in revenue in the
six months ended June 30, 2008 and is still dependent on financing, but no
longer considers itself a development stage company. The Company has elected
September 30 as its fiscal year-end.
Basis of Presentation
On May 11, 2007, Mynk completed a
transaction with Panglobal, whereby Mynk became a wholly-owned subsidiary of
Panglobal (see Note 3). Panglobal was a development stage company and had
terminated its prior operations by that date and was essentially a shell company
seeking a new business opportunity. For financial reporting purposes, Mynk was
considered the accounting acquirer in the merger and the merger was accounted
for as a reverse merger. The determination to account for this transaction as a
reverse merger was based on the fact that the shareholders and officers of Mynk
acquired effective control of Panglobal at the conclusion of the transactions
described herein, through control of the Board of Directors and ownership of
approximately 43% of the issued and outstanding shares of common stock of
Panglobal. Additional factors that Panglobal considered in arriving at this
determination included that through a series of planned and interdependent
transactions beginning in December 2006, as disclosed in Panglobals prior
filings with the Securities and Exchange Commission, Panglobal and its
controlling shareholder (who owned approximately 79% of the outstanding common
shares in December 2006) terminated Panglobals prior business operations,
changed its name, appointed new officers and directors, entered into a series of
stock-based transactions funded by Panglobals controlling shareholder to
facilitate the acquisition
- 7 -
and operations of Mynk, and raised approximately $4,750,000 of
equity capital from investors to fund the business operations of Mynk as a
wholly-owned subsidiary of Panglobal.
The controlling shareholder of
Panglobal returned 18,975,000 shares of common stock to the Company for
cancellation immediately prior to the closing of the transaction on May 10,
2007. Of the 11,396,550 shares of common stock retained by the Panglobal
shareholders on May 11, 2007 upon the closing of the transaction, 5,025,000
shares were owned by the controlling shareholder, resulting in the other public
shareholders owning 6,371,550 shares. Of such 5,025,000 shares, 2,025,000 shares
were subject to purchase and escrow agreements transferring such shares to new
management at June 30, 2007, and of the remaining 3,000,000 shares, 2,500,000
were transferred to a consultant to the Company, Lolly Factory (see Note 8), and
250,000 transferred to the Chief Financial Officer(see Note 3).
Accordingly, the historical
financial statements presented herein are those of Mynk and do not include the
historical financial results of Panglobal, except for the period subsequent to
May 11, 2007. The stockholders equity section of Panglobal has been
retroactively restated for all periods presented to reflect the accounting
effect of the reverse merger transaction. All costs associated with the reverse
merger transaction were expensed as incurred.
Interim Financial Information
The interim consolidated
financial statements are unaudited, but in the opinion of management of the
Company, contain all adjustments (including normal recurring adjustments),
necessary to present fairly the financial position at June 30, 2008, the results
of operations for the three and nine months ended June 30, 2008 and 2007, and
the cash flows for the nine months ended June 30, 2008 and 2007.
Operating results for the three
and nine months ended June 30, 2008 are not necessarily indicative of the
results to be expected for the full fiscal year ending September 30, 2008.
2. Business Operations and Summary of Significant Accounting
Policies
Going Concern and Plan of Operations
The Companys financial
statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. Prior to December 31, 2007 the Company had been in
the development stage. It has generated approximately $8.4 million in revenues
from operations for the six months ended June 30, 2008, but is still dependent
upon debt and equity financing which raises substantial doubt about its ability
to continue as a going concern. The Companys ability to continue as a going
concern is dependent upon its ability to develop continued additional sources of
capital, and achieve profitable operations. As of June 30, 2008, the Company had
an accumulated deficit of $11,444,043; and had incurred a net loss of $6,685,936
and used net cash in operating activities of $5,687,409 for the nine months
ended June 30, 2008. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
At June 30, 2008, the Company has
had two quarters of material revenue-generating operations. Principal activity
through December 31, 2007 related to the Companys formation, capital raising
efforts and initial product design and development activities. Revenue
generating activities generated $8.1 in revenue for the period from January
1-June 30, 2008 and the Company has an order backlog of approximately $8.5
million in prospective sales. The Company has yet to generate any material cash
flows from operations, and is essentially dependent on debt and equity funding
from both related and unrelated parties to finance its operations.
Prior to February 28, 2007, the
Companys cash requirements were funded by advances from Mynks founders. On
February 27, 2007, the Company completed an initial closing of its private
placement (see Note 3), selling 9,426,894 shares of common stock at a price of
$0.45 per share and receiving net proceeds of $4,220,203. On February 28, 2007,
the Company completed a second closing of its private placement, selling
1,183,332 shares of common stock at a price of $0.45 per share and receiving net
proceeds of $532,499.
- 8 -
On October 23, 2007, the Company
closed a private placement of 2,871,759 units for gross proceeds of $2,153,819.
Each unit was sold for $0.75 and consists of one common share and one common
share purchase warrant. Each common share purchase warrant entitles the holder
to purchase, if exercised, one additional common share of our company at a price
of $1.00 per common share until October 23, 2008 and at $1.50 per common share
if exercised during the period from October 24, 2008 until the warrants expire
on October 23, 2009.
The Company raised $4,000,000 in
a private placement selling 8,000,000 of its common shares at a price of $0.50
per share which officially closed on July 11, 2008; but is reflected at June 30,
2008 as cash had been received by the Company at quarter-end.
Principles of Consolidation
The accompanying consolidated
financial statements include the financial statements of Panglobal and its
wholly-owned subsidiary, Mynk Corporation. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and
cash equivalents, accounts receivable, due from factor, prepaid expenses,
accounts payable, accrued expenses, loan from officer and convertible note
payable to shareholders approximate their respective fair values due to the
short-term nature of these items and/or the current interest rates payable in
relation to current market conditions.
Cash and Cash Equivalents
The Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents. At times, such cash and cash equivalents may
exceed federally insured limits. The Company has not experienced a loss in such
accounts to date. The Company maintains its accounts with financial institutions
with high credit ratings.
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, the
Companys allowance for doubtful accounts has been estimated to be $335,000 at
June 30, 2008. The Companys credit losses for the periods presented have not
significantly exceeded managements estimates.
- 9 -
Concentration of Credit Risks
During the nine months ended June
30, 2008 sales to two customers accounted for 34% and 18% of the Companys net
sales. During the nine months ended June 30, 2008, purchases from one supplier
totaled approximately $1,308,000. At June 30, 2008, one customer accounted for
62% of the Accounts Receivable, net of allowance. At June 30, 2008, two
customers accounted for 46% and 13%, respectively, of the Due From Factor.
Inventory
Inventories are valued at the
lower of cost or market, with cost being determined by the first-in, first-out
method. The Company continually evaluates its inventories by assessing
slow-moving product and records mark-downs as appropriate. At June 30, 2008,
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.
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. There were no indicators of impairment of long lived assets or intangibles
based upon managements assessment at June 30, 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 based upon historical
percentages.
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
nine months ended June 30, 2008 and June 30, 2007 amounted to $39,745 and
$3,004, respectively.
- 10 -
Shipping and Handling Costs
The Company records shipping and
handling costs billed to customers as a component of revenue, and shipping and
handling costs incurred by the Company for inbound and outbound freight are
recorded as a component of cost of sales. Total shipping and handling costs
included as a component of cost of sales amounted to approximately $181,640 and
$12,586 for the nine months ended June 30, 2008 and June 30, 2007,
respectively.
Stock-Based Compensation
Effective February 3, 2006, the
Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS No. 123R), a revision to SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123R requires that the
Company measure the cost of employee services received in exchange for equity
awards based on the grant date fair value of the awards, with the cost to be
recognized as compensation expense in the Company's financial statements over
the period of benefit, which is generally the vesting period of the awards.
Accordingly, the Company recognizes compensation cost for equity-based
compensation for all new or modified grants issued after February 3, 2006
(Inception).
The Company accounts for stock
option and warrant grants issued and vesting to non-employees in accordance with
EITF No. 96-18, Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and
EITF 00-18, Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees, whereas the value of the stock
compensation is based upon the measurement date as determined at either (a) the
date at which a performance commitment is reached or (b) at the date at which
the necessary performance to earn the equity instruments is complete.
Income Taxes
The Company accounts for income
taxes under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax assets and
liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The Company will provide a
valuation allowance for the full amount of the deferred tax asset since there is
no assurance of future taxable income. Tax deductible losses can be carried
forward for 20 years until utilized.
Effective January 1, 2007, the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes (FIN 48). FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on de
recognition, classification, interest and penalties on income taxes, accounting
in interim periods and requires increased disclosures. The adoption of the
provisions of FIN 48 did not have a material effect on the Companys financial
statements. The Company currently files or has in the past filed income tax
returns in Canada and the United States. The Company is subject to tax
examinations by tax authorities for tax years ending in 2006 and subsequently.
The Companys policy is to record
interest and penalties on uncertain tax provisions as income tax expense. As of
June 30, 2008, the Company has no accrued interest or penalties related to
uncertain tax positions.
- 11 -
Loss per Common Share
Loss per common share is computed
by dividing net loss by the weighted average number of shares of common stock
outstanding during the respective periods. Basic and diluted loss per common
share are the same for all periods presented because all warrants and stock
options outstanding are anti-dilutive. The related party loan may be convertible
to common shares if not repaid by August 31, 2008, but the conversion is also
anti-dilutive. The 2,884,612 shares of common stock issued to the founders of
Mynk in conjunction with the closing of the reverse merger transaction on May
11, 2007 have been presented as outstanding for all periods presented.
3. Share Exchange Agreement and Private Placement
As a result of the sale of the
10,610,226 shares of common stock in late February 2007 at a per share price of
$0.45, and the acquisition of Mynk by Panglobal effective May 11, 2007, the
Company has determined that the grant date fair value charge to operations for
all stock options and other similar stock-based compensation that is amortizable
over future periods should begin on May 11, 2007, since that is the date on
which acquisition occurred and the period of benefit therefore began. Since the
Companys common stock traded on a very limited and sporadic basis prior to May
11, 2007, the Company has also determined that the best indicator of fair value
of the Companys common stock on May 11, 2007 was the $0.45 per share cash price
paid by the investors in the recent private placement, who owned approximately
40% of the issued and outstanding shares of common on May 11, 2007. These
determinations affected the accounting for the stock-based transactions noted
below through June 30, 2008.
Share Exchange Agreement
On May 11, 2007, pursuant to a
Share Exchange Agreement dated as of February 15, 2007 (the Share Exchange
Agreement) by and among Panglobal, the shareholders of Mynk Corporation
(Selling Shareholders) and Mynk, Panglobal issued 3,749,995 shares of its
common stock in exchange for all of the issued and outstanding shares of Mynk,
issued 975,000 shares of it common stock in payment of $390,000 of outstanding
loans to Mynk, and agreed to reimburse a shareholder of Mynk up to $100,000 for
outstanding amounts due (the Exchange).
Previously, on February 3, 2006,
Mynk had issued 10,000,000 shares of its common stock to its founders for
$497,700 in cash, and 3,000,000 shares of its common stock valued at $149,310,
as loan fees on June 20, 2006, for a total of 13,000,000 shares, which
constituted all of the issued and outstanding shares of Mynk prior to the
Exchange. The share exchange was conducted on the basis of 0.2884615 common
shares of Panglobal for every one common share of Mynk. As a result of the
Exchange, Mynk became a wholly-owned subsidiary of Panglobal.
The Company also agreed to file
with the Securities and Exchange Commission, within a reasonable time following
the closing of the Share Exchange Agreement, a registration statement on Form
SB-2 to effect the registration of half of the shares of the common stock that
were issued to Mynk shareholders pursuant to the Share Exchange Agreement. There
was no specified filing deadline or financial penalty if the Company failed to
file the registration statement.
Pursuant to the Exchange,
Panglobal issued to the Selling Shareholders 3,749,995 shares of its common
stock. Panglobal had a total of 26,731,771 shares of common stock issued and
outstanding after giving effect to the Exchange and the 10,610,226 shares of
common stock issued in the Companys two private placements.
As a result of the Exchange and
the shares of common stock issued in the two private placements, on May 11,
2007, the stockholders of the Company immediately prior to the Exchange owned
11,396,550 shares of common stock, equivalent to approximately 43% of the issued
and outstanding shares of the Companys common stock, and the Company was
controlled by the former stockholders of Mynk at that time.
- 12 -
Private Placements
On February 27, 2007, in
anticipation of the Exchange, the Company sold an aggregate of 9,426,894 shares
of its common stock to fifty accredited investors in an initial closing of its
private placement at a per share price of $0.45, resulting in aggregate gross
proceeds to the Company of $4,242,103. Net cash proceeds to the Company, after
the deduction of all private placement offering costs and expenses of $21,900,
were $4,220,203.
On February 28, 2007, the Company
sold an aggregate of 1,183,332 shares of its common stock to nine accredited
investors in a second closing of the private placement at a per share price of
$0.45, resulting in aggregate gross proceeds to the Company of $532,499. Net
cash proceeds to the Company were also $532,499.
Stephen Soller, the Companys
Chief Executive Officer, purchased 291,666 shares in the private placement for
$131,250. Craig Soller, the brother of Stephen Soller and a consultant to the
Company, purchased 244,444 shares of common stock in the private placement for
$110,000. Three Mynk shareholders also purchased an aggregate of 299,999 shares
in the private placement for $134,500.
On October 23, 2007, the Company
closed a private placement of 2,871,759 units for gross proceeds of $2,153,819.
Each unit was sold for $0.75 and consists of one common share and one common
share purchase warrant. Each common share purchase warrant entitles the holder
to purchase, if exercised, one additional common share of our company at a price
of $1.00 per common share until October 23, 2008 and at $1.50 per common share
if exercised during the period from October 24, 2008 until the warrants expire
on October 23, 2009.
On July 11, 2008, the Company closed a private placement,
selling 8,000,000 shares of common stock at a price of $0.50 per share for
proceeds of $4,000,000. We issued 560,000 shares pursuant to the exemption from
registration under the United States Securities Act of 1933 provided by Section
4(2), Section 4(6) and/or Rule 506 of Regulation D promulgated under the 1933
Act to four (4) investors who are accredited investors within the respective
meanings ascribed to that term in Rule 501(a) under the 1933 Act. We issued
7,440,000 shares to eighteen (18) non U.S. persons (as that term is defined in
Regulation S of the Securities Act of 1933) in an offshore transaction relying
on Regulation S and/or Section 4(2) of the Securities Act of 1933.
Stock Options
On January 18, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to Felix Wasser, the Companys Chief Financial Officer, a stock option
to purchase an aggregate of 250,000 shares of common stock, exercisable for a
period of five years at $0.30 per share, with one quarter vesting every six
months through January 18, 2009. The fair value of this option, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $97,500
($0.39 per share), and was being charged to operations ratably from May 11, 2007
through January 18, 2009. Felix Wasser resigned as an officer of the Company on
August 21, 2007 and no further charges to operations were recorded. Vesting has
ceased and the 250,000 options have been cancelled.
On February 12, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to Stephen Soller, the Companys Chief Executive Officer, stock options
to purchase an aggregate of 1,800,000 shares of common stock, exercisable for a
period of five years at $0.30 per share, with one-sixth vesting every six months
through February 12, 2010. The fair value of this option, as calculated pursuant
to the Black-Scholes option-pricing model, was determined to be $702,000 ($0.39
per share), and is being charged to operations ratably from May 11, 2007 through
February 12, 2010. During the three months ended June 30, 2008 the Company
recorded a charge to operations of $63,818 with respect to this option. During
the nine months ended June 30, 2008, the Company recorded a charge to operations
of $191,454 with respect to this option.
The fair value of these stock
options were calculated using the following Black-Scholes input variables: stock
price on date of grant - $0.45; exercise price - $0.30; expected life 4.67
4.75 years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 5.0% .
- 13 -
On February 12, 2007, in
anticipation of the closing of the Exchange and Private Placements, the Company
granted to two consultants stock options to purchase an aggregate of 375,000
shares of common stock exercisable for a period of five years at $0.45 per
share, with one-third of the options vesting annually on each of February 11,
2008, February 11, 2009 and February 11, 2010. The fair value of these options,
as calculated pursuant to the Black-Scholes option-pricing model, was initially
determined to be $142,500 ($0.38 per share). The fair value of such options is
being charged to operations ratably from May 11, 2007 through February 11, 2010.
In accordance with EITF 96-18, options granted to consultants are valued each
reporting period to determine the amount to be recorded as an expense in the
respective period. On June 30, the fair value of these options, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $0.50
per share, which resulted in a charge to operations of $5,682 during the three
months ended June 30, 2008. During the nine months ended June 30, 2008, the
Company recorded a charge to operations of $26,250 with respect to these
options. As the options vest, they will be valued on each vesting date and an
adjustment will be recorded for the difference between the value already
recorded and the then current value on the date of vesting. On October 31, 2007
the relationship of one of the consultants with the Company ended and options to
exercise 250,000 shares of common stock have been cancelled at that time and
previously calculated compensation in the amount of $34,205 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 250,000
options.
On February 12, 2007, the fair
value of the aforementioned stock options was calculated using the following
Black-Scholes input variables: stock price on date of grant - $0.45; exercise
price - $0.45; expected life 4.75 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% . On September 30, 2007, the
fair value of the aforementioned stock options was calculated using the
following Black-Scholes input variables: stock price of grant - $1.02; exercise
price - $0.45; expected life 4.625 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0%
On August 7, 2007, the Company
granted a consultant a stock option to purchase 100,000 shares of common stock
exercisable for a period of one year at $0.45 per share, all of which were fully
vested upon issuance, for past services through June 2007. The fair value of
this option, as calculated pursuant to the Black-Scholes option-pricing model,
was determined to be $69,000 ($0.69 per share), and was charged to operations at
June 30, 2007. At June 30, 2008, the Company agreed to extend the exercise
period by one year. The fair value of the one year extension, as calculated
pursuant to the Black-Scholes option pricing model, was determined to be $35,000
($0.35 per share), and was fully charged to operations at June 30, 2008.
On October 23, 2007, the Company
granted to Charles Lesser, the Companys Chief Financial Officer, stock options
to purchase an aggregate of 480,000 shares of common stock, exercisable for a
period of five years at $0.75 per share, with 10,000 shares vesting monthly
commencing January 1, 2008 through December 1, 2011. The fair value of this
option, as calculated pursuant to the Black-Scholes option-pricing model, was
determined to be $355,200 ($0.74 per share), and is being charged to operations
ratably from November 1, 2007 through December 1, 2011. During the three months
ended June 30, 2008, and during the nine months ended June 30, 2008 the Company
recorded a charge to operations of $21,312 and $56,832, respectively 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 - $0.88; exercise price - $0.75; expected life 4.25
4.50 years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 5.0% .
On October 23, 2007, the Company
granted to Charles Lesser, the Companys Chief Financial Officer, Incentive
stock options to purchase an aggregate of 660,000 shares of common stock,
exercisable for a period of five years at $0.75 per share, with 132,000 shares
vesting on December 1, 2007 and 11,000 shares vesting monthly commencing January
1, 2008 through December 1, 2011. The fair value of this option, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be
$488,400 ($0.74 per share), and is being charged to operations ratably from
November 1, 2007 through December 1, 2011. During the three months ended June
30, 2008 and during the nine months ended June 30, 2008, the Company recorded a
charge to operations of $29,304 and $78,144, respectively, with respect to this
option.
- 14 -
The fair value of these stock
options were calculated using the following Black-Scholes input variables: stock
price on date of grant - $0.88; exercise price - $0.75; expected life 4.25
4.50 years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 5.0% .
On April 18, 2008, the Company
granted to 15 employees, stock options to purchase an aggregate of 1,535,000
shares of common stock, exercisable for a period of five years at $1.10 per
share, with twenty five percent of the shares vesting each year through April
18, 2012. The fair value of this option, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $1,427,550 ($0.93 per
share). On June 17, 2008 the Company decided to lower the exercise price to
reflect market conditions to $0.75 per share. The fair value of the option at
that date, as calculated by the Black-Scholes option pricing model, was
determined to be $1,473,600 ($0.96 per share) and is being charged to operations
ratably from April 18, 2008 through April 17, 2012. During the three months
ended June 30, 2008 the Company recorded a charge to operations of $92,100 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 - $1.10; exercise price - $0.75; expected life 4.75
5.00 years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 3.0% .
On June 17, 2008, the Company granted to 3 employees, stock
options to purchase an aggregate of 185,000 shares of common stock, exercisable
for a period of five years at $0.75 per share, with twenty five percent of the
shares vesting each year through June 17, 2012. The fair value of this option,
as calculated pursuant to the Black-Scholes option-pricing model, was determined
to be $111,000 ($0.60 per share and is being charged to operations ratably from
June 17, 2008 through June 17, 2012. During the three months ended June 30, 2008
the Company recorded a charge to operations of $6,938 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 - $.71; exercise price - $0.75; expected life 4.75
5.00 years; expected volatility -125%; expected dividend yield - 0%; risk-free
interest rate 3.0% .
During the period from February
3, 2006 (Inception) through December 31, 2006, the Company did not issue any
stock options.
A summary of stock option activity for the nine months ended
June 30, 2008 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2007
|
|
2,337,500
|
|
$
|
0.333
|
|
|
4.23
|
|
Granted
|
|
2,860,000
|
|
|
0.750
|
|
|
4.80
|
|
Exercised
|
|
---
|
|
|
---
|
|
|
---
|
|
Cancelled
|
|
(312,500
|
)
|
|
0.420
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
4,885,000
|
|
$
|
0.570
|
|
|
4.23
|
|
Options exercisable at June 30, 2008
|
|
999,667
|
|
$
|
0.437
|
|
|
3.75
|
|
The aggregate intrinsic value of stock options outstanding at
June 30, 2008 was $244,250.
- 15 -
Share Purchase Agreements
In anticipation of the closing of
the Exchange and Private Placements, additional compensatory transactions were
entered into pursuant to various Share Purchase Agreements between Jacques
Ninio, the controlling shareholder of Panglobal at that time, and the Chief
Executive Officer and certain other consultants. Since these transactions were
intended to benefit the Company and were entered into by an affiliate of the
Company, the Company has recorded these transactions on its financial statements
as follows:
On February 12, 2007, Stephen
Soller, the Companys Chief Executive Officer, purchased 519,250 shares of
common stock from two former founding shareholders of Mynk at a price of $0.325
per share. The fair value of this transaction was determined to be in excess of
the purchase price by $64,904 ($0.125 per share), reflecting the difference
between the $0.325 purchase price and the $0.45 private placement price, and was
charged to operations on May 11, 2007.
On February 12, 2007, Stephen
Soller, the Companys Chief Executive Officer, acquired the beneficial rights to
1,800,000 shares of common stock from Jacques Ninio, the controlling shareholder
of Panglobal at that time, at a price of $0.0001 per share. Pursuant to a
related Escrow Agreement, the shares are to vest and be released to Mr. Soller
at the rate of 600,000 shares every six months beginning on August 12, 2007,
provided that Mr. Sollers underlying employment agreement has not been
terminated. The fair value of this transaction, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $810,000 ($0.45 per
share), reflecting the difference between the $0.0001 purchase price and the
$0.45 private placement price, and is being charged to operations ratably from
May 11, 2007 through August 11, 2008. During the three months ended June 30,
2008, the Company recorded a charge to operations of $162,000. During the nine
months ended June 30, 2008, the Company recorded a charge to operations of
$486,000.
On February 12, 2007, the fair
value of the aforementioned share purchases was calculated using the following
Black-Scholes input variables: stock price on date of grant - $0.45; exercise
price - $0.0001; expected life 1.25 years; expected volatility - 125%;
expected dividend yield - 0%; risk-free interest rate 5.0% . On May 11, 2007,
the fair value of the aforementioned share purchases was calculated using the
following Black-Scholes input variables: stock price of grant - $0.45; exercise
price - $0.0001; expected life 3 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% . At June 30, 2007, the fair
value of the aforementioned share purchase was calculated using the following
Black-Scholes input variables: stock price of grant - $1.02; exercise price -
$0.0001; expected life 2.875 years; expected volatility - 125%; expected
dividend yield - 0%; risk-free interest rate 5.0% .
On May 11, 2007, Craig Soller and
David Long, two consultants to the Company, acquired the beneficial rights to
125,000 shares and 100,000 shares of common stock, respectively, from Jacques
Ninio, the controlling shareholder of Panglobal at that time, at a price of
$0.0001 per share. Pursuant to related Escrow Agreements, the 225,000 shares are
to vest and be released to the consultants at the rate of 75,000 shares annually
beginning on May 11, 2008, provided that the underlying consulting agreements
have not been terminated. The fair value of these transactions, as calculated
pursuant to the Black-Scholes option-pricing model, was initially determined to
be $101,250 ($0.45 per share), reflecting the difference between the $0.0001
purchase price and the $0.45 private placement price. In accordance with EITF
96-18, such compensation arrangements granted to consultants are valued each
reporting period to determine the amount to be recorded as an expense in the
respective period. On June 30, 2008, the fair value of the transaction, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $77,500 ($0.62 per share), which resulted in a charge to operations of $6,458
during the three months ended June 30, 2008 and a charge to operations of
$24,014 during the nine months ended June 30, 2008. 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.
- 16 -
On October 31, 2007, David Long,
as part of a settlement agreement, acquired the beneficial rights to acquire
20,000 shares of common stock from Jacques Ninio, a shareholder of Panglobal ,
at a price of $0.0001 per share. The 20,000 shares are to vest immediately. The
fair value of this transaction, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $20,000 ($1.00 per share), reflecting
the difference between the $0.0001 purchase price and the $1.00 fair market
value on October 31, 2007 and the amount of $20,000 was charged to operations
during the three months ended December 31, 2007.
On October 23, 2007, Charles
Lesser, the Companys Chief Financial 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 is being charged to operations ratably from November 1, 2007
through June 30, 2009. During the three months ended June 30,, 2008, the Company
recorded a charge to operations of $33,000 and during the nine months ended June
30, 2008, the Company recorded a charge to operations of $86,000.
4. Accounts Receivable .
The Company also sells goods to
some of its customers and assumes the credit risk. At June 30, 2008 management
has determined that a misunderstanding with a customer could result in a
$300,000 doubtful debt. Accounts receivable, as presented in the balance sheet
at June 30, 2008 and September 30, 2007 is presented below:
|
|
June 30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Outstanding accounts receivable
|
$
|
969,029
|
|
$
|
44,650
|
|
Less: allowance for doubtful debts
|
|
(335,030
|
)
|
|
(14,675
|
)
|
|
|
|
|
|
|
|
|
$
|
633,999
|
|
$
|
29,975
|
|
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, 75% of eligible outstanding
accounts receivable. The factor holds as security substantially all assets of
the Company and charges interest at a rate of prime plus 1.0% on the outstanding
advances. At March 31, 2008, the Company had a cash account in the amount of
$400,000 with the factor to be used as collateral for the loans advanced. On May
5, 2008 the cash collateral was reduced to $300,000. The Company is liable to
the factor for merchandise disputes and customer claims on receivables sold to
the factor. The factoring agreement expires on March 4, 2009.
At times, our customers place
orders that exceed the credit that they have available from the factor. We
evaluate those orders to consider if the customer is worthy of additional credit
based on our past experience with the customer. If we decide to sell merchandise
to the customer on credit, we take the credit risk for the amounts that are
above their approved credit limit with the factor. As of June 30, 2008, the
amount of Due from Factor for which we bear the credit risk is $406,000.
- 17 -
For the nine months ended June
30, 2008 and 2007, the Company paid a total of approximately $35,267 and $0,
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
chargebacks and other deductions as presented in the balance sheet at June 30,
2008 and September 30, 2007 is summarized below:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Outstanding factored receivables
|
$
|
3,172,306
|
|
$
|
292,119
|
|
Cash collateral reserve
|
|
300,000
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
3,472,306
|
|
|
292,119
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(1,676,093
|
)
|
|
-----
|
|
Reserves for chargeback and other
deductibles
|
|
(40,632
|
)
|
|
(117,035
|
)
|
|
|
|
|
|
|
|
|
$
|
1,755,581
|
|
$
|
175,084
|
|
6. Inventory
Inventory consists of the following at June 30, 2008 and
September 30, 2007:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Finished goods
|
$
|
1,091,638
|
|
$
|
135,546
|
|
Work-in-process
|
|
182,041
|
|
|
15,896
|
|
Raw materials
|
|
165,474
|
|
|
158,258
|
|
|
$
|
1,439,153
|
|
$
|
309,700
|
|
7. Property and Equipment
A summary of property and equipment at June 30, 2008 and
September 30, 2007 is as follows:
|
|
June 30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Machinery and equipment
|
$
|
139,496
|
|
$
|
128,585
|
|
Computer hardware and software
|
|
164,179
|
|
|
56,669
|
|
Furniture and fixtures
|
|
72,749
|
|
|
18,815
|
|
Leasehold improvements
|
|
137,656
|
|
|
19,688
|
|
|
|
598,781
|
|
|
223,757
|
|
Less accumulated depreciation and amortization
|
|
(74,822
|
)
|
|
(12,827
|
)
|
|
$
|
523,959
|
|
$
|
210,930
|
|
Depreciation and amortization
expense for the nine months ended June 30, 2008 and 2007 was $62,686 and $5,711,
respectively.
- 18 -
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 r used in marketing apparel
products under the Scrapbook 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 two trademarks, Scrapbook and Crafty Couture.
The purchase price was allocated as follows:
Office equipment and furniture
|
$ 22,765
|
Trademarks and intangible assets
|
1,177,235
|
Total Purchase price
|
$ 1,200,000
|
The Company engaged an
independent firm of appraisers to perform a valuation of the purchased assets
and determined that the price paid represented a fair price and that no
adjustment needs to be made.
Employment of Kelly Kaneda
The Company subsequently hired
Kelly Kaneda, the originator of the Scrapbook label at a salary of $150,000 per
year for the first 12 months, increasing by $25,000 per year for each of three
additional years.. In addition, Mr. Kaneda shall receive a commission of one and
one-half percent (1.5%) on the net sales of the Scrapbook Division. Net sales
shall be defined as gross sales less discounts, markdowns, returns, losses for
uncollected accounts, and other allowances actually taken by customers. Mr.
Kaneda has received a signing bonus of 200,000 shares of restricted common
stock. The fair value of this transaction, as calculated pursuant to the
Black-Scholes option-pricing model, was determined to be $128,000 ($0.64 per
share), and, as these shares are fully vested, is being charged to operations at
June 30, 2008.
In each of the first four (4)
years of Mr. Kanedas employment commencing June, 2008, upon attainment of
specified sales targets, he shall receive restricted common stock in the amounts
set forth below, which stock shall be transferred and shall vest on the last day
of the applicable contract year. In the event that Mr. Kaneda is terminated
other than for cause or Mr. Kaneda resigns for cause, he shall be entitled to a
prorated portion of the annual stock bonus, calculated through the effective
date of termination or resignation.
- 19 -
Year
|
Sales Goals
|
|
Shares of
Stock
|
Year 1
|
$20,000,000
|
|
200,000
|
Year 2
|
$25,000,000
|
|
250,000
|
Year 3
|
$30,000,000
|
|
250,000
|
Year 4
|
$40,000,000
|
|
250,000
|
|
|
Total:
|
950,000
|
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.
Convertible Note Payable to Shareholders
On March 3, 2008 the Company
entered into a Revolving Loan Agreement with two of the shareholders of the
Company. 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 must 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 is an outstanding amount on the Loan, the lenders may convert, by
written notice, either a portion or the total amount of the outstanding loan to
common shares of the Company at a price per share equal to the lesser of:
|
a)
|
the average closing bid for the five (5) trading days
immediately preceding the first advance date of February 26, 2008;
or
|
|
|
|
|
b)
|
the average closing bid price for the five (5) trading
days immediately preceding the notice of intent to
convert.
|
At June 30, 2008 the Company had
an outstanding balance of $750,000 on the loan. During the three months ended
June 30, 2008, the Company paid $14,340 in interest expense on the Loan.
Loan from Officer
From April 17-30, 2008 an officer
of the Company advanced an aggregate of $400,000, free of interest, to the
Company as a short term loan. At June 30, 2008 the balance of the loan was
$250,000. As of the date of this report, the balance of the loan is $0.
- 20 -
10. Consulting Agreement for Sosik
On August 20, 2007 the Company
signed a consulting agreement with Lolly Factory, Inc. and its sole shareholder
(Consultant) to provide sales and merchandising consulting services for the
Sosik and Juniors apparel divisions through December 31, 2010. Consulting fees
totaling $452,125 were payable between September 2007 and June 2008 and have
been fully paid. For the nine months ended June 30, 2008, $360,675 in consulting
fees were paid. In addition, under the consulting agreement the Consultant shall
earn a 3.5% commission on the Sosik/Junior divisions net sales. The Company
recorded sales commission expense of $62,499 and $124,998 for the three months
and nine months ended June 30, 2008, respectively. The Consultant also earns
100,000 of our common shares payable each month from September, 2007 to June,
2008, up to an aggregate of 1,000,000 common shares which shares are deemed to
be earned and vested each month. The Company recorded an expense to operations
in the amount of $232,000 for 300,000 common shares earned for the three months
ended June 30, 2008 and an expense of $694,000 for the nine months ended June
30, 2008.
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 Company has not accrued an expense for issuing shares for
meeting the sales target for 2008.
11. Common Stock
Prior to December 15, 2006, the
Companys Articles of Incorporation authorized the issuance of 100,000,000
shares of the Companys common stock with a par value of $0.0001 per share. On
February 2, 2007 the Company increased the number of its authorized shares of
common stock to 600,000,000 shares. The Company does not have any preferred
stock authorized.
On February 2, 2007, the Company
effected a six-for-one forward split of its outstanding common stock. All common
share amounts referred to herein are presented on a post-split basis. All
options referred to herein were issued on a post-split basis.
Mynks initial capitalization
consisted of cash of $497,700 in exchange for the issuance of 10,000,000 shares
of Mynk common stock (equivalent to 2,884,612 shares of Panglobal common
stock).
On May 11, 2007, pursuant to a
Share Exchange Agreement dated as of February 15, 2007 (the Share Exchange
Agreement) by and among Panglobal, the shareholders of Mynk Corporation
(Selling Shareholders) and Mynk, Panglobal issued 3,749,995 shares of its
common stock in exchange for all of the issued and outstanding shares of Mynk,
issued 975,000 shares of it common stock in payment of $390,000 of outstanding
loans to Mynk, and agreed to reimburse a shareholder of Mynk up to $100,000 for
outstanding amounts due (the Exchange). Previously, on February 3, 2006, Mynk
had issued 10,000,000 shares of its common stock to its founders for $497,700 in
cash, and 3,000,000 shares of its common stock valued at $149,310, as loan fees
on June 20, 2006, for a total of 13,000,000 shares, which constituted all of the
issued and outstanding shares of Mynk prior to the Exchange. The share exchange
was conducted on the basis of 0.2884615 common shares of Panglobal for every one
common share of Mynk.
- 21 -
12. Commitments
The Companys executive and head
office moved on February 15, 2008 to 2853 E. Pico Blvd., Los Angeles, CA 90023.
The Company has signed a three year lease for the new head office measuring
18,200 square feet at a monthly rental of $11,500. The lease began on January 1,
2008 and the Company moved into the new premises on February 15, 2008. Total
rent expense for the nine months ended June 30, 2008 and 2007 was $226,699 and
$34,254, respectively. Total rent expense for the three months ended June 30,
2008 and 2007 was $82,155 and $18,474, respectively.
The table below sets forth the Companys lease obligations
through 2012.
Year ending September 30,
2008
|
$
|
83,646
|
|
2009
|
$
|
342,406
|
|
2010
|
$
|
353,528
|
|
2011
|
$
|
222,609
|
|
2012
|
$
|
123,027
|
|
Thereafter
|
$
|
10,278
|
|
|
|
|
|
|
$
|
1,135,495
|
|
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.
13. Income Taxes
Potential benefits of income tax
losses are not recognized in the accounts until realization is more likely than
not. The Company has adopted SFAS No. 109 Accounting for Income Taxes as of
its inception. Pursuant to SFAS No. 109 the Company is required to compute tax
asset benefits for net operating losses carried forward. The potential benefits
of net operating losses have not been recognized in these financial statements
because the Company cannot be assured it is more likely than not it will utilize
the net operating losses carried forward in future years.
The deferred tax benefit is composed of the following:
|
2007
|
2006
|
Deferred tax benefit: Federal
|
$1,392,000
|
$280,000
|
Deferred tax benefit: State
|
361,000
|
73,000
|
Total benefit of NOL carryforward
|
1,753,000
|
$353,000
|
Valuation allowance
|
(1,753,000)
|
(353,000)
|
Total
|
$0
|
$0
|
As of June 30, 2008 unused net
operating losses equal to $3,966,000 are available for 17 years to offsetfuture
years federal and state taxable income. SFAS 109 requires that the tax benefit
of such NOLs be recorded using current tax rates as an asset to the extent
management assesses the utilization of such NOLs to be more likely than not.
Based upon the Company's short term historical operating performance, the
Company provided a full valuation allowance against the deferred tax asset.
- 22 -
Item 2. Managements Discussion and Analysis or Plan of
Operation.
The following discussion should
be read in conjunction with our Form 10-KSB and the audited consolidated
financial statements and the related notes for the year ended September 30, 2007
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
annual report, particularly in the section entitled "Risk Factors" beginning on
page 29 of this annual report.?
Our financial statements are
stated in United States Dollars and are prepared in accordance with United
States Generally Accepted Accounting Principles.
As used in this quarterly report,
the terms "we", "us", "our" and "Panglobal" mean Panglobal Brands Inc. and our
wholly owned subsidiary Mynk Corporation, unless otherwise indicated.
Overview
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 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.
- 23 -
Our Current Business
Business Strategy
Our strategy is to build a series
of apparel brands, consisting of mainly womens apparel, and to build brand
recognition by marketing our products to fashion conscious, affluent consumers
who shop in high-end boutiques and department stores and who want to wear and be
seen in the latest and most fashionable clothing and accessories. We plan to
update our product offerings continually to be seen as a trend setter in
fashionable clothing and accessories. We also are targeting the junior market
and design, have manufactured and sell junior denim, t-shirts, dresses and other
apparel. Lastly, based upon our branded products, we expect to be offered the
opportunity to manufacture private label womens apparel including dresses,
skirts and knit and woven tops.
We operate all of our apparel businesses through our
wholly-owned subsidiary, Mynk Corporation .
Our divisions are aggregated into
three major consumer market product groupings-Sosik, Scrapbook and Sportswear.
The major consumer divisions are as follows:
SOSIK-Sosik designs, merchandises
and sells junior t-shirts, dresses, skirts and knit and woven tops and other
apparel and is manufactured in Asia. Junior apparel includes clothing for girls
ages 14-22 as well as products for children ages 6-14. Sales of Sosik, including
products that will be sold under private labels for junior products commenced in
October, 2007 and shipments commenced in January 2008. We anticipate that
greater than 50% of our revenue for our fiscal year ending September 30, 2008
will be from Sosik and junior products; currently Sosik sales are approximately
75% of total sales. Customers include Charlotte Russe, Forever 21, Wet Seal,
Guess, Ross and Limited Too.
SCRAPBOOK-Scrapbook and Crafty
Couture trademarks were acquired June 18, 2008. The Scrapbook label is aimed at
junior (teen and early 20s) contemporary markets and is known for its mix and
match prints and comfortable knit fabrics. Scrapbook products can be found at
better department stores and boutiques. Major customers include Nordstroms
followed by Delias, Dillards, Macys, Anthropologie, Top Shop (in London, UK),
Forever 21 and Hot Topic. Panglobal Brands, Inc. will be employing Kelly Kaneda,
founder of the brand, to be the new president of the Scrapbook division of
Panglobal Brands, Inc. Crafty Couture is less fashionable and aimed at a younger
market, early through late teens.
The following four divisions have been consolidated into the
sportswear group.
HAUTEUR MYNK-Hauteur Mynk is a
trademarked brand name selling premium denim jeans, skirts, dresses and shorts.
Mynk is currently sold at Saks Fifth Avenue and approximately 100 premium
boutiques throughout the U.S. Mynk products are manufactured in Los Angeles
using Italian denim fabric. The products image is a low-rise, soft, sexy look
perfect for evening wear and is available for both women and men. The retail
price point ranges from $200-240 for denim bottoms. Competition is strong from
larger companies including Seven, True Religion, Paige Denim, Citizens for
Humanity, Rock and Republic, etc.
NELA-Nela designs, merchandises
and sells women's better dresses using Italian prints and related fabrics. The
dresses are manufactured under contract in Asia and a royalty fee will be paid
to the Italian fabric manufacturer. We commenced shipments in February 2008. We
intend to sell Nela designs through high-end department stores and boutiques
catering to a contemporary woman 30+ years old. Retail prices points will range
from $280-400 and competition includes well-known designers such as Diane von
Furstenburg, Marc by Marc Jacobs, Rozae Nichols, Milly, Tibi, etc.
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 and will be manufactured in
Asia. Prospective retail customers include Federated department store chains.
Competition includes Velvet, Ella Moss and A Common Thread.
- 24 -
PRIVATE LABEL- Lastly, based upon our branded products, we
expect 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 shipments beginning January, 2008 included
customers such as Sears Holdings and Victorias Secret.
We anticipate no significant
change in our products lines or new apparel industry divisions. In all of our
divisions, we purchase finished goods from numerous contract manufacturers and
to a lesser extent raw materials directly from numerous textile mills and yarn
producers and converters. We have not experienced difficulty in obtaining
finished goods or raw materials essential to our business in any of our apparel
business divisions.
We plan on outsourcing our
warehousing and shipping functions to a third party warehousing company designed
to ship apparel products for multiple companies.
We maintain a company website at www.panglobalbrand.com where
examples of our products can be seen.
Consulting Agreement for Sosik Division
On August 20, 2007 the Company
signed a consulting agreement with Lolly Factory, Inc. and its sole shareholder
(Consultant) to provide sales and merchandising consulting services for the
Sosik and Juniors apparel divisions through December 31, 2010. Consulting fees
totaling $452,125 were payable between September 2007 and June 2008 and have
been fully paid. For the nine months ended June 30, 2008, $360,675 in consulting
fees were paid. In addition, under the consulting agreement the Consultant shall
earn a 3.5% commission on the Sosik/Junior divisions net sales. The Company
recorded sales commission expense of $62,499 and $124,998 for the three months
and nine months ended June 30, 2008, respectively. The Consultant also earns
100,000 of our common shares payable each month from September, 2007 to June,
2008, up to an aggregate of 1,000,000 common shares which shares are deemed to
be earned and vested each month. The Company recorded an expense to operations
in the amount of $232,000 for 300,000 common shares earned for the three months
ended June 30, 2008 and an expense of $694,000 for the nine months ended June
30, 2008.
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;
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|
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|
(ii)
|
500,000 shares upon meeting the sales target for calendar
year 2009; and,
|
|
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(iii)
|
500,000 shares upon meeting the sales target for calendar
year 2010.
|
The Company has not accrued an expense for issuing shares for
meeting the sales target for 2008.
Manufacturing
We outsource all of our
manufacturing to third parties on an order-by-order basis. These contract
manufacturers are found in Asia, Mexico and the United States and they will
manufacture our garments on an order-by-order basis. We believe that we will be
able to meet our production needs in this way. Although the various fabrics that
we intend to use in the manufacture of our products will be of the high quality,
they are available from many suppliers in the United States and abroad.
Employees
As of August, 2008, we have 78
full-time employees: four (4) are executive, fifteen (15) are design staff,
twenty four (24) are production staff, seventeen (17) are sewing staff, eight
(8) are sales staff, six (6) are customer service
- 25 -
and shipping staff and four (4) 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.
Financial Condition, Liquidity and Capital Resources
At June 30, 2008, we had working
capital t of $1,167,427.
At June 30, 2008, our total assets were
$6,894,668 of which $1,069,430 consisted of cash.
At June 30, 2008, our total liabilities
were $3,891,527.
Assets
Our current assets totaled
$5,058,954 and $1,735,997 at June 30, 2008 and September 30, 2007, respectively.
Total assets were $6,894,668 and $2,014,972 at March 31, 2008 and September 30,
2007, respectively. The increase in current assets is primarily due to the
growth in accounts receivable, due from factor and inventory as the Companys
sales increased to $2.9 million for three months ending March 31, 2008 and to
$5.3 million for the three months ended June 30, 2008.
Liabilities and Working Capital
Our current liabilities totaled
$3,891,527 and $406,988 at June 30, 2008 and September 30, 2007, respectively.
This resulted in working capital of $1,167,427 at June 30, 2008 as accounts
payable increased due to increased purchases of goods for resale and a
short-term loan and advance from officer was necessary to fund losses. We had no
long term debt in either year.
Cash Requirements and Additional Funding
On February 27 and 28, 2007, we
raised approximately $4,774,602 through the sale of our equity securities in
private placement transactions. We have also earned revenues from the sale of
our fall product line. With the money we raised through the private placements
and the revenue we earned through the sale of our products, we were able to pay
our operating expenses for approximately the next nine months. At that point, we
anticipated requiring further corporate financing i to carry out our business
plan.
On October 23, 2007, the Company
closed a private placement of 2,871,759 units for gross proceeds of $2,153,819.
Each unit was sold for $0.75 and consists of one common share and one common
share purchase warrant. Each common share purchase warrant entitles the holder
to purchase, if exercised, one additional common share of our company at a price
of $1.00 per common share until October 23, 2008 and at $1.50 per common share
if exercised during the period from October 24, 2008 until the warrants expire
on October 23, 2009.
On March 3, 2008 the Company
entered into a Revolving Loan Agreement with two of the shareholders of the
Company. 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 must 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.
- 26 -
At any time after August 31,
2008, if there is an outstanding amount on the Loan, the lenders may convert, by
written notice, either a portion or the total amount of the outstanding loan to
common shares of the Company at a price per share equal to the lesser of:
|
a)
|
the average closing bid for the five (5) trading days
immediately preceding the first advance date of February 26, 2008;
or
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b)
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the average closing bid price for the five (5) trading
days immediately preceding the notice of intent to
convert.
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At June 30, 2008 the Company had
an outstanding balance of $750,000 on the loan. During the three months ended
June 30, 2008, the Company paid $14,340 in interest expense on the Loan.
Advance by Officer
From April 17-30, 2008 an officer
of the Company advanced an aggregate of $400,000, free of interest, to the
Company as a short term loan. At June 30, 2008 the balance of the officer
advance was $250,000. As of the date of this report, the balance of the officer
advance is $0.
Private Placement
The Company raised $4,000,000 in
a private placement selling 8,000,000 of its common shares at a price of $0.50
per share which officially closed on July 11, 2008; but is reflected at June 30,
2008 as cash had been received by the Company at quarter-end. There are no
assurances that we will earn the funds required for our continued operation. If
we do not earn the required revenues, then we will have to seek another source
of financing, likely through the sale of more shares of our common stock or
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
extending through December 2008. 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.
The Nine Months Ended June 30, 2008 Compared to the Nine
Months Ended June 30, 2007
Revenue
Net sales for the nine months
ended June 30, 2008 totaled $8,405,346. Sales of Sosik/junior apparel totaled
$6,147,666, sales of Scrapbook apparel totaled $1,125,277 and the remainder of
the sales were Tea and Honey, Nela dresses and Hauteur Mynk denim jeans. Net
sales for the nin months ended June 30, 2007 were $382,084. The $8,405,346
increase was the result of the increase in and expansion of our operations. Net
sales for the nine months ended June 30, 2007 were $382,084. The increase was
due to the increase in and expansion of our operations. All of the sales during
the nine months ended June 30, 2007, were sales of Hauteur Mynk denim jeans.
Gross profit/(loss) was $1,748,338 and ($624,358) for the nine months ended June
30, 2008 and 2007 respectively. Sales returns for the nine months ended June 30,
2007 totaled $258,664 causing a negative gross profit as the Company neared the
end of denim jeans being returned due to earlier manufacturing problems. At this
time, we have a backlog of sales orders in excess $8.2 million for shipments
through December 2008. With the addition of Scrapbook, our sales mix is
changing. Approximately 41% of these orders are for Sosik and junior apparel
products
- 27 -
including skirts and knit and woven tops, 45% are for Scrapbook
apparel, and the balance is for Mynk jeans, Tea and Honey dresses and Nela
dresses. Our Sosik products are sold through in-house sales staff and we have
corporate sales showrooms in Los Angeles and New York. Our Scrapbook apparel is
sold through in-house sales staff and independent sales showrooms in Chicago,
Dallas and Miami. Our Mynk/Nela/Tea and Honey products are sold through in-house
sales staff and a corporate sales showroom in New York, and through contract
outside sales showrooms in Los Angeles earning sales commissions of 10-12%.
Expenses
Our total costs and expenses were
$8,403,170 for the nine months ended June 30, 2008. This included $2,580,354 in
design and development expenses and $1,613,190 in Selling and shippingexpenses,
$62,686 in depreciation and amortization and $4,146,940 in general and
administrative expenses, of which $1,878,400 consisted of non-cash compensation
expenses. Expenses for the nine months ended June 30, 2007 totalled $1,466,400.
The increase was due to the increase in and expansion of our operations. Our
costs and expenses for the nine months ended June 30, 2007 related mainly to the
original start-up of Mynk Corporation and the development and sales of Hauteur
Mynk jeans. For the nine months ended June 30, 2007, design and development
expenses totaled $229,481, selling and shipping expenses totalled $326,391,
general and administrative expenses were $904,857 and depreciation and
amortization expenses were $5,711 . During this period, designers for all of our
product divisions developed collections for shipping during 2008 and into 2009.
Salaries totaled $521,000. Purchases of sample fabric and trims totaled
$272,000. Production expenses consist of production staff salaries ($252,000),
production patternmaking salaries ($401,000), sample sewers salaries ($480,000),
fabric cutting ($91,000) and outside services ($51,000).
For the nine months ended June
30, 2008 selling and shipping expense totaled $1,613,190 compared to $326,391
for the nine months ended June 30, 2007 due to the increase in sales volume.
During the nine months ended June 30, 2008, travel and trade show expenses
totaled $134,000, sales salaries totaled $368,000 and sales consulting expenses
totaled $388,000. On August 20, 2007 we signed a consulting agreement with Lolly
Factory, Inc. and its principal, Mark Cywinski through December 31, 2010 to
provide sales and merchandising consulting services for the Sosik and juniors
apparel division. Included in sales consulting expenses for the nine months
ending June 30, 2008 was $360,675 paid to Lolly Factory, Inc. Selling expenses
for the nine months ended June 30, 2007 consisted of commissions ($85,000),
public relations and advertising ($43,000), and travel and trade show expense
($130,000). None of the other divisions were in operation during the nine months
ended June 30, 2007, only the Hauteur Mynk denim brand, and selling expenses
were considerably lower.
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, telephone),
office supplies, and courier and postage costs.
For the nine months ended June
30, 2008 general and administrative expenses (including non-cash compensation
costs of $1,878,411) totaled $4,146,940. Key components included salaries for
executive, accounting and customer service totaling $514,000, payroll taxes
($228,815), professional(accounting and legal) fees ($204,000), postage and
delivery ($182,000), insurance, including health, liability and directors &
officers liability ($118,000) and rent ($96,600). Included in general and
administrative expenses is $300,000 as a reserve for doubtful debts due to a
payment dispute with a Scrapbook customer. Not included in general and
administrative expenses is $62,686 in depreciation expense. For the nine months
ended June 30, 2007 general and administrative expenses totaled $625,487, plus
$279,370 of non-cash compensation expenses. Key components included consulting
fees ($67,500) and professional fees ($169,000) and executive and administrative
salaries ($111,000) as the Company was still in the development stage.
- 28 -
The Three Months Ended June 30, 2008 Compared to the Three
Months Ended June 30, 2007
Revenue
Sales, net of returns and
allowances of $189,000 for the three months ended June 30, 2008 totaled
$5,321,794. Sales of Sosik/junior apparel totaled $3,828,525, sales of Scrapbook
apparel totaled $1,125,227 and the remainder of the sales were Nela and Tea and
Honey dresses, private label and Hauteur Mynk denim jeans. Net sales for the
three months ended June 30, 2007 were $201,462. The increase was due to the
increase in and expansion of our business. All of the sales during the three
months ended June 30, 2007 were sales of Hauteur Mynk denim jeans. Gross
profit/(loss) was $1,053,153, or 19.8% and ($388,802) for the three months ended
March 31, 2007, respectively. Sales returns for the three months ended June 30,
2007 were significant as the Company neared the end of denim jeans being
returned due to earlier manufacturing problems causing a negative gross profit.
At this time, we have a backlog of sales orders in excess $8.2 million for
shipments through December 2008. Our sales mix is changing with Scrapbook
becoming a significant part of our business with 45% of the order backlog. Our
Sosik products are sold through in-house sales staff and we have corporate sales
showrooms in Los Angeles and New York. Our Scrapbook apparel is sold through
in-house sales staff and independent sales showrooms in Chicago, Dallas and
Miami. Our Mynk/Nela/Tea and Honey products are sold through in-house sales
staff and a corporate sales showroom in New York, and through contract outside
sales showrooms in Los Angeles earning sales commissions of 10-12%.
Expenses
Sales, net of returns and
allowances of $189,000 for the three months ended June 30, 2008 totaled
$5,321,794. Net sales for the three months ended June 30, 2007 were $201,462.
The increase was due to the increase in and expansion of our operations. Sales
of Sosik/junior apparel totaled $3,828,525, sales of Scrapbook apparel totaled
$1,125,227 and the remainder of the sales were Nela and Tea and Honey dresses,
private label and Hauteur Mynk denim jeans. All of the sales during the three
months ended June 30, 2007 were sales of Hauteur Mynk denim jeans. Gross
profit/(loss) was $1,053,153, or 19.8% and ($388,802) for the three months ended
March 31, 2007, respectively. Sales returns for the three months ended June 30,
2007 were significant as the Company neared the end of denim jeans being
returned due to earlier manufacturing problems causing a negative gross profit.
At this time, we have a backlog of sales orders in excess $8.2 million for
shipments through December 2008. Our sales mix is changing with Scrapbook
becoming a significant part of our business with 45% of the order backlog. Our
Sosik products are sold through in-house sales staff and we have corporate sales
showrooms in Los Angeles and New York. Our Scrapbook apparel is sold through
in-house sales staff and independent sales showrooms in Chicago, Dallas and
Miami. Our Mynk/Nela/Tea and Honey products are sold through in-house sales
staff and a corporate sales showroom in New York, and through contract outside
sales showrooms in Los Angeles earning sales commissions of 10-12%.
Expenses
Our total costs and expenses were
$3,410,708 ($815,612 were non-cash compensation expenses) for the three months
ended June 30, 2008 compared to $889,934 for the three months ended June 30,
2007. The increase was due to the increase in and expansion of our operations.
Our total costs and expenses for the three months ended June 30, 2008 included
$784,967 in design and development expenses and $475,000 in production expenses,
$708,000 in selling and shipping expenses, and $1,074,556 in general and
administrative expenses, excluding the $815,612 non-cash expenses. For the three
months ended June 30, 2007, total costs and expenses, related mainly to the
original start-up of Mynk Corporation and the development and sales of Hauteur
Mynk jeans. The increase was due to the increase in and expansion of our
business. For the three months ended June 30, 2008 design, development and
production expenses totaled $785,000. Design salaries totaled $196,000.
Purchases of sample fabric and trims totaled $50,000. Production expenses
consist of production staff salaries ($113,000), production patternmaking
salaries ($131,000), sample sewers salaries ($158,000), fabric cutting ($29,000)
and supplies services ($17,000).
- 29 -
For the three months ended June
30, 2008 selling and shipping expense totalled $708,711 compared to $88,972 for
the three months ended June 30, 2007, all related to the difference in sales
volumes. For the three months ended June 30, 2008, travel and trade show
expenses totaled $27,000, sales salaries totaled $149,000 and sales consulting
expenses totaled $104,375. On August 20, 2007 we signed a consulting agreement
with Lolly Factory, Inc. and its principal, Mark Cywinski through December 31,
2010 to provide sales and merchandising consulting services for the Sosik and
juniors apparel division. Included in sales consulting expenses for the three
months ending June 30, 2008 was $89,375 paid to Lolly Factory, Inc. Selling
expenses for the three months ended June 30, 2007 consisted of commissions
($22,000), public relations and advertising ($14,000), and travel and trade show
expenses ($19,000). The only division operating in 2007 was the Hauteur Mynk
division resulting in lower selling expenses.
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, telephone),
office supplies, and courier and postage costs.
For the three months ended June
30, 2008 general and administrative expenses (including non-cash compensation
costs of $815,612) totalled $1,890.168. Key components included salaries for
executive, accounting and customer service totalling $199,000, payroll taxes
($82,000), professional accounting and legal fees ($76,000 which includes $7,00
for trademark fees), postage and delivery ($63,000) , insurance ($56,000) factor
commissions ($39,000) and rent ($36,000) and computer expense relating to
upgrades ($25,000). Not included in general and administrative expenses is
$26,862 in depreciation and amortization expense. Key components of general and
administrative expenses for the three months ended June 30, 2007 included
professional and consulting fees ($109,000). At June 30, 2007, the Company was
considerably smaller, with nominal delivery costs and few employees resulting in
less payroll tax expense.
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, 75% of eligible outstanding
accounts receivable. The factor holds as security substantially all assets of
the Company and charges interest at a rate of prime plus 1.0% on the outstanding
advances. At March 31, 2008, the Company had a cash account in the amount of
$400,000 with the factor to be used as collateral for the loans advanced. On May
5, 2008 the cash collateral was reduced to $300,000. The Company is liable to
the factor for merchandise disputes and customer claims on receivables sold to
the factor. The factoring agreement expires on March 4, 2009.
At times, our customers place
orders that exceed the credit that they have available from the factor. We
evaluate those orders to consider if the customer is worthy of additional credit
based on our past experience with the customer. If we decide to sell merchandise
to the customer on credit, we take the credit risk for the amounts that are
above their approved credit limit with the factor. As of June 30, 2008, the
amount of Due from Factor for which we bear the credit risk is $406,000.
For the nine months ended June
30, 2008 and 2007, the Company paid a total of approximately $35,267 and $0,
respectively, of interest to the factor which is reported as a component of
interest expense in the consolidated statements of income.
Due from factor, net of
chargebacks and other deductions as presented in the balance sheet at June 30,
2008 and September 30, 2007 is summarized below:
- 30 -
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September
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June 30,
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30,
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2008
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2007
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Outstanding factored receivables
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$
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3,172,306
|
|
$
|
292,119
|
|
Cash collateral reserve
|
|
300,000
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
3,472,306
|
|
|
292,119
|
|
|
|
|
|
|
|
|
Less: advances
|
|
(1,676,093
|
)
|
|
-----
|
|
Reserves for chargeback and other
deductibles
|
|
(40,632
|
)
|
|
(117,035
|
)
|
|
|
|
|
|
|
|
|
$
|
1,755,581
|
|
$
|
175,084
|
|
Critical Accounting Policies
Our consolidated financial
statements and accompanying notes are prepared in accordance with generally
accepted accounting principles used in the United States. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. These estimates
and assumptions are affected by managements application of accounting policies.
We believe that understanding the basis and nature of the estimates and
assumptions involved with the following aspects of our consolidated financial
statements is critical to an understanding of our financials.
Inventory is valued at the lower
of cost or market, cost being determined by the first-in, first-out method. We
continually evaluate our inventories by assessing slow moving current product as
well as prior seasons inventory. Market value of non-current inventory is
estimated based on historical sales trends for each category of inventory of our
companys individual product lines, the impact of market trends, an evaluation
of economic conditions and the value of current orders relating to the future
sales of this type of inventory.
Revenue from product sales is
recognized as title passes to the customer upon shipment. Sales returns, to date
from Mynk denim products have been $61,765 and we record sales discounts and
allowances as they are taken. In addition we have accrued $335,030 as of June
30, 2008, 2008 for estimated sales returns and $40,632 for other allowances.
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, the
Companys allowance for doubtful accounts has been estimated to be $335,000 at
June 30, 2008. The Companys credit losses for the periods presented have not
significantly exceeded managements estimates.
Concentration of Credit Risks
During the nine months ended June
30, 2008 sales to two customers accounted for 34% and 18% of the Companys net
sales. During the nine months ended June 30, 2008, purchases from one supplier
totaled approximately $1,308,000. At June 30, 2008, one customer accounted for
62% of the Accounts Receivable, net of allowance. At June 30, 2008, two
customers accounted for 46% and 13%, respectively, of the Due From Factor.
- 31 -
Inventory
Inventories are valued at the
lower of cost or market, with cost being determined by the first-in, first-out
method. The Company continually evaluates its inventories by assessing
slow-moving product and records mark-downs as appropriate. At June 30, 2008,
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.
Recent Accounting Pronouncements
In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157), which establishes a formal framework for
measuring fair value under generally accepted accounting principles. SFAS No.
157 defines and codifies the many definitions of fair value included among
various other authoritative literature, clarifies and, in some instances,
expands on the guidance for implementing fair value measurements, and increases
the level of disclosure required for fair value measurements. Although SFAS No.
157 applies to and amends the provisions of existing FASB and AICPA
pronouncements, it does not, of itself, require any new fair value measurements,
nor does it establish valuation standards. SFAS No. 157 applies to all other
accounting pronouncements requiring or permitting fair value measurements,
except for: SFAS No. 123R, share-based payment and related pronouncements, the
practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
that deal with software revenue recognition. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
assessing the potential effect of SFAS No. 157 on its consolidated financial
statements.
In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159), which provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. SFAS No. 159 helps to mitigate this type of accounting-induced
volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 requires companies to provide additional information
that will help investors and other users of financial statements to more easily
understand the effect of the companys choice to use fair value on its earnings.
SFAS No. 159 also requires companies to display the fair value of those assets
and liabilities for which the company has chosen to use fair value on the face
of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements
included in other accounting standards, including requirements for disclosures
about fair value measurements included in SFAS No. 157 and SFAS No. 107. SFAS
No. 159 is effective as of the beginning of a companys first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the company makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157. The Company is currently assessing the potential
effect of SFAS No. 159 on its consolidated financial statements and has not
elected to adopt SFAS 159 at this time.
- 32 -
In December 2007, the FASB issued SFAS No. 141(revised 2007),
Business Combinations
, and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
. SFAS No. 141R improves reporting by creating greater consistency
in the accounting and financial reporting of business combinations, resulting in
more complete, comparable, and relevant information for investors and other
users of financial statements. SFAS No. 141R requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS No. 160 improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report non-controlling (minority) interests in
subsidiaries in the same wayas equity in the consolidated financial statements.
Moreover, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and non-controlling interests by
requiring they be treated as equity transactions. The two statements are
effective for fiscal years beginning after December 15, 2008 and management is
currently evaluating the impact that the adoption of these statements may have
on the Companys consolidated financial statements.
In March 2008, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB No. 133, (SFAS 161). SFAS 161 is
intended to improve transparency in financial reporting by requiring enhanced
disclosures of an entitys derivative instruments and hedging activities and
their effects on the entitys financial position, financial performance, and
cash flows. SFAS 161 applies to all derivative instruments within the scope of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
(SFAS 133). SFAS 161 also applies to non-derivative hedging instruments and
all hedged items designated and qualifying under SFAS 133. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative disclosures for periods
prior to its initial adoption. We will adopt SFAS 161 on November 15, 2008 and
are currently evaluating the potential impact on our financial statements when
implemented.
In April 2008, the FASB issued FASB Staff Position (FSP) No.
142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends
the factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible assets
under FASB Statement No. 142, Goodwill and Other Intangible Assets. This new
guidance applies prospectively to intangible assets that are acquired
individually or with a group of other assets in business combinations and asset
acquisitions. FSP 142-3 is effective for financial statements issued for fiscal
years and interim periods beginning after December 15, 2008. Early adoption is
prohibited. We are currently evaluating the impact, if any, that FSP 142-3 will
have on our consolidated financial statements.
Management does not believe that
any other recently issued, but not yet effective, accounting standards, if
currently adopted, would have a material effect on the Company's financial
statements.
RISK FACTORS
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.
- 33 -
Risks Related to our Business
Our continued operations depend on current fashion trends.
If our products and designs are not considered fashionable or desirable by
enough consumers, then our business could be adversely affected.
The acceptance by consumers of
our products and design is important to our success and competitive position,
and the inability to continue to develop and offer fashionable and desirable
products to consumers could harm our business. We cannot be certain that our
high-fashion clothing and accessories will be considered fashionable and
desirable by enough consumers to make our operations profitable. There are no
assurances that our future designs will be successful, and any unsuccessful
designs could adversely affect our business. If we are unable to respond to
changing consumer demands in a timely and appropriate manner, we may fail to
establish or maintain our brand name and brand image. Even if we react
appropriately to changes in consumer preferences, consumers may consider our
brand image to be outdated or associate our brand with styles that are no longer
popular. Should trends veer away from our style of products and designs, our
business could be adversely affected.
We may be unable to achieve or sustain growth or manage our
future growth, which may have a material adverse effect on our future operating
results.
We cannot provide any assurances
that our business plan will be successful and that we will achieve profitable
operations. Our future success will depend upon various factors, including the
strength of our brand image, the market success of our current and future
products, competitive conditions and our ability to manage increased revenues,
if any, or implement our growth strategy. In addition, we anticipate
significantly expanding our infrastructure and adding personnel in connection
with our anticipated growth, which we expect will cause our selling, general and
administrative expenses to increase in absolute dollars and which may cause our
selling, general and administrative expenses to increase as a percentage of
revenue. Because these expenses are generally fixed, particularly in the
short-term, operating results may be adversely impacted if we do not achieve our
anticipated growth.
Future growth may place a
significant strain on our management and operations. If we experience growth in
our operations, our operational, administrative, financial and legal procedures
and controls may need to be expanded. As a result, we may need to train and
manage an increasing number of employees, which could distract our management
team from our business. Our future success will depend substantially on the
ability of our 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.
- 34 -
Our business could suffer if our manufacturers do not meet
our demand or delivery schedules.
Although we design and market our
products, we outsource manufacturing to third party manufacturers. Outsourcing
the manufacturing component of our business is common in the apparel industry
and we compete with other companies for the production capacity of our
manufacturers. Because we are a small enterprise and many of the companies with
which we compete have greater financial and other resources than we have, they
may have an advantage in the competition for production capacity. There is no
assurance that the manufacturing capacity we require will be available to us, or
that if available it will be available on terms that are acceptable to us. If we
cannot produce a sufficient quantity of our products to meet demand or delivery
schedules, our customers might reduce demand, reduce the purchase price they are
willing to pay for our products or replace our product with the product of a
competitor, any of which could have a material adverse effect on our financial
condition and operations.
Government regulation and supervision could restrict our
business.
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 have
an adverse effect on our business.
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.
- 35 -
Risks Related to Our Company
We lack an operating history and have losses which we expect
to continue into the future. Our auditor has stated that we have incurred a loss
from operations and negative cash flows from operations that raise substantial
doubt about our ability to continue as a going concern. There is no assurance
our future operations will result in profitable revenues. If we cannot generate
sufficient revenues to operate profitably, we may suspend or cease operations.
Our inception date was February
3, 2006. We have a very short operating history upon which an evaluation of our
future success or failure can be made. Our net loss since inception was
$11,044,043 as of June 30, 2008. In its audit report dated January 14, 2008, our
auditor stated that 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.
Based upon current plans, we
expect to incur operating losses in future periods because we will continue to
incur expenses. We cannot guarantee that we will be successful in becoming
profitable in the future. Failure to become profitable would cause us to go out
of business.
Our management may be able to
control substantially all matters requiring a vote of our stockholders and their
interests may differ from the interests of our other stockholders and cause
investors to lose some or all potential benefit from their investment.
As of June 30, 2008, our
directors and officers as a group beneficially owned approximately 10% 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.
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.
- 36 -
The equity markets have, on
occasion, experienced significant price and volume fluctuations that have
affected the market prices for many companies' securities and that have often
been unrelated to the operating performance of these companies. Any such
fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. As a result, stockholders may be
unable to sell their shares, or may be forced to sell them at a loss.
The U.S. Securities and Exchange Commission imposes
additional sales practice requirements on brokers who deal in our shares which
are penny stocks, some brokers may be unwilling to trade them. This means that
you may have difficulty reselling your shares and this may cause the price of
the shares to decline.
Our shares are classified as
penny stocks and are covered by Section 15(g) of the Securities Exchange Act of
1934 and the Rules which impose additional sales practice requirements on
brokers/dealers who sell our securities in this offering or in the aftermarket.
For sales of our securities, the broker/dealer must make a special suitability
determination and receive from you a written agreement prior to making a sale
for you. Because of the imposition of the foregoing additional sales practices,
it is possible that brokers will not want to make a market in our shares. This
could prevent you from reselling your shares and may cause the price of the
shares to decline.
We do not intend to pay dividends and there will be less
ways in which you can make a gain on any investment in our company.
We have never paid any cash
dividends and currently do not intend to pay any dividends for the foreseeable
future. To the extent that we require additional funding currently not provided
for in our financing plan, our funding sources may likely prohibit the payment
of a dividend. Because we do not intend to declare dividends, any gain on an
investment in our company will need to come through appreciation of the stocks
price.
Item 3. Controls and Procedures
As required by Rule 13a-15 under
the Securities Exchange Act of 1934, as of the end of the period covered by the
quarterly report, being June 30, 2008, we have carried out an evaluation of the
effectiveness of the design and operation of our companys disclosure controls
and procedures. This evaluation was carried out by our companys principal
executive officer and our companys principal financial officer. Based upon that
evaluation, our companys principal executive officer and our companys
principal financial officer concluded that our companys disclosure controls and
procedures are not effective as at the end of the period covered by this report.
As an early stage Company, the Company continually reviews and revises its
internal accounting policies and procedures. There have been no changes in our
internal controls over financial reporting that occurred during our most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.
Disclosure controls and
procedures and other procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time period specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 is accumulated and
communicated to management, including our chief financial officer and our chief
executive officer and our chief financial officer as appropriate, to allow
timely decisions regarding required disclosure.
- 37 -
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.
Elk Brands Manufacturing Company,
Inc. is suing Mynk Corporation for an alleged payment owing of approximately
$70,800. We believe that this claim is unfounded and we intend to fight it
through all reasonable legal means. We believe that we will not be held liable
for or be required to pay the amount claimed by Elk Brands. The claim was filed
in the circuit court for Davidson County, Tennessee at Nashville on February 16,
2007.
On October 19, 2007, a complaint
was filed in the Superior Court of the State of California for the County of Los
Angeles by Unger Fabrik, LLC, a Delaware limited liability company, against our
company, Mark Cywinski, Craig Soller and Stephen M. Soller, our chief executive
officer and a director and our company. The complaint made several allegations,
including breach of contract, unfair competition and unfair business practices.
The plaintiff was seeking monetary damages, punitive damages, injunctions,
restitution, attorney fees, pre and post judgment interest and any further
relief that the Court deems just and proper. A settlement agreement and mutual
release was signed on February 7, 2008 wherein Unger will file a request for
dismissal of Panglobal Brands Inc., Stephen Soller and Mark Cywinski.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
On October 23, 2007, the Company
closed a private placement of 2,871,759 units for gross proceeds of $2,153,819.
Each unit was sold for $0.75 and consists of one common share and one common
share purchase warrant. Each common share purchase warrant entitles the holder
to purchase, if exercised, one additional common share of our company at a price
of $1.00 per common share until October 23, 2008 and at $1.50 per common share
if exercised during the period from October 24, 2008 until the warrants expire
on October 23, 2009.
On July 11, 2008, the Company closed a private placement,
selling 8,000,000 shares of common stock at a price of $0.50 per share for
proceeds of $4,000,000. We issued 560,000 shares pursuant to the exemption from
registration under the United States Securities Act of 1933 provided by Section
4(2), Section 4(6) and/or Rule 506 of Regulation D promulgated under the 1933
Act to four (4) investors who are accredited investors within the respective
meanings ascribed to that term in Rule 501(a) under the 1933 Act.
We issued 7,440,000 shares to eighteen (18) non U.S. persons
(as that term is defined in Regulation S of the Securities Act of 1933) in an
offshore transaction relying on Regulation S and/or Section 4(2) of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
- 38 -
Item 5. Other Information
On June 16, 2008 we entered into a purchase and sale of assets
agreement with Hana Financial, Inc. (Hana). Hana owns the assets of Femme
Knits, Inc., a garment manufacturer, and wishes to sell the assets to our
company. We agreed to pay to Hana, US $762,688.87 and which includes payment of
an outstanding invoice in the amount of US $49,933 to Golden Horse
International.
- 39 -
Item 6. Exhibits.
Exhibits required by Item 601 of Regulation S-B
Exhibit
|
Description
|
Number
|
|
(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 Corporation (Attached as an exhibit to our Form SB- 2 filed February
3, 2006).
|
3.4
|
Bylaws of Mynk
Corporation. (Attached as an exhibit to our Form SB-2 filed February 3,
2006).
|
3.5
|
Certificate of Amendment (Attached
as an exhibit to our Current Report on Form 8-K filed on February 6, 2007).
|
3.6
|
Certificate of
Ownership (Attached as an exhibit to our Current Report on Form 8-K filed
on February 6, 2007).
|
(10)
|
Material Contracts
|
10.1
|
PayPal User Agreement
(Attached as an exhibit to our Form SB-2 filed February 3, 2006).
|
10.2
|
Affiliated Stock Purchase Agreement
dated December 12, 2006 (Attached as an exhibit to our Current Report
on Form 8-K filed on December 13, 2006).
|
10.3
|
Share Exchange
Agreement between Panglobal Brands Inc. and Mynk Corporation, dated February
15, 2007 (Attached as an exhibit to our Current Report on Form 8- K filed
on February 20, 2007).
|
10.4
|
Consulting Agreement between
our company, Lolly Factory, LLC and Mark Cywinski dated September 16,
2007 (Attached as an exhibit to our Form 8-K filed September 27, 2006).
|
10.5
|
Lease Agreement
with RFS Investments LLC, dated January 11, 2007 (Attached as an exhibit
to our Current Report on Form 8-K filed on February 20, 2007).
|
10.6
|
Lease Agreement with YMI Jeanswear
(Attached as an exhibit to our Annual Report on Form 10-KSB filed on January
15, 2008).
|
10.7
|
Lease Agreement
with Jamison California Market Center, L.P. (Attached as an exhibit to
our Annual Report on Form 10-KSB filed on January 15, 2008)
|
10.8
|
Lease Agreement with Steven Goldstein
(Attached as an exhibit to our Annual Report on Form 10-KSB filed on January
15, 2008)
|
10.9
|
Lease Agreement
with TR 39th St. Land Corp. (Attached as an exhibit to our Annual Report
on Form 10-KSB filed on January 15, 2008) Term Sheet with Femme Knits,
Inc. dated June 2, 2008 (Attached as an exhibit to our Current Report
|
10.10
|
on Form 8-K filed on June 4,
2008).
|
10.11*
|
Agreement
of Purchase and Sale of Assets dated June 16, 2008
|
(31)
|
Section 302 Certifications
|
31.1*
|
Certification
under Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certification
under Sarbanes-Oxley Act of 2002.
|
(32)
|
Section 906
Certifications
|
32.1*
|
Certification
under Sarbanes-Oxley Act of 2002.
|
32.2*
|
Certification
under Sarbanes-Oxley Act of 2002.
|
* filed herewith
- 40 -
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PANGLOBAL BRANDS INC.
(Registrant)
By:
/s/ Stephen Soller
Stephen Soller
Chief
Executive Officer
(Principal Executive Officer)
Date: August 19, 2008
By:
/s/ Charles Lesser
Charles Lesser
Chief
Financial Officer
(Principal Accounting Officer and Principal Financial
Officer)
Date: August 19, 2008
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