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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
PENGE CORP.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 000-52180 71-0895709
----------------------------- --------------------- ---------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1501 NORTH FAIRGROUNDS
MIDLAND, TEXAS 79705
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (423) 683-8800
Check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 [ ]
Check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Act): YES [ ] NO [X]
As of December 31, 2006 the issuer had 24,832,745 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PENGE CORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
CONTENTS
PAGE
-- Unaudited Condensed Consolidated Balance Sheets,
December 31, 2006 and June 30, 2006 1
-- Unaudited Condensed Consolidated Statements of
Operations, for the three and six months ended
December 31, 2006 and 2005 3
-- Unaudited Condensed Consolidated Statements of
Cash Flows, for the six months ended
December 31, 2006 and 2005 4
-- Notes to Unaudited Condensed Consolidated Financial
Statements 7
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2006 2006
--------------- ---------------
CURRENT ASSETS:
Cash $ 76,848 $ 111,915
Accounts receivable, net of $23,685 and $6,193 of
allowance for doubtful accounts for December 2006
and June 2006 88,487 89,062
Inventories 2,806,137 2,442,469
Prepaid expenses 430 4,769
--------------- ---------------
Total Current Assets 2,971,902 2,648,215
PROPERTY, PLANT AND EQUIPMENT, net 4,430,686 4,710,650
LAND HELD FOR SALE 1,636,675 1,636,675
OTHER ASSETS:
Deferred loan costs 19,859 229
Goodwill 150,000 150,000
Definite-life intangible assets, net 8,555 13,490
--------------- ---------------
Total Other Assets 178,414 163,719
--------------- ---------------
$ 9,217,677 $ 9,159,259
=============== ===============
[CONTINUED]
1
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
December 31, June 30,
2006 2006
--------------- ---------------
CURRENT LIABILITIES:
Current portion of notes payable 1,565,979 940,272
Current portion of related party notes payable 443,976 266,863
Current portion of convertible notes payable 1,835,653 918,125
Current portion of related party convertible notes payable 250,000 150,000
Current Portion of Lease Liability 69,313 63,700
Accounts payable 878,705 1,320,214
Related party accounts payable 240,628 217,590
Customer deposits 80,000 -
Current derivative liabilities 62,246 56,203
Other accrued liabilities 397,924 284,040
--------------- ---------------
Total Current Liabilities 5,824,424 4,217,007
LONG-TERM DEBT:
Notes payable, less current portion 1,500,135 1,500,154
Related party notes payable, less current portion 721,692 771,760
Convertible notes payable, less current portion 840,731 1,578,156
Related party convertible notes payable,
less current portion 450,000 550,000
Long-term capital lease obligations, less current portion 221,216 255,597
Deferred income 18,339 23,310
--------------- ---------------
Total Long-term Debt 3,752,113 4,678,977
--------------- ---------------
9,576,537 8,895,984
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 10,000,000 - -
shares authorized, no shares issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares
authorized, 24,832,745 and 24,515,730 shares
issued and outstanding, respectively 24,779 24,516
Additional paid-in capital 3,788,545 3,637,593
Accumulated (Deficit) (4,172,184) (3,398,834)
--------------- ---------------
Total Stockholders Equity (Deficit) (358,860) 263,275
--------------- ---------------
$ 9,217,677 $ 9,159,259
=============== ===============
2
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended December 31, Ended December 31,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
NET REVENUES:
Sales, net $ 720,045 $ 1,229,954 $ 1,021,821 $ 1,432,737
COST OF GOODS SOLD 302,691 904,769 536,318 1,087,789
-------------- -------------- -------------- --------------
GROSS PROFIT 417,354 325,185 485,503 344,948
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Salaries, Wages and Related 133,867 135,609 369,979 298,411
Expenses
Consulting - 16,125 - 16,125
Advertising 5,044 371 15,057 1,926
Other General and Administrative 142,288 78,455 265,873 163,546
-------------- -------------- -------------- --------------
Total Operating Expenses 281,199 230,560 650,909 480,008
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 136,155 94,625 (165,406) (135,060)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income - 8 56 148
Interest expense related party (73,974) (44,163) (123,541) (54,475)
Interest expense (218,509) (150,997) (382,760) (272,725)
Note Conversion/Stock Expense (32,215) (85,657) (32,215) (85,657)
Other income (expense) (38,410) (7,934) (69,484) (14,006)
-------------- -------------- -------------- --------------
Total Other (Expense) (363,108) (288,743) (607,944) (426,715)
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES (226,953) (194,118) (773,350) (561,775)
CURRENT TAX EXPENSE - - - -
CURRENT TAX (BENEFIT) - - - -
-------------- -------------- -------------- --------------
NET LOSS $ (226,953) $ (194,118) $ (773,350) $ (561,775)
============== ============== ============== ==============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 24,655,942 23,395,644 24,604,002 23,260,317
-------------- -------------- -------------- --------------
3
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended December 31,
----------------------------------
2006 2005
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (773,350) $ (561,775)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 31,442 20,432
Change in deferred loan costs (23,554) 17,995
Change in allowance for bad debts 2,974 800
Depreciation and amortization 77,401 170,609
Contingent derivative liabilities 6,043 24
Accounts receivable (2,399) (94,584)
Inventories (221,725) (532,361)
Prepaid expenses 3,271 (12,522)
Refundable deposits 560
Accounts payable (168,981) (71,502)
Accrued liabilities 145,206 433,677
Customer deposits 80,000 -
--------------- ---------------
Net Cash Used by Operating Activities (843,672) (628,647)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (23,648) (483,133)
Proceeds for property and equipment 141,193 -
--------------- ---------------
Net Cash Provided (Used) by Investing Activities 117,545 (483,133)
--------------- ---------------
[Continued]
4
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Six Months
Ended December 31,
----------------------------------
2006 2005
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in related party advances 23,038 13,728
Proceeds from notes payable 422,500 322,500
Payments on notes payable (6,395) (436)
Proceeds from related party notes payable 100,000 102,270
Payments on related party notes payable (23,893) (19,813)
Proceeds from convertible notes payable 150,000 412,500
Payments on convertible notes payable (9,422) -
Proceeds from capital lease obligations 38,888
Payments on capital lease obligations (28,768) -
Proceeds from stock subscription receivables - 143,277
Proceeds from issuance of common stock 64,000 26,500
--------------- ---------------
Net Cash Provided by Financing Activities 691,060 1,039,413
--------------- ---------------
INCREASE IN CASH AND EQUIVALENTS (35,067) (72,366)
CASH AND EQUIVALENTS AT THE BEGINNING OF
THE PERIOD 111,915 338,291
--------------- ---------------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 76,848 $ 265,925
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 368,793 $ 284,832
Income Taxes $ - $ -
[Continued]
5
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
In August 2006, the Company paid $6,000 towards and a related party assumed
$50,000 of a $56,000 note payable.
In October 2006, the Company issued 8,572 shares of common stock valued at
$15,585 to satisfy the decrease in the private placement share price of
$0.70 to $0.55.
In October 2006, the Company executed two Promissory Notes for outstanding
accounts payable for a total of $272,528 with BWI and Eason Horticulture
Resources.
In November 2006, the Company issued 50,000 shares of common stock valued
at $27,500 as part of a secured Promissory note.
In November 2006, the Company issued 100,000 shares of common stock valued
at $55,000 as part of a Commercial Lease agreement.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005
During the year, a related party paid $72,169 from the sale of personal
property against a note payable of the Company.
In November 2005, the Company entered into a Capital Equipment lease
agreement which netted the Company $38,888 over the carrying value of the
leased assets.
In December 2005, the Company received 408,296 shares of treasury stock to
satisfy a subscription receivable.
In December 2005, the Company entered into a secured, convertible Promissory
Note for $242,000 for 119.47 acres in Midland, Texas.
In December 2005, notes payable of $300,000 plus accrued interest were
converted into 1,091,995 shares of stock.
In December 2005, the Company assumed a note of a related party and reduced
the related party's note by $133,000.
6
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Penge Corp., ("Parent") was organized under the laws of the
State of Nevada and was reincorporated in Delaware by a Merger on May 17,
1987.
Penge Corp. ("Penge") was organized under the laws of the State of Nevada on
August 6, 2002.
Major Trees, Inc. ("MT Subsidiary") was organized under the laws of the
State of Arizona on December 29, 1993.
S&S Plant Farms, Inc. ("S&S Subsidiary") was organized under the laws of the
State of Texas on February 23, 1995.
Texas Landscape Center, Inc. ("TLC Subsidiary") was organized under the laws
of the State of Texas on September 1, 2005. The subsidiary was organized by
the Parent and as such, became a wholly owned subsidiary of the Parent. The
financial statements include operations of Texas Landscape Center, Inc from
September 1, 2005 through December 31, 2006.
Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary ("the
Company") grow landscaping and garden plants, flowers, shrubs, trees and
other agricultural products for sale to retail nurseries, landscape
professionals, and the general public in Southwestern United States. The
Company has, at the present time, not paid any dividends and any dividends
that may be paid in the future will depend upon the financial requirements
of the Company and other relevant factors.
CONSOLIDATION -The financial statements presented reflect the accounts of
Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary; all
significant inter-company transactions have been eliminated in
consolidation.
AGRICULTURAL PRODUCTION - The Company accounts for their agricultural
activities in accordance with Statement of Position 85-3, "Accounting by
Agricultural Producers and Agricultural Cooperatives". All direct and
indirect costs of growing crops are either accumulated as inventory or
expensed as cost of goods sold. Permanent land development costs are
capitalized and not depreciated. Limited-life land development costs and the
development costs to bring long-life and intermediate-life plants into
production are capitalized and depreciated using the straight-line method
over the estimated useful lives of the assets.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid debt
investments purchased with an original maturity of three months or less to
be cash equivalents. The Company had $0 and $0 in excess of federally
insured limits at December 31, 2006 and June 30, 2006, respectively.
Continued
7
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE - Accounts receivable consist of trade receivables
arising in the normal course of business. At December 31, 2006 and June 30,
2006, the Company has an allowance for doubtful accounts of $23,685 and
$6,193, respectively, which reflects the Company's best estimate of probable
losses inherent in the accounts receivable balance. The Company estimates
allowances for doubtful accounts based on the aged receivable balances and
historical losses. The Company records interest income on delinquent
accounts receivable only when payment is received. The Company first applies
payments received on delinquent accounts receivable to eliminate the
outstanding principal. The Company charges off uncollectible accounts
receivable when management estimates no possibility of collecting the
related receivable. The Company considers accounts receivable to be past due
or delinquent based on contractual terms.
INVENTORIES - Finished goods inventory is stated at the lower of cost or
market using the retail method as the Company has a large quantity of
inventory items that have similar costs and markups; the Company does not
have any individually significant items. Because the Company's inventory has
these characteristics, it is not beneficial to track inventory costs to each
individual unit of inventory. Under the retail method, the Company counts
and extends their inventory at estimated sales prices, based upon historical
sales, which it then multiplies by its cost ratio to determine inventory at
cost. The Company's cost ratio is determined by adding the total cost of the
beginning inventory and all direct and indirect costs of growing crops
divided by the total estimated sales price of ending inventory, based on
historical sales, plus sales revenues. Raw material inventory is stated at
the lower of market or cost using the first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or
carryover basis. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized upon being placed
in service. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. In accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company periodically reviews their
property and equipment for impairment.
LAND HELD FOR SALE - Land held for sale is recorded at the lower of cost or
net realizable value.
INTANGIBLE ASSETS - The Company accounts for their intangible assets in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 establishes three
classifications for intangible assets including definite-life intangible
assets, indefinite-life intangible assets and goodwill and requires
different accounting treatment and disclosures for each classification. In
accordance with SFAS No. 142, the Company periodically reviews their
intangible assets for impairment.
Continued
8
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT WARRANTY - The Company does not warranty their agricultural products
against damage that may occur prior to delivery to the customer. The Company
does warrant trees and shrubs sold through the one retail site. At December
31, 2006 and June 30, 2006, the Company has established a reserve for future
warranty expense of $4,540 and $0, respectively.
REVENUE RECOGNITION - The Company's revenue comes primarily from the sale of
agricultural products. The Company recognizes revenue from retail sales at
the time of retail purchase. The Company recognizes revenue from landscaping
and wholesale customers when rights and risk of ownership have passed to the
customer, there is persuasive evidence of a sales arrangement, product has
been shipped, (delivered to or picked up by the customer), the price and
terms are finalized and collection of the resulting receivable is reasonably
assured.
ADVERTISING COSTS - Cost incurred in connection with advertising of the
Company's products are expensed as incurred. Such costs amounted to $5,044
and $371 for the three months ended December 31, 2006 and December 31, 2005
respectively and $15,057 and $1,926 for the six months ended December 31,
2006 and December 31, 2005, respectively.
LEASE COMMITTMENTS - The Company accounts for lease commitments in
accordance with SFAS 98, wherein the underlying assets are capitalized and
the capital lease obligation recorded if the lease commitments meet the
requirement for capitalization. All other lease obligations accounted are
accounted for as operating leases wherein payments are expensed as the
obligation arises [See Note 11].
STOCK-BASED COMPENSATION - The Company has stock option plans that provide
for stock-based employee compensation, including the granting of stock
options, to certain key employees [See Note 12]. Prior to July 1, 2005, the
Company applied APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for awards made under
the Company's stock-based compensation plans. Under this method,
compensation expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
During the periods presented in the accompanying financial statements, the
Company has granted options under its 2002 Stock Incentive Plan. The Company
has adopted the provisions of SFAS No. 123R using the modified-prospective
transition method and the disclosures that follow are based on applying SFAS
No. 123R. Under this transition method, compensation expense recognized
Continued
9
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the year ended June 30, 2006 included: (a) compensation expense for
all share-based awards granted prior to, but not yet vested as of July 1,
2005, and (b) compensation expense for all share-based awards granted on or
after July 1, 2005. Accordingly, no compensation cost has been recognized
for grants of options to employees and directors in the accompanying
statements of operations with an associated recognized tax benefit of $0 of
which $0 was capitalized as an asset for the period ended December 2006 and
2005 respectively. In accordance with the modified-prospective transition
method, the Company's financial statements for the prior year have not been
restated to reflect, and do not include, the impact of SFAS 123R. Had
compensation cost for the Company's stock option plans and agreements been
determined based on the fair value at the grant date for awards in 2005
consistent with the provisions of SFAS No. 123R, the Company's net loss and
basic net loss per common share would have been increased to the pro forma
amounts indicated below:
December 31,
2005
--------------
Net loss, as reported $ (561,775)
Add: Stock-based employee
compensation expense included in
reported net loss -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method -
--------------
Net loss (561,775)
--------------
Loss per common share, as reported $ (0.02)
Loss per common share, pro forma $ (0.02)
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" [SEE NOTE 13].
LOSS PER SHARE - The Company calculates loss per share in accordance with
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share." Basic loss per
common share is based on the weighted average number of common shares
outstanding during each period. Diluted earnings per common share when
presented are based on shares outstanding as computed under basic EPS and
potentially dilutive common shares. Potential common shares included in the
diluted earnings per share calculation include in-the-money stock options
that have been granted but have not been exercised and convertible notes
payable. [SEE NOTE 14]
Continued
10
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reported period.
Actual results could differ from those estimated.
FAIR VALUE OF FINANCIAL INSTRUMENTS -The fair value of the Company's
accounts receivable, accounts payable, accrued liabilities, and notes
payable approximate their carrying values based on their effective interest
rates compared to current market prices for similar assets and liabilities.
RECLASSIFICATION - The financial statements for the period ended prior to
December 31, 2006 have been reclassified to conform to the headings and
classifications used in the December 31, 2006 financial statements.
RECENTLY ENACTED ACCOUNTING STANDARDS - In May 2005, the FASB issued
Statement of Financial Accounting Standards No. 154 ("SFAS 154"),
"Accounting Changes and Error Corrections" which replaces APB Opinion No. 20
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements--An Amendment of APB Opinion No. 28". SFAS 154
requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principal unless it is not practicable.
SFAS 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005 and is required to be
adopted by the Company in the first quarter of fiscal 2006. The impact that
the adoption of SFAS 154 will have on Penge Corp results of operations and
financial position will depend on the nature of future accounting changes
adopted by Penge Corp and the nature of transitional guidance provided in
future accounting pronouncements.
Continued
11
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles of the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company has current liabilities in excess of current assets, incurred
significant, recurring losses and has not generated positive cash flow from
operating activities. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided
by operations through loans or through additional sales of their common
stock or through possible business combinations. There is no assurance that
the Company will be successful in raising this additional capital or in
achieving profitable operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 3 INVENTORIES
Inventories consist of the following at:
December 31, June 30,
2006 2006
-------------- --------------
Raw Materials $ 19,471 $ 97,904
Finished Goods 2,816,206 2,369,565
Allowance for obsolete / slow
moving inventory (25,000) (25,000)
Warranty Reserve (4,540) -
-------------- --------------
$ 2,806,137 $ 2,442,269
============== ==============
Most of the Company's inventories are collateral on various notes payable
[See Notes 7, 8, 9 and 10].
12
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following at:
Estimated
Useful Lives of December 31, June 30,
Assets (Years) 2006 2006
----------------- ------------- -------------
Office furniture and equipment 1 - 10 $ 80,886 $ 78,944
Retail furniture and equipment 1 - 10 620,645 613,113
Farm equipment 2 - 15 2,369,968 2,540,857
Buildings 20 - 30 1,397,138 1,394,278
Land not applicable 592,753 592,753
Construction in Progress not applicable 113,510 15,539
------------- -------------
Total 5,174,900 5,235,484
Less accumulated depreciation (744,214) (524,834)
------------- -------------
Property, Plant and Equipment, net $ 4,430,686 $ 4,710,650
============= =============
Depreciation expense for the six months ended December 31, 2006 and 2005 was
$50,614 and $3,805, respectively. All of the Company's property and
equipment are collateral for certain notes payable [See Notes 7, 8, 9 and
10].
NOTE 5 LAND HELD FOR RESALE
FARM LAND - On December 21, 2005, the Company purchased a 119 acre parcel in
Midland, Texas for $242,000. At December 31, 2006, the land is held as
collateral on a note payable [See Note 9].
COMMERCIAL PROPERTY - In 2005, the Company also purchased 7 acres of
commercial property in San Angelo, Texas for $1,394,675. At December 31,
2006, the land is held as collateral on a note payable [See Note 9].
13
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS
The following is a summary of goodwill and definite-life intangible assets:
December 31, June 30,
2006 2006
------------- ------------
GOODWILL
Goodwill $ 150,000 $ 150,000
------------- ------------
DEFINITE-LIFE INTANGIBLE ASSETS
5-year non-compete contract with
note holder 28,907 28,907
5-year non-compete contract with
shareholder 28,907 28,907
Less accumulated amortization (49,259) (44,324)
------------- ------------
Net Definite-Life Intangible Assets $ 8,555 $ 13,490
============= ============
The Company estimates that its amortization expense will be approximately as
follows for the twelve month periods ended:
Amortization
December 31, Expense
-------------- --------------
2007 8,555
Thereafter -
--------------
8,555
Definite Life Intangible Assets - The Company is amortizing their
definite-life intangible assets on a straight-line basis over five years.
Amortization expense of $4,935 and $5,781 was recorded for the six months
ended December 31, 2006 and 2005, respectively, and has been included in
general and administrative expense.
Goodwill - The Company recorded goodwill of $150,000 in connection with the
acquisition of Profile Diagnostic Sciences, Inc. as the purchase price of
$150,000 exceeds the $0 net book value of the assets acquired.
14
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable summarized in groups
with similar attributes at:
December 31, June 30,
2006 2006
-------------- --------------
12% Note payable, maturing in May to June 2007,
convertible at $.65 per share for the first twelve
months and $.75 per share for the second twelve
months, secured by UCC-1 lien against inventory 270,000 270,000
12% Note Payable, maturing in February 2007,
convertible at $.30 per share through February
2007, secured by UCC-1 lien against inventory 228,000 228,000
12% Note Payable, maturing in June to October 2007,
convertible at $.65 per share for the first twelve
months and $.75 per share for the second twelve
months, secured by UCC-1 lien against inventory 750,000 750,000
12% Note payable, maturing in October 2007 to
May 2008, convertible at $.95 per share for the first
twelve months and $1.05 for the second twelve
months, secured by UCC-1 lien against inventory 452,500 452,500
15% Note Payable, maturing in 2007, convertible at
$.30 per share (At the time of conversion, the creditor
can require the Company to redeem any amount of
the shares in the conversion at $.345 per share),
secured by a lien using a Trust Deed and Trust
Deed Note, against Major Trees, a lien using a Trust
Deed and Trust Deed Note, against Major Trees,
TX, and a term life insurance policy on two officers
of the Company 409,649 370,125
12% Note payable, maturing in January 2008,
convertible at $.95 per share for the first twelve
months and $1.10 for the second twelve months,
secured by A UCC-1 lien against inventory 200,000 200,000
Continued
15
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
12% Note payable, maturing in March 2008,
convertible at $.95 per share for the first twelve
months and $1.10 for the second twelve months,
secured by 119.47 acres in Midland, TX 216,235 225,656
12% Note payable, maturing in January 2008,
convertible at $.95 per share for the first twelve
months and $1.10 for the second twelve months,
secured by A UCC-1 lien against inventory 150,000 --
-------------- --------------
Total 2,676,384 2,496,281
Less Current Portion (1,835,653) (918,125)
-------------- --------------
$ 840,731 $ 1,578,156
============== ==============
The convertible notes payable mature as follows for the twelve-month periods
ended:
Principle
December 31, Due
-------------- ------------
2007 $ 1,835,653
2008 840,731
Thereafter -
------------
$ 2,676,384
============
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the six months
ended December 31, 2006 and 2005, the Company amortized $0 and $18,691,
respectively, the discounts on notes payable as interest expense.
At December 31, 2006, the Company had a total of $19,860 in loan fees and
costs from establishing these convertible notes payable. These costs have
been deferred and are being amortized over the term of the respective notes.
For the six months ended December 31, 2006, the Company amortized $19,860 of
the deferred loan costs as interest expense.
For the six months ended December 31, 2006 and 2005, interest expense on the
convertible notes payable amounted to $159,572 and $117,677, respectively.
16
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 RELATED PARTY CONVERTIBLE NOTES PAYABLE
The Company had the following related party convertible notes payable
summarized in groups with similar attributes due to shareholders of the
Company at:
December 31, June 30,
2006 2006
-------------- --------------
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
UCC-1 lien against inventory 100,000 100,000
12% Notes payable, maturing in 2008, convertible at
$.65 per share for the first twelve months and $.75
per share for the second twelve months, secured by
UCC-1 lien against inventory 50,000 50,000
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
inventory 100,000 100,000
12% Notes Payable, maturing in 2008, convertible
at $.70 per share through January 31, 2008,
secured by TLC's building and land in Midland, TX 450,000 450,000
-------------- --------------
Total 700,000 700,000
Less Current Portion (250,000) (150,000)
-------------- --------------
$ 450,000 $ 550,000
============== ==============
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
Principle
December 31, Due
-------------- ------------
2007 $ 250,000
2008 450,000
Thereafter -
------------
$ 700,000
============
Continued
17
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 RELATED PARTY CONVERTIBLE NOTES PAYABLE (CONTINUED)
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the six months
ended
December 31, 2006 and 2005, the Company amortized $938 and $3,616,
respectively, of the discounts on notes payable as interest expense.
At December 31, 2006, the Company had a total of $0 in loan fees and costs
from establishing these convertible notes payable. These costs have been
deferred and are being amortized over the term of the respective notes. For
the six months ended December 31, 2006 and 2005, the Company amortized $229
and $1,375 respectively, of the deferred loan costs as interest expense.
For the six months ended December 31, 2006 and 2005, interest expense on the
related party convertible notes payable amounted to $33,262 and $15,122,
respectively.
NOTE 9 NOTES PAYABLE
The Company had the following notes payable summarized in groups with
similar attributes at:
December 31, June 30,
2006 2006
-------------- --------------
7% Notes payable, yearly payments of $50,000,
mature in 2007, secured by Major Tree's
outstanding shares of capital stock, financial
books and records, equipment, and furniture $ 77,150 $ 77,150
Unsecured 6% Notes payable, maturing
2007 18,055 21,200
24% Notes payable, maturity extended to August
15, 2006, beginning balance of $200,000
secured by land. Security was released upon
principle payment of $144,000 in June 2006 - 56,000
24% Notes payable, maturing December 15, 2006
secured by land; extended month to month on
December 1, 2006. 200,000 147,500
14% Notes payable maturing in 2006, secured by MT
Subsidiary's land in Cochise County, AZ. Verbally
extended to monthly; good standing on 12/31/06 311,337 280,646
Continued
18
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
14% Notes payable, maturing in 2007, secured by the
property of an officer in Clark County, Nevada.
In September 2005 an officer of the Company
paid $72,169 in behalf of the Company and the
lien on the property was released by the holder
of the note 105,399 99,851
12% Notes payable, balloon payment due upon
maturity, matures in 2007, secured by inventory 85,577 85,577
6.75% Note payable, monthly payments of
$3,355, matures in 2021, secured by TLC's building
and land 367,833 376,632
7% Note payable, monthly payments of $1,370,
mature in 2008, secured by S&S' land and office
building 125,974 129,551
24% Notes payable, maturing November 2006,
unsecured. 150,000 -
24% Notes payable, maturing December 2006,
unsecured. 60,000 -
24% Notes payable, maturing January 2007,
unsecured. 80,000 -
24% Notes payable, maturing December 2006,
unsecured. 30,000 -
24% Notes payable, maturing January 2007,
unsecured. 50,000 -
9% Notes payable, maturing September 2007,
unsecured. 161,498 -
12% Notes payable, maturing September 2008,
unsecured. 76,972 -
Continued
19
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
Interest rate will be 6% note payable until July 1, 2006.
Beginning July 1, 2006, interest will accrue at the rate per
year that will be the lesser of .5% in excess of the Prime
Interest Rate as published by the Wall Street Journal;
or the maximum nonusurious rate of interest permitted
by applicable law. Beginning January 2007, monthly
payments necessary to amortize the balance over a
period ending July 2015 will be required. The note
matures on July 1, 2010 when the balance will be due.
Note is secured by land in San Angelo, TX which
is held for resale. Extension of interest only through
January 2007. 1,166,319 1,166,319
-------------- --------------
Total 3,066,114 2,440,426
Less Current Portion (1,565,979) (940,272)
-------------- --------------
$ 1,500,135 $ 1,500,154
============== ==============
The notes payable mature as follows for the twelve-month periods ended:
Principle
December 31, Due
-------------- ------------
2007 $ 1,565,979
2008 249,278
2009 99,407
2010 106,938
2011 115,040
Thereafter 929,472
------------
$ 3,066,114
============
At December 31, 2006, the Company had a total of $19,860 in loan fees and
costs from establishing these notes payable. These costs have been deferred
and are being amortized over the term of the respective notes. For the six
months ended December 31, 2006, the Company amortized $30,270 of the
deferred loan costs as interest expense.
For the six months ended December 31, 2006 and 2005, interest expense on the
notes payable amounted to $164,643 and $89,383, respectively.
20
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE
The Company had the following related party notes payable summarized in
groups with similar attributes due to shareholders of the Company at:
December 31, June 30,
2006 2006
-------------- --------------
7% Note payable, yearly payments of $75,000,
maturing in 2009, secured by Major Tree's
farmland, buildings, and equipment $ 194,292 $ 201,081
8% Note payable, monthly payments of $2,500,
maturing in 2009, secured by land and inventory 267,007 271,198
7% Note payable, quarterly payments of $11,660
through March 2007, quarterly payments of
$13,527 from March 2007 through March 2009,
quarterly payments of $15,483 from March
2009 through March 2010, mature in 2010,
secured by all of the issued and outstanding
shares of S&S Plant Farm, Inc.'s capital stock 365,393 367,282
12% Note payable, quarterly interest
payments beginning April 2006, maturing
January 10, 2007, unsecured. 88,976 100,000
10% Note payable, maturing in 2007, secured by
UCC-1 lien against inventory, net discount for
options issued of $0 and $938 50,000 49,062
12% Notes payable, balloon payment due upon
maturity, mature in 2007, secured by inventory 50,000 50,000
24% Notes payable, balloon payments due upon
maturity, mature in 2008, unsecured. 150,000 -
-------------- --------------
Total 1,165,668 1,038,623
Less Current Portion (443,976) (266,863)
-------------- --------------
$ 721,692 771,760
============== ==============
Continued
21
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE
At December 31, 2006, the Company had a total of $0 in loan fees and costs
from establishing these notes payable. For the three months ended December
31, 2006 and 2005, the Company amortized $229 and $1,375, respectively, of
the deferred loan costs as interest expense. For the six months ended
December 31, 2006 and 2005, interest expense on the related party notes
payable amounted to $56.716 and $41,307, respectively.
The notes payable mature as follows for the six-month periods ended:
Principle
December 31, Due
-------------- ------------
2007 $ 443,976
2008 142,220
2009 529,836
2010 49,636
2011 -
Thereafter -
------------
$ 1,165,668
============
The discounts due to the options issued with the notes are being amortized
over the term of the respective notes. For the six months ended December 31,
2006 and 2005, the Company amortized $938 and $3,616, respectively, of the
discounts on notes payable as interest expense.
NOTE 11 CAPITAL LEASES OBLIGATION
The Company leases equipment under capital leases and that expire on October
2009 and July through November 2010. The gross amount of assets recorded
under capital leases and the associated accumulated depreciation are
included under property and equipment and are as follows:
December 31,
2006
--------------
Farm equipment $ 360,181
--------------
Total 360,181
Less accumulated depreciation (91,848)
--------------
Net Leased Equipment $ 268,333
==============
Continued
22
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 CAPITAL LEASES OBLIGATION (CONTINUED)
The Company amortizes its lease obligations over the term of each lease.
Amortization expense was $22,753 for the six months ended December 31, 2006.
The future minimum lease payments are as follows for the twelve-month
periods ended:
Amortization
December 31, Amount Due
-------------- --------------
2007 $ 97,630
2008 96,021
2009 93,822
2010 62,698
Thereafter -
--------------
Total minimum obligations 350,171
Executory costs and interest (59,642)
--------------
PV of minimum obligations 290,529
Current portion (69,313)
--------------
Long-term obligations $ 221,216
==============
NOTE 12 CAPITAL STOCK AND OPTIONS
PREFERRED STOCK - In October 2004, Parent amended its articles of
incorporation to authorize 10,000,000 shares of preferred stock, $.001 par
value, with such rights, preferences and designations and to be issued in
such series as determined by the Board of Directors. At December 31, 2006
and June 30, 2006, no preferred shares were issued and outstanding.
COMMON STOCK - In November 2006, the Company issued 100,000 shares of their
previously authorized but unissued common stock for the signing of a lease
with a two-year buyout to purchase the Odessa, TX location, stock valued at
$55,000, or $0.55 per share.
In November 2006, the Company issued 50,000 shares of their previously
authorized but unissued common stock for interest expense of $27,500, or
$0.55 per share.
Continued
23
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
In October 2006, the Company issued 58,182 shares of their previously
authorized but unissued common stock for cash of $32,000, or $0.55 per
share.
In October 2006, the Company issued 8,572 shares of their previously
authorized but unissued common stock for a reduction in private placement
value of stock valued at $15,585 or $0.55 per share.
In September 2006, the Company issued 45,714 shares of their previously
authorized but unissued common stock for cash of $32,000, or $.70 per share
In March and June 2006, the Company issued 59,286 shares of their previously
authorized but unissued common stock for services and supplies valued at
$41,500 or $.70 per share.
In April 2006, the Company issued 35,715 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per share.
In March 2006, the Company issued 15,000 shares of their previously
authorized but unissued common stock for services and supplies valued at
$10,500 or $.70 per share.
In February and March 2006, the Company issued 142,860 shares of their
previously authorized but unissued common stock for cash of $100,000, or
$.70 per share.
In January 2006, the Company issued 50,000 shares of their previously
authorized but unissued common stock for employee services rendered valued
at $35,000 or $.70 per share.
In December 2005, the Company issued 666,667 shares of their previously
authorized but unissued common stock for the conversion of $200,000 note
payable, or $.30 per share.
In December 2005, the Company issued 308,921 shares of their previously
authorized but unissued common stock for the conversion of $75,000 note
payable and $2,230 interest, or $.25 per share. The Company recorded an
additional $55,117 in interest for the adjusting the conversion price to
$0.25 per share.
In December 2005, the Company issued 116,407 shares of their previously
authorized but unissued common stock for the conversion of $25,000 note
payable and $110 interest, or $.22 per share. The Company recorded an
additional $45,632 in interest for the adjusting the conversion price to
$0.22 per share.
Continued
24
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
In November 2005, the Company issued 35,714 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per share
In August 2005, the Company issued 5,000 shares of their previously
authorized but unissued common stock for the exercise of options at $.30 per
share.
SUBSCRIPTION RECEIVABLE - During Fiscal 2006, the Company received cash of
$233,977 in payment of subscriptions receivable due from officers of the
Company. Also during 2006, the Company received 408,296 common shares valued
at $0.88 per share in payment of $359,300 in subscriptions receivable from
officers of the Company. The 408,296 common shares were held in treasury
until canceled during June 2006.
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with a
maximum of 8,000,000 shares of common stock reserved for issuance under the
Plan. The Plan provides for both the direct award of shares and for the
grant of options to purchase shares to employees, officers, directors,
agents, consultants, advisors and independent contractors. Awards under the
Plan will be granted as determined by the Board of Directors and the Board
of Directors shall determine which eligible persons are to receive Incentive
Stock Options, Non-Statutory Stock Options or stock issuances. The Board of
Directors also sets the number of shares, the exercise price and the
exercise terms for grants. Options granted to non-exempt employees are
required to have an exercise price of at least 85% of the fair market value
of the common stock at the time of grant. Incentive Stock Options must be
granted with an exercise price of at least 100% (110% for shareholders who
own at
least 10% of the Company's outstanding stock) of the fair market value of
the common stock at the time of grant. Incentive Stock Options are required
to expire within 10 years. At December 31, 2006 and 2005, total awards
available to be granted from the plan amounted to 3,150,000 and 3,150,000,
respectively.
The fair value of each of the Company's stock option awards is estimated on
the date of grant using a Black-Scholes option-pricing model that uses the
assumptions noted in the table below. The fair value of the Company's stock
Option awards is expensed on a graded vesting straight-line basis over the
vesting period of the options, which is generally immediate. Expected
volatility is based on an average of historical volatility of the Company's
stock. The risk-free interest rate for periods within the contractual life
of the stock option award is based on the yield curve of a zero-coupon U.S.
Treasury bond on the date the award is granted with a maturity
Continued
25
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
equal to the expected term of the award. The expected term of awards granted
is derived from historical experience under the Company's stock-based
compensation plans and represents the period of time that awards granted are
expected to be outstanding.
The fair value of each option granted is estimated on the date granted using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the six months ended December 31, 2006:
expected dividend yields of zero, expected life of 4.43 years, expected
volatility of 302.4%, and risk-free interest rates of 3.9%.
A summary of the status of options granted at December 31, 2006, and changes
during the period then ended are as follows:
For the Six Months Ended
December 31, 2006
---------------------------------------------------------------
Weighted Weighted
Average Average Aggregate
Exercise Remaining Intrinsic
Shares Price Contractual Term Value
-------------- -------------- ------------------ --------------
Outstanding at beginning of period 845,000 $ 0.25 4.68 years $253,500
Granted - -
Exercised - -
Forfeited -
Expired -
Outstanding at end of period 845,000 $ 0.25 4.43 years $253,500
Vested and expected to vest in the future 845,000 $ 0.25 4.43 years $253,500
Exercisable at end of period 845,000 $ 0.25 4.43 years $253,500
Weighted average fair value of options
granted - $ -
--------------
The Company had no non vested options at the beginning of the period. At
December 31, 2006 the Company had no non vested options resulting in no
unrecognized compensation expense.
Continued
26
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
The total intrinsic value of options exercised during the six months ended
December 31, 2006 and 2005 was $0 and $2,000 respectively. Intrinsic value
is measured using the fair market value at the date of exercise (for shares
exercised) or at December 31, 2006 and 2005 (for outstanding options), less
the applicable exercise price.
During the six months ended December 31, 2006 and 2005, the Company received
cash of $0 and $1,500 and recorded a subscription receivable of $0 and $0
upon the exercise of awards. The Company realized no tax benefit due to the
exercise of options as the Company had a loss for the period and historical
net operating loss carry forwards.
Common shares issued upon exercise of options are issued from available
authorized but unissued common shares. As of December 31, 2006, the Company
has no plans to repurchase common shares issued upon exercise of options.
A summary of the status of stock options outstanding at December 31, 2006 is
presented below:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted
Average Weighted
Range of Remaining Average Weighted
Exercise Number Contractual Exercise Number Average
Prices Outstanding Life Price Exercisable Exercise Price
----------------- --------------- ----------------- ---------------- --------------- ----------------
$ 0.10 200,000 5.84 years $ 0.10 200,000 $ 0.10
0.30 645,000 3.04 years 0.30 645,000 0.30
----------------- --------------- ----------------- ---------------- --------------- ----------------
$0.10-0.30 845,000 4.43 years $ 0.25 845,000 $ 0.25
----------------- --------------- ----------------- ---------------- --------------- ----------------
NOTE 13 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". Which
requires the Company to provide a net deferred tax asset or liability equal
to the expected future tax benefit or expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards.
At December 31, 2006 and June 30, 2006, the total of all deferred tax assets
is approximately $913,000 and $804,000 and the total of all deferred tax
liabilities is $191,000 and $191,000. The amount of and ultimate realization
of the benefits from the deferred tax assets is dependent, in part, upon the
tax laws in effect, the future earnings of the Company, and other future
events, the effects of which cannot be determined. Because of these
uncertainties surrounding the realization of the NOL carryforwards, the
Company has established a valuation allowance of approximately $722,000 and
$613,000 at December 31, 2006 and June 30, 2006. The change in the valuation
allowance for the six months ended December 31, 2006 was approximately
$27,000.
27
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2006 and June 30, 2006, the Company has available unused net
operating loss carryforwards of approximately $5,430,000 and $4,650,000
respectively, which may be applied against future taxable income and which
expire in various years through 2026. Also, the Company has unused capital
loss carryovers at December 31, 2006 and June 30, 2006 of approximately
$81,000 and $81,000, respectively, which expire in various years through
2009.
NOTE 14 LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
For the Three Months For the Six Months
Ended December 31, Ended December 31,
---------------------------- ----------------------------
2006 2005 2006 2005
Loss from operations available to
common shareholders (numerator) $ (226,953) $ (194,118) $ (773,350 $ (561,775)
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 24,655,942 23,395,644 24,604,002 23,260,317
----------- ----------- ----------- -----------
At December 31, 2006, the Company had outstanding options to purchase
845,000 shares and notes payable convertible into 6,268,361 shares which
were not used in the computation of loss per share because their effect
would be anti-dilutive. At December 31, 2005, the Company had outstanding
options 850,000 shares and notes payable convertible into 5,714,692 shares
which were not used in the computation of loss per share because their
effect would be anti-dilutive
28
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 RELATED PARTY TRANSACTIONS
RELATED PARTY ADVANCES - During the six months ended December 31, 2006 and
2005, officers/shareholders of the Company and their relatives have made
advances to the Company and the Company has repaid the advances as funds
have been available. During the six months ended December 31, 2006
officers/shareholders of the Company and their relatives made advances
totaling $56,248 and the company repaid advances totaling $0. Since the
Company owed $184,380 from prior-year advances, the remaining balance owed
to the officers/shareholders of the Company and their relatives at December
31, 2006 is $240,628.
During the year ended June 30, 2006, officers/shareholders of the Company
and their relatives have made advances to the Company and the Company has
repaid the advances as funds have been available. During the year ended June
30, 2006, officers/shareholders of the Company and their relatives made
advances totaling $244,853 and the company repaid advances totaling $65,618.
Since the Company owed $5,144 from prior-year advances, the remaining
balance owed to the officers/shareholders of the Company and their relatives
at June 30, 2006 is $184,380.
NOTE 16 CONCENTRATIONS
ACCOUNTS RECEIVABLE - At December 31, 2006, 14% of the Company's accounts
receivable was owed by only one customer. At June 30, 2006, 41% of the
Company's accounts receivable was owed by three customers. The following
table lists the percent of the receivables owed by those customers that
accounted for 10% or more of the total accounts receivable at December 31,
2006 and June 30, 2006 respectively:
December 31, 2006 June 30, 2006
----------------- -------------
Customer A 14% *
Customer B * 17%
Customer C * 14%
Customer D * 10%
* Customer did not account for 10% or more of total accounts receivable
REVENUES - During the six months ended December 31, 2006 and 2005,
respectively, the Company had a significant customer which accounted for 26%
and 50% of the Company's total sales. The loss of this significant customer
could adversely affect the Company's business and financial condition.
Our revenue decreased due to cessation of unprofitable wholesale business
through S&S Plant Farm and the cessation of business with the Texas region
of Home Depot due to a high probability of sales returns from the Texas
region's new vendor consignment model. Cost of goods sold decreased due to
lower sales, and Cost of goods sold as a percentage of sales decreased from
76% for the six months ended December 2005 to 52.5% for the six months ended
December 2006 as a result of eliminating low margin sales at S&S Plant Farm
and having higher margins sales at Texas Landscape Center.
29
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 COMMITMENTS AND CONTINGENCIES
DERIVATIVE LIABILITY FOR THE REDEMPTION OF COMMON STOCK - The Company has a
convertible note payable which is convertible into common stock at $.30 per
share. At the time of conversion, the creditor can require the Company to
redeem any amount of the shares issued in the conversion at $.345 per share.
At December 31, 2006, the Company owed $409,650 in principal and $5,325 in
accrued interest on the note. If the note had been converted into stock on
December 31, 2006, then the Company would have issued 1,383,250 shares of
common stock which would have been redeemable at the creditor's option for
$477,221. The Company has recorded a remaining contingent derivative
liability of $62,246 associated with the option.
NOTE 18 SUBSEQUENT EVENTS
COMMON STOCK ISSUANCE - In January 2007, the Company issued 45,455 shares of
their previously authorized but unissued common stock for cash of $25,000,
or $0.55 per share.
CONVERSION OF NOTES PAYABLE TO STOCK - In January 2007, the Company
converted a $150,000 Promissory Note between Penge Corp and Gary Rowbotham
dated July 12, 2006 to common stock at $0.30 per share for a total of
500,000 shares.
In January 2007, the Company converted a $50,000 Promissory Note between
Penge Corp and Campbell Family Properties, Ltd. dated June 15, 2005 to
common stock at $0.55 per share for a total of 90,909 shares.
In January 2007, the Company signed $25,000 in notes payable. The note
accrues interest at 12% per annum and is due August 2007.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB (this "Report") contains various
forward-looking statements. Such statements can be identified by the use of the
forward-looking words "anticipate," "estimate," "project," "likely," "believe,"
"intend," "expect" or similar words. These statements discuss future
expectations, contain projections regarding future developments, operations, or
financial conditions, or state other forward-looking information. When
considering such forward-looking statements, you should keep in mind the risk
factors noted in "the subsection titled "Risk Factors" below and other
cautionary statements throughout this Report and our other filings with the SEC.
You should also keep in mind that all forward-looking statements are based on
management's existing beliefs about present and future events outside of
management's control and on assumptions that may prove to be incorrect. If one
or more risks identified in this Report or any other applicable filings
materializes, or any other underlying assumptions prove incorrect, our actual
results may vary materially from those anticipated, estimated, projected, or
intended.
OVERVIEW
Penge Corp is a Delaware corporation incorporated in 1987 with its
principal offices at 1501 North Fairgrounds, Midland, Texas 79705. Our telephone
number is (432) 683-8800. We are in the wholesale and retail nursery business.
Our stock is traded on the OTC Pink Sheets under the symbol "PNGC."
Our operations are directly or indirectly run through a subsidiary, Penge
Corp, a Nevada corporation ("Penge Nevada"), which was organized in 2002 to
engage in the nursery business. On June 30, 2005, Penge Nevada merged with a
subsidiary of Profile Diagnostic Sciences, Inc., a Delaware corporation with no
current operations. Following the merger, the officers and directors of Penge
Nevada became the officers and directors of Profile Diagnostic Sciences, Inc.
and the business Penge Nevada and its affiliates became the business of Profile
Diagnostic Sciences, Inc. Following the merger, we changed the name of Profile
Diagnostic Sciences, Inc. to "Penge Corp" Unless otherwise specified, references
to "Penge," "we," "us" or the "company" for periods prior to June 30, 2005
relate to Penge Nevada and its affiliates. For periods from and after June 30,
2005, those descriptions relate to Penge Corp (f/k/a Profile Diagnostic
Sciences, Inc.) and its affiliates, including Penge Nevada.
Since commencing business in August 2002, we have acquired the land and
certain other assets from three tree, shrub and plant farms, one of which is in
Arizona and two of which are in Texas. As we have acquired the properties, we
have taken steps to improve operations and to expand the number of trees, shrubs
and plants growing on, and harvested from, each such property.
In October 2005, we purchased a vacant 13,000 square foot building on 3.8
acres in Midland, Texas for the site of our first retail nursery. We completed a
$951,000 dollar conversion of the property including a complete remodel of the
building and the addition of 32,000 square feet of greenhouse and 40,000 feet of
tree display area. Going forward both the wholesale and retail business will be
done at the retail center.
2
In 2005, we also purchased 7 acres of commercial property in San Angelo,
Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club. Based
upon the sales price of recently sold land at the same intersection, we believe
that our property is currently worth more than we paid for it. We plan to either
sell or develop the property. We have not entered into any agreements with
respect to the sale or development of this site.
In December 2006, we entered into a Commercial Lease Agreement with Marrs
& Smith, Ltd., with respect to commercial property located in at 2600 Andres
Highway, Odessa, Texas. The primary term of the lease is approximately two (2)
years, and our base rent under the lease is $4,000 per month. The property is
expected to be used primarily for a landscape center and nursery.
In connection with the lease, we also entered into a Contract of Sale with
Marrs & Smith, Ltd. for the purchase of the property underlying the lease. The
purchase price for the property is $861,704.33, subject to discount if we close
the transaction prior to December 1, 2008. The closing date of the transaction
must be on or after December 1, 2007, but before December 1, 2008. We also
issued 100,000 shares of common stock to Marrs & Smith, Ltd. in connection with
this agreement.
Going forward, our focus will be to create and to expand a vertically
integrated wholesale and retail nursery business. We expect that our tree, shrub
and plant farms will be able to provide a substantial portion of the inventories
for our recently opened and planned retail nurseries in the coming years. By
owning the tree, shrub and plant farms that provide much of the inventory for
the retail nurseries, we believe that we will be able to compete with, and even
undercut, the "big box stores" that have become the dominant force in the retail
nursery business. These big box stores have been driving many retail nurseries
out of business by buying nursery materials in large quantities at big discounts
from wholesale nursery growers in the United States. This allows them to sell at
a discount using smaller margins and to undercut the small nurseries by 30% to
50%. We believe that our vertically integrated wholesale/retail nursery business
model will allow us to compete with the big box stores on price, while providing
better selection and service.
For our wholesale business, our goal is to expand the number of trees and
shrubs planted on our farms in the next few years while holding down increases
in our administrative and other general operating expenses. As we spread our
production costs over a larger inventory, we also hope to experience a decline
in our per-unit production and sales costs. We do not plan to expand our
wholesale sales. Instead, we plan to provide most of what we grow to our retail
centers.
GENERAL OUTLOOK
OUR INDUSTRY AND WHOLESALE/RETAIL BUSINESS MODEL
The retail nursery business has been under attack for many years from Home
Depot, Lowe's and Wal-Mart. These big box stores buy nursery materials in large
quantities at big discounts from wholesale nursery growers. This allows them to
sell at a discount, using smaller margins, and to undercut the small nurseries
by 30%-50%. Small nurseries generally cannot compete on price and so they try to
compete by offering better service, better selection, and convenience. Although
this approach has worked for some small nurseries, it has not worked for most of
them, and a large number of small nurseries have gone out of business in the
last 10 years primarily because they are unable to compete on price with the big
box stores.
In the last 5 years, a new model has emerged in the nursery industry that
we believe is able to compete effectively with the big box stores. This model
requires a retail nursery to grow a substantial percentage its own plant
material (trees, shrubs, and flowers) instead of buying them from a wholesale
grower. It is capital intensive for a retail nursery to grow its own products
and it takes from 3-5 years to grow its initial inventory. But, once the model
is in place, it can allow the retail nursery to offer products at prices that
are lower than or equal to those of the big box stores, while continuing to
offer a level of selection and service that the big box stores can not offer.
Over the last 4 years, we have purchased wholesale operations growing
trees, shrubs, and flowers and plan to continue to open retail operations in
addition to our Midland, Texas retail nursery. We believe that this new hybrid
retail/wholesale nursery business model will enable us to increase sales and
create and sustain a profitable operation. We also believe that the competition
in Texas and surrounding areas has not switched over to the new model, which
should give us at least a 3 - 5 year head start on rolling out the model in this
region.
3
OUR WHOLESALE BUSINESS
We currently own three wholesale nursery operations in Texas and Arizona.
At the end of 2002, we purchased a 272-acre tree farm near Tucson, Arizona known
as "Major Trees" and now referred to as our Major Trees Tucson Farm. In May of
2004, we acquired a 17-acre of farming property near Houston Texas on which we
have established a wholesale operation and which we refer to as our Major Trees
Houston Farm. In 2005, we purchased the S&S Plant Farm in Midland, Texas which
specializes in plants and flowers. This last farm is a 50-acre property with 8
acres under greenhouse and shade house, and a full complement of equipment and
machinery for propagating trees, shrubs, plants and flowers from seeds and
plugs.
We now have hundreds of thousands of trees and shrubs planted on the three
wholesale farms, and enough infrastructure and equipment to grow trees, shrubs,
and flowers for multiple locations in west Texas.
Our wholesale operations are able to provide products to our retail
nurseries, which we believe will allow us to offer competitive pricing, service
and selection. Although we plan to divert our landscape trees, shrubs, plants
and flowers to our retail stores as demand at such stores grows, we plan to
continue our wholesale business for the foreseeable future. We currently grow a
variety of landscape trees, shrubs, bedding plants and flowers on three farms in
Texas and Arizona. Our major wholesale customers include retail nurseries, major
retail outlets and landscape companies located in the southwest United States.
We have experienced strong demand from retailers and landscape companies for our
landscape products in the southwest United States over the last three years,
even as our production capacity has continued to grow, and expect to be able to
maintain relationships with a sufficient number of our customers in order to be
able to sell inventory that is not shipped to our retail stores.
OUR RETAIL BUSINESS
Our current retail operations consist of an approximately 4-acre retail
nursery in Midland, Texas. Midland is a town of just over 100,000 people in West
Texas. In December 2006, we entered into a two-year lease agreement with a
buy-out provision with Marrs & Smith, Ltd. for an approximately 4-acre retail
site in Odessa, Texas. Our rent under the lease is $4,000 per month, and we have
the option to purchase the property for $861,704.33 on or after December 1,
2007, but before December 1, 2008. Odessa is a town of approximately 120,000
people in West Texas and is located approximately 20 miles from Midland.
In October 2005, we purchased a vacant 13,000 square foot building on 3.8
acres in Midland, Texas for the site of our first retail nursery. We completed a
$951,000 dollar conversion of the property, including a complete remodel of the
building and the addition of 32,000 square feet of greenhouse and 40,000 feet of
tree display area.
In 2005, we also purchased 7 acres of commercial property in San Angelo,
Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club. We plan
to either sell or develop the property. We have not entered into any agreements
with respect to the sale or development of this site; however, the property is
currently listed for sale.
As the availability of capital and other business factors permit, we plan
to aggressively open retail centers and ramp up our wholesale operations in the
coming years in Texas and surrounding areas. There are over 30 million people in
this region, which we believe could allow us to build a large number of
nurseries to compete in these markets.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL COMMITMENTS AND EXPENDITURES. The following table discloses
aggregate information about our contractual obligations including long-term
debt, operating and capital lease payments, office lease payments, contractual
service agreements and the periods in which payments are due as of December 31,
2006.
4
LESS THAN
1 YEAR 2-3 YEARS 4-5 YEARS AFTER
(1/1/07 TO (1/1/08 TO (1/1/10 TO 5 YEARS
CONTRACTUAL OBLIGATIONS TOTAL 12/31/07) 12/31/09) 12/31/11) (AFTER 1/1/12)
------------------------------------ ----------- ------------- ------------- ------------- --------------
Operating leases -- -- -- -- --
Capital leases 290,529 69,313 159,839 61,377 --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 7,608,166 4,095,607 2,311,472 271,614 929,473
------------------------------------ ----------- ------------- ------------- ------------- --------------
Total contractual cash obligations 7,898,695 4,164,920 2,471,311 332,991 929,473
------------------------------------ ----------- ------------- ------------- ------------- --------------
During the six month ended December 31, 2006, we entered into convertible
and nonconvertible notes in an aggregate principal amount of $960,970.42 with
interest rates ranging from 9% per annum to 24% per annum. As of December 31,
2006, the total amount owed under outstanding notes payable was $7,608,166 in
the aggregate, $4,095,607 of which is due and payable within a period of one
year. Of such notes, as of December 31, 2006, as a result of extensions, none
are in default.
As of December 31, 2006, we had $76,848 in cash and cash equivalents. This
represents a decrease of $35,067 compared to June 30, 2006. Cash used during the
six months ended December 31, 2006 includes approximately $844,000 used in
operations as well as approximately $118,000 provided by investing activities.
Sources of cash during the six months ended December 31, 2006 included a net
amount of approximately $691,000 from financing activities. Of the approximately
$691,000 of net cash provided by financing activities, approximately $632,000
was from net cash received less payments made on notes, and $64,000 represented
the proceeds from issuance of common stock less offering costs. The difference
between the approximately $691,000 of net cash provided by financing activities
and the cash itemized above represented new notes payable, advances from related
parties, payments on related party advances and loan costs and payments on
capital lease obligations.
There were no material capital expenditures for the quarter ended December
31, 2006.
We anticipate making capital expenditures during Fiscal 2007.
Specifically, resources permitting, we plan to spend approximately $500,000 for
inventory sold during Fiscal 2006, inventory and a new watering system,
structural repairs, and other remodeling for the Odessa location, and $1,000,000
for a third retail nursery.
LIQUIDITY. The following table reflects selected balance sheet data as of
December 31, 2006:
DECEMBER 31, 2006
-----------------
BALANCE SHEET DATA:
Cash and cash equivalents......................... 76,848
Working capital (deficit)......................... (2,852,522)
Total assets...................................... 9,217,677
Retained deficit.................................. (4,172,184)
Stockholders' equity.............................. (358,860)
As of December 31, 2006, we had $76,848 in cash and cash equivalents,
total current assets of $2,971,902 and current liabilities of $5,824,424,
representing a current working capital deficit of ($2,852,522). Our current
liabilities as of December 31, 2006 include a $2,085,653 balance on secured
convertible notes due within one year, and a $2,009,955 principal balance on
secured and unsecured non-convertible notes payable due within one year.
With respect to the current portion of our notes payable, we believe that
most of the holders of the convertible and non-convertible notes coming due in
the next year will either convert such debt to equity or replace existing notes
with notes with deferred payment dates. To the extent that does not occur, we
believe that we can raise capital sufficient to repay the current portion of our
long term debt through the issuance of additional notes and the sale of equity
securities and warrants.
5
In addition, members of our management have informally agreed to provide
up to $400,000 of short-term financing to us. Such financing bears interest at
12% per annum. Management may demand payment on 30 days written notice.
Other than the informal and nonbinding commitments from management, we do
not have any specific commitments from third parties to provide financing needed
to cover any capital shortfalls with respect to our operations, planned capital
expenditures or near-term debt obligations. We caution that, particularly in
light of the early stage of our business, such financing may not be available on
favorable terms, or at all. We may be compelled to divert substantial portions
of our existing cash and future cash flow to the repayment of debt, which would
limit our ability to replace or expand inventory and acquire additional farms.
This would have an adverse affect on revenues in the coming years. Certain of
such debt is secured by our real property, and holders of the unsecured debt
have standard remedies available to creditor and secured creditors. If we were
to default on such notes and the holders were to exercise their remedies, we
would incur substantial legal expenses, penalties and related costs and could be
forced to seek bankruptcy protection or to discontinue operations.
Our consolidated financial statements have been prepared on the assumption
that our Company will continue as a going concern. Our independent registered
public accounting firm has issued its report dated August 12, 2006 that includes
an explanatory paragraph stating that recurring losses raise substantial doubt
about our ability to continue as a going concern. It has been necessary to rely
upon financing from the issuance of promissory notes and the sale of our equity
securities to sustain operations in the past. Additional financing will be
required if we are to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements at December 31, 2006.
SEASONALITY
Our underlying wholesale business is the production and sale of trees,
shrubs, bedding plants, and flowers to retailers and landscape companies. As
with other agricultural businesses, our business is seasonal in nature with the
majority of our revenues coming during the March-June and September-December
periods.
On our Major Trees Tucson Farm, we generally harvest trees in the fall and
generate over 80% of our revenues from that farm between October and December.
Revenues from our Major Trees Tucson Farm during other months of the year are
growing but are still small. Costs associated with the Major Trees Tucson Farm
also peak during approximately the same period as we harvest the trees,
transport them to market and conduct most of our planting activities.
On our S&S Plant Farm and the Major Trees Houston Farm, we generally
harvest trees, shrubs, bedding plants and flowers between March and June and
between September and December of each year. We generate substantially all of
our revenues from those farms directly or indirectly through our retail
operations at the Texas Landscape Center, during the same period. We also incur
increased transportation, sales and planting expenses during that period.
The acquisition of the Texas-based farms and the commencement of our
retail business has helped balance the seasonality of our business to some
extent. Even so, we will continue to experience dramatic increases and decreases
in revenue and expenses throughout the year and, as a result, our quarterly or
multi-quarterly results will generally not be indicative of our annual results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management is basing this discussion and analysis of our financial
condition and results of operations on our consolidated financial statements.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our critical accounting policies and estimates,
including those related to agricultural productions, inventories, property and
6
equipment, acquisition costs and revenue recognition. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. These judgments and estimates affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting periods. Changes to these judgments and estimates could
adversely affect our future results of operations and cash flows.
o Agricultural Production - We account for agricultural activities in
accordance with Statement of Position 85-3, "Accounting by Agricultural
Producers and Agricultural Cooperatives". All direct and indirect costs of
growing crops are either accumulated as inventory or expensed as cost of goods
sold. Permanent land development costs are capitalized and not depreciated.
Limited-life land development costs and the development costs to bring long-life
and intermediate-life plants into production are capitalized and depreciated
using the straight-line method over the estimated useful lives of the assets.
o Inventories - Growing crops inventory is stated at the lower of cost or
market using the retail method as we have a large quantity of inventory items
that have similar costs and markups; we do not have any individually significant
items. Because our inventory has these characteristics, it is not beneficial to
track inventory costs to each individual unit of inventory. Under the retail
method, we count and extend our inventory at estimated sales prices, based upon
historical sales, which we then multiply by our cost ratio to determine
inventory at cost. Our cost ratio is determined by adding the total cost of the
beginning inventory and all direct and indirect costs of growing crops divided
by the total estimated sales price of ending inventory, based on historical
sales, plus sales revenues. Raw material inventory is stated at the lower of
market or cost using the first-in first-out (FIFO) method.
o Property and Equipment - Property and equipment are stated at cost or
carryover basis. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized upon being placed in
service. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we periodically review our property and equipment for
impairment.
o Revenue Recognition - Our revenue comes primarily from the sale of
agricultural products. We recognize revenue from retails sales at the time of
retail purchase. We recognize revenue from landscaping and wholesale customers
when rights and risk of ownership have passed to the customer, there is
persuasive evidence of a sales arrangement, product has been shipped (delivered
or picked up by the customer), the price and terms are finalized and collection
of the resulting receivable is reasonably assured.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 2005
The following table reflects selected operational results for the Three and the
Six Months Ended December 31, 2006 compared to the Three and the Six Months
Ended December 31, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------- -----------
2006 2005 2006 2005
---- ---- ---- ----
Statement of Operations Data:
REVENUE $ 720,045 $1,229,954 $1,021,821 $1,432,737
COST OF GOODS SOLD (302,691) (904,769) (536,318) (1,087,789)
---------- ---------- ---------- ----------
GROSS PROFIT 417,354 325,185 485,503 344,948
OPERATING EXPENSES (281,199) (230,560) (650,909) (480,008)
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS 136,155 94,625 (165,406) (135,060)
INTEREST AND OTHER EXPENSE (363,108) (288,743) (607,944) (426,715)
---------- ---------- ---------- ----------
NET LOSS $ (226,953) $ (194,118) $ (773,350) $ (561,775)
---------- ---------- ---------- ----------
LOSS PER COMMON SHARE (0.01) (0.01) (0.03) (0.02)
---------- ---------- ---------- ----------
7
Our results of operations for the six months ended December 31, 2006
included the operations of our Major Trees Houston Farm, Major Trees Tucson
Farm, S&S Plant Farm and the Texas Landscape Center. Our results of operations
for the six months ended December 31, 2005 included our three farms but not the
Texas Landscape Center.
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of plants, trees, shrubs and other retail nursery products. Revenues
decreased from $1,229,954 for the three months ended December 2005 to $720,045
for the three months ended December 2006. Costs of Good Sold decreased from
$904,769 for the three months ended December 2005 to $302,691 for the three
months ended December 2006. Our revenue decreased due to cessation of
unprofitable wholesale business through S&S Plant Farm and the cessation of
approximately $350,000 in wholesale business with the Texas region of Home Depot
due to a high probability of sales returns from the Home Depot new vendor
consignment model in the Texas region.
The California region of our Home Depot relationship which accounted for
approximately $265,000 in the quarter ended December 31, 2006, has not been
affected by the termination of our Texas region; however, if the California
region of Home Depot decides to use the pay by scan consignment model, we will
likely terminate our relationship with Home Depot. We are currently working to
diversify our customer base within the landscape market and we are selling the
Major Trees' products through our own retail location which provides us with a
higher margin sale.
Cost of goods sold decreased due to lower sales, and Cost of goods sold as
a percentage of sales decreased from 73% for the three months ended December
2005 to 42% for the three months ended December 2006 as a result of eliminating
low margin sales at S&S Plant Farm and having higher margins sales at Texas
Landscape Center.
Revenues decreased from $1,432,737 for the six months ended December 2005
to $1,021,821 for the six months ended December 2006. Costs of Good Sold
decreased from $1,087,789 for the six months ended December 2005 to $536,318 for
the six months ended December 2006. Cost of goods sold decreased due to lower
sales, and Cost of goods sold as a percentage of sales decreased from 76% for
the six months ended December 2005 to 52.5% for the six months ended December
2006.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and non-allocated depreciation. Operating
expenses increased from $230,560 for the three months ended December 2005 to
$281,199 for the three months ended December 2006. Operating expenses as a
percentage of revenue increased from 19 % for the three months ended December
2005 to 39% for the three months ended December 2006. The increase in operating
expense was due to increased wages and salaries, advertising, accounting/legal
fees, and other general and administrative expenses associated with the addition
of the Texas Landscape Center. We expect our operating expenses as a percentage
of revenue to decrease through the remainder of the fiscal year ending June 30,
2007 ("fiscal 2007")..
Operating expenses increased from $480,008 for the six months ended
December 2005 to $650,909 for the six months ended December 2006. Operating
expenses as a percentage of revenue increased from 33.5% for the six months
ended December 2005 to 63.7% for the six months ended December 2006.
OTHER EXPENSE. Other expense consists of interest paid on outstanding
notes payable, amortization of deferred loan costs, noncash notes payable costs,
stock conversions and losses on the disposal of fixed assets. Other expense
increased from $288,743 for the three months ended December 2005 to $363,108 for
the three months ended December 2006. An increase in other expenses was
attributed to the additional financing during the current three months ended
December 2006 over the prior year's three months ended December 2005. The
majority of the increase in other expenses was a result of an increase in
finance charges and interest expense due to an increase in indebtedness and
interest on indebtedness. We expect our other expenses to increase as a
percentage of revenue short-term and then to decrease as a percentage of revenue
long-term as our short and long-term notes are paid off and converted to stock.
8
Other expense increased from $426,715 for the six months ended December
2005 to $607,944 for the six months ended December 2006. An increase in other
expenses was attributed to the additional financing during the current six
months ended December 2006 over the prior year's six months ended December 2005.
NET LOSS. Our net loss increased from $194,118 for the three months ended
December 2005 to $226,953 for the three months ended December 2006. The increase
in net loss is due primarily to an increase in salaries and wages, interest
expense and other general and administrative expenses. We expect our net loss to
increase as a result of conversion expenses related to our convertible debt for
the remainder of Fiscal 2007 and to decrease in the fiscal year ending June 30,
2008 as a result of higher sales, increased gross margins, and lower operating
expenses as a percentage of sales.
Our net loss increased from $561,775 for the six months ended December
2005 to $773,350 for the six months ended December 2006.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We consider all forward-looking statements contained in this Quarterly Report to
be covered by and to qualify for the safe harbor protection provided by Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. Stockholders and prospective stockholders
should understand that several factors govern whether the results described by
any such forward-looking statement will be or can be achieved. Any one of those
factors could cause actual results to differ materially from those projected in
this report.
The forward-looking statements contained in this report include plans and
objectives of management for future operations, plans relating to the products
and predictions regarding our economic performance. Assumptions applicable to
the foregoing involve judgments with respect to, among other things, future
economic, competitive, and market conditions, future business decisions, and the
time and money required to successfully complete development projects, all of
which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of those assumptions could prove
inaccurate. Therefore, we cannot assure that the results contemplated in any of
the forward-looking statements contained herein will be realized. The impact of
actual experience and business developments may cause us to alter our marketing,
capital expenditure plans, or other budgets, which may in turn affect our
results of operations. In light of the inherent uncertainties in forward-looking
statements, the inclusion of any such statement does not guarantee that our
objectives or plans will be achieved. Among other risk factors to consider are
the factors identified in the subsection entitled "Factors That May Affect
Future Results" below.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our short and long-term success is subject to certain risks, many of which are
substantial in nature. The following risk factors should be carefully
considered, in addition to other risks identified in this report, when
evaluating an investment in our common stock. Any one of these factors could
cause actual results of operations to differ materially from projected results.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following discussion of risks in addition to the other information
in this Report before purchasing any shares of our common stock. In addition to
historical information, the information in this Report contains forward-looking
statements about our future business and performance. Our actual operating
results and financial performance may be very different from what we expect as
of the date of this Report. The risks described in this Report represent the
risks that management has identified and determined to be material to our
company. Additional risks and uncertainties not currently known to us, or that
we currently deem to be immaterial, may also materially and adversely affect our
business operations. Any of these risks could materially and adversely affect
our business, results of operations and financial condition.
RISKS REGARDING OUR COMPANY AND OUR BUSINESS
OUR LIMITED OPERATING HISTORY AND EVOLVING BUSINESS PLAN MAKE IT DIFFICULT FOR
YOU TO EVALUATE OUR PERFORMANCE AND FORECAST OUR FUTURE.
9
We were formed and began operations in 2002, have made several acquisitions of
businesses and assets in the last 4 years and are in the process of expanding
the focus of our business to include retail, as well as wholesale, nursery
operations. We began operating tree, shrub and plant farms less than four years
ago and are just entering into the retail nursery business. None of our key
management personnel have any experience in the retail nursery business. Our
limited operating history, recent acquisitions, and expanding business focus
make it difficult for you to evaluate our ability to generate revenues, manage
costs, create profits and generate cash from operations. Before investing in our
common stock, you should consider the risks and difficulties we may encounter as
a relatively new business, including risks related to our ability to
o implement our business plan;
o obtain capital necessary to continue operations and implement our
business plan;
o anticipate and adapt to changes in the market;
o find, acquire and develop new wholesale and retail properties;
o administer and manage our operations; and
o successfully compete in the retail nursery industry.
If we fail to successfully manage these risks, our operations and
financial condition will suffer, and we may fail.
WE HAVE INCURRED SUBSTANTIAL LOSSES SINCE OUR INCEPTION AND MAY CONTINUE TO
INCUR LOSSES IN THE FUTURE.
We have experienced net losses in each twelve-month period since inception, with
a retained deficit of approximately $4,172,184 as of December 31, 2006. As we
continue to invest in the purchase of new properties or businesses, and to
expand our wholesale and retail operations, it is unlikely we will become
profitable in the near future. Even if we do become profitable, we may not be
able to maintain profitability or to increase profitability in the future.
OUR ACCOUNTANTS HAVE INCLUDED AN EXPLANATORY PARAGRAPH IN OUR FINANCIAL
STATEMENTS REGARDING OUR STATUS AS A "GOING CONCERN."
Our consolidated financial statements have been prepared on the assumption
that our Company will continue as a going concern. Our independent registered
public accounting firm has issued its report dated August 12, 2006 that includes
an explanatory paragraph stating that recurring losses raise substantial doubt
about our ability to continue as a going concern. Our product line is limited,
and it has been necessary to rely upon financing from the issuance of promissory
notes and the sale of our equity securities to sustain operations in the past.
Additional financing will be required if we are to continue as a going concern.
IF WE CANNOT RAISE SUFFICIENT CAPITAL AT REASONABLE PRICES, WE MAY BE UNABLE TO
MEET EXISTING OBLIGATIONS OR ADEQUATELY EXPLOIT EXISTING OR FUTURE
OPPORTUNITIES.
As of December 31, 2006, we had $76,848 in cash and cash equivalents and a
working capital account deficit of $2,852,522. We need to obtain significant
additional working capital to implement our business plan of expanding our
retail nursery operations and to be able to meet our financial obligations as
they become due. We may not be able to raise the additional capital needed, or
we may be forced to pay an extremely high price for capital. Factors affecting
the availability and price of capital may include the following:
o the availability and cost of capital generally;
o our financial results;
o market interest, or lack of interest, in our industry and business
plan;
o the success of our business;
o the amount of our capital needs; and
10
o the amount of debt, options, warrants and convertible securities we
have outstanding.
If we cannot raise sufficient capital or are forced to pay a high price for
capital, we may be unable to meet current or future obligations or adequately
exploit existing or future opportunities. If we are unable to obtain capital for
an extended period of time, we may be forced to discontinue operations.
WE HAVE PLEDGED A SIGNIFICANT PORTION OF OUR ASSETS TO SECURE FINANCING
AGREEMENTS, AND IF WE DEFAULT UNDER SUCH ARRANGEMENTS, OUR CREDITORS MAY
FORECLOSE ON OUR PLEDGED ASSETS.
We have pledged substantially all of our assets to secure notes payable
funding each of our farms and commercial properties and to secure other
indebtedness. Governing security agreements grant our creditors the rights and
remedies that are commonly provided a secured creditor. If we default under such
arrangements, such creditors may foreclose on, seize, and dispose of all pledged
assets. If this were to occur, we would be forced to discontinue operations.
OUR EXPANSION INTO THE RETAIL NURSERY BUSINESS CREATES NUMEROUS ADDITIONAL
RISKS.
We opened our first retail nursery in Midland, Texas and plan to establish
additional retail stores throughout Texas and the surrounding area over the next
several years. Our business plans anticipate our becoming an integrated
wholesale retail operation. Our foray into the retail nursery business may fail
for various reasons, including the following:
o We do not have experience in the retail nursery business and may
have failed to properly anticipate marketing needs, operating costs,
inventory costs, competition for retail employees, its affect on our
wholesale business and other important aspects of the nursery retail
business.
o We may be unable to draw customers from, and compete with, large
stores such as Home Depot or Wal-Mart, which dominate the markets we
hope to penetrate. Such stores have established reputations,
customer bases and significant amounts of capital. Such capital
could be used to increase their advertising, offer goods at a price
that is below our production or purchase costs (even if at a
short-term loss) or aggressively compete in other ways.
o If initial sales are slower than expected, we may not have, or may
be unable to obtain, the capital necessary to continue operation of
our initial retail store or subsequent stores until sales expand.
o We may be unable to supply all variety or quantities of trees,
shrubs, flowers and other plants for our retail store. If not, plant
inventory may not be available from other sources or may be
available only at a high cost.
o We do not have, or expect to have, in place long-term supply
agreements for non-plant items typically sold at retail stores, such
as containers, fertilizers and tools. We may be unable to purchase
such inventory at a cost that will permit us to be competitive with
the big box stores on those items.
We have invested significantly in, and borrowed extensively in order to fund,
our new retail nursery business. The failure of our retail business to grow as
expected or for individual stores to become profitable within a reasonable time
after opening would likely create a significant liquidity problem and otherwise
materially adversely affect our business, our operations, and our financial
condition.
WE ARE REQUIRED TO MAKE PAYMENTS UNDER OUTSTANDING NOTES IN AMOUNTS EXCEEDING
OUR EXISTING CASH AND CASH EQUIVALENTS BEGINNING IN 2007.
We have issued convertible and nonconvertible notes to fund operations
having a principal amount of $7,608,166 as of December 31, 2006. Of these notes,
$6,107,087 are secured by our farming and commercial properties, and by trees
contained in inventory. As of December 31, 2006, our monthly interest payment
with respect to such notes was approximately $60,000 per month, and we are
required to begin paying down principal on these notes at various times
beginning in 2007.
11
The amounts payable under our outstanding notes in the current fiscal year
exceed our current cash and cash equivalents. If we default on payments under
these notes, the holders will have the right to accelerate principal and
interest payments and pursue remedies available at law and under governing
documents. The exercise of such remedies would likely result in our insolvency.
OUR WHOLESALE BUSINESS HAS HISTORICALLY BEEN DEPENDENT UPON A FEW CUSTOMERS, AND
UNTIL OUR RETAIL OPERATIONS ARE DEVELOPED TO THE POINT WHERE WE CAN USE
SUBSTANTIALLY ALL OF OUR WHOLESALE PRODUCTS, WE WILL CONTINUE TO BE VULNERABLE
TO ACTIONS BY A FEW CUSTOMERS.
In 2006, Home Depots located in the Texas region adopted a pay by scan
consignment model, which shifted much of the risk of their sales to their
suppliers. We terminated our relationship with Home Depot in such region, and
this termination caused an approximately $350,000 reduction in revenue for the
three months in ended December 31, 2006, compared to the same period in 2005.
Home Depots in the California region accounted for approximately $265,000 in
revenue in the quarter ended December 31, 2006. If our relationship with Home
Depot in the California region is terminated, or we lose another significant
customer, our revenues will be harmed for the short term, and possibly for the
long term.
WE MAY BE UNABLE TO SELL A PORTION OF OUR PROPERTY IN SAN ANGELO, TEXAS OR
OTHERWISE OBTAIN CAPITAL IN ORDER TO BUILD A RETAIL STORE ON THAT SITE, WHICH IS
AN IMPORTANT COMPONENT OF OUR BUSINESS PLAN.
We own approximately 7 acres of commercial property in San Angelo, Texas,
a portion of which we plan to sell to partially fund the construction of a
retail store. We have listed such property for sale, but do not have any
commitments from any parties to purchase such property. Even if a portion of the
San Angelo property were sold, we would likely need additional capital in order
to complete the construction of a retail store on that site. We do not have the
capital in order to build the retail store and do not have any commitments to
provide capital. Because we are unprofitable and already highly leveraged, we
may be unable to obtain capital necessary to commence or complete construction
of a retail store. Even if we are able to obtain needed capital, we may not
obtain it on a timely basis and may be forced to pay a high price for capital.
Our business plan anticipates that we will be able to complete construction of,
and open, a store in San Angelo Texas by the spring of 2008, which is the
primary revenue period for a retail nursery. If we fail, because of the absence
of capital or for other reasons, to complete timely construction of that store,
our revenues for 2008 will be less than expected, and our results of operations
will be harmed, in part because we will continue to have debt obligations
associated with the San Angelo site but may not have a commensurate amount of
revenue in order to fund the debt.
WE MAY BE UNABLE TO CONTINUE TO IDENTIFY APPROPRIATE ACQUISITION TARGETS OR
CONSUMMATE ACQUISITIONS OF THOSE TARGETS, AND IF WE ARE UNABLE TO DO SO OUR
BUSINESS WILL NOT CONTINUE TO GROW AS PLANNED.
Our business plan anticipates growth in part through continued acquisition
of farming and retail properties or businesses. We may be unable to implement
that acquisition strategy for several reasons, including the following:
o We may be unable to locate suitable nursery businesses or properties
for acquisition for various reasons, including:
o the absence of such businesses or properties;
o our lack of knowledge of such businesses or properties or the
fact that they are for sale;
o our lack of sufficient working capital to conduct an adequate
search for potential acquisition targets, and to conduct the
due diligence necessary to evaluate the appropriateness of a
potential target; and
o our lack of expertise or experience in evaluating or operating
the types of businesses or properties that are for sale.
o The owners of businesses and properties that we are interested in
acquiring may be unwilling to sell to us for various reasons,
including:
o an unwillingness to accept our restricted equity securities or
a promissory note as consideration;
o a desire to receive cash and a lack of confidence in our
ability to obtain the cash necessary to close;
o concerns with our ability to operate the business profitably
or appropriately, and
o a desire to be acquired by a larger company for strategic or
personal reasons (including the desire to be employed by a
larger, more stable acquirer).
o We may be unable to raise the capital necessary to purchase
those businesses or properties that we identify as potential
acquisition targets quickly enough or at all in order to be
able to consummate desired acquisitions.
12
If we cannot continue to identify appropriate acquisition targets and consummate
acquisitions, our business will not continue to grow as planned.
WE MAY BE UNABLE TO MANAGE SIGNIFICANT GROWTH.
To successfully implement our business strategy, we must establish and
achieve substantial growth in our customer base through expansion of production
and sales from existing properties, through business acquisitions, and through
expansion into the retail nursery business. If achieved, significant growth
would place significant demands on our management and systems of financial and
internal controls, particularly because of the number of places of businesses
from which we operate or expect to operate. Moreover, significant growth would
require an increase in the number of our personnel, particularly within sales,
accounting and management. The market for such personnel remains highly
competitive, and we may not be able to attract and retain the qualified
personnel required by our business strategy. If successful in expanding our
business, we may outgrow our present management capacity, placing additional
strains on our human resources in trying to locate, manage and staff multiple
locations. If we are unable to adequately manage our projected growth, our
operations and financial condition may fail to improve, or even deteriorate.
WE ARE DEPENDENT UPON KEY PERSONNEL, AND THE LOSS OF SUCH PERSONNEL COULD
SIGNIFICANTLY IMPAIR OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN.
We are highly dependent upon the efforts of management, particularly Kirk
Fischer, our Chairman and Chief Executive Officer, KC Holmes, our President and
Chief Financial Officer, and Jim Fischer, our Vice President of Arizona Tree
Operations. Competition for management personnel is intense, and the number of
qualified managers knowledgeable about, and interested in, the tree and shrub
nursery industry is limited. As a result, we may be unable to retain our key
management employees or attract other highly qualified employees in the future.
In addition, the large number of shares of common stock issued to our officers
and directors to date are not subject to repurchase rights if such persons
terminate employment with us, decreasing our ability to provide equity-based
incentive for new management. We may be required to offer significant salaries
and equity-based compensation in order to retain or attract qualified management
personnel and key employees. If we are unsuccessful in retaining or attracting
such employees, the reduction in the quantity or quality of personnel may lead
to a decline in our production, sales or service capacity.
OUR RETAIL CENTER IS OUR PRIMARY SOURCE OF REVENUE THE COMPETITIVENESS OF OUR
PRICES IS DEPENDENT UPON OUR FARMS' ABILITIES TO PROVIDE A SUBSTANTIAL AMOUNT OF
OUR INVENTORY.
Our retail center is our primary source of revenue and our ability to
offer competitive prices will be dependent upon our ability to produce a
substantial portion of our inventory on our farms. The various plant varieties
that we grow on the farms are subject to risks associated with disease, insects,
weather, drought, fire and other natural hazards. We cannot prevent or predict
the impact of disease, insects, weather, drought, fire or other natural hazards
on our trees, shrubs and plants. If our trees, shrubs and plants we grow are
damaged or destroyed by any of those elements, we could suffer a significant
loss of revenue and assets. The loss would be particularly significant if the
affected plants were the Eldarica Pine, which accounted for approximately 46% of
our revenue in Fiscal 2005 and 28% of our sales in Fiscal 2006.
TRADING IN OUR COMMON STOCK IS THIN, AND THERE IS A LIMIT TO THE LIQUIDITY OF
OUR COMMON STOCK.
Our common stock is quoted on the OTC Pink Sheets but experiences
extremely low volume and is traded on a sporadic basis. Trading in our common
stock is likely to be dominated by a few individuals. Because of the thinness of
the market for our stock, the price of our common stock may be subject to
manipulation by one or more stockholders and may increase or decrease
significantly because of buying or selling by a single stockholder. In addition,
the low volume of trading limits significantly the number of shares that one can
purchase or sell in a short period of time. Consequently, an investor may find
it more difficult to dispose of large numbers of shares of our common stock or
to obtain a fair price for our common stock in the market.
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EVEN IF A BROADER MARKET FOR OUR COMMON STOCK DEVELOPS, THE MARKET PRICE FOR OUR
COMMON STOCK WILL LIKELY CONTINUE TO BE VOLATILE AND MAY CHANGE DRAMATICALLY AT
ANY TIME.
Our common stock is quoted on the OTC Pink Sheets, but experiences
extremely low volume and is traded on a sporadic basis. Even if a broader market
for our common stock develops, the market price of our common stock, like that
of the securities of other early-stage companies, can be expected to be highly
volatile. Our stock price may change dramatically as the result of announcements
of our quarterly results, the execution or termination of significant contracts,
significant litigation or other factors or events that would be expected to
affect our business or financial condition, results of operations and other
factors specific to our business and future prospects. In addition, the market
price for our common stock may be affected by various factors not directly
related to our business, including the following:
o intentional manipulation of our stock price by existing or future
shareholders;
o short selling of our common stock or related derivative securities;
o a single acquisition or disposition, or several related acquisitions
or dispositions, of a large number of our shares;
o the interest, or lack of interest, of the market in our business
sector, without regard to our financial condition or results of
operations;
o the adoption of governmental regulations and similar developments in
the United States or abroad that may affect our ability to offer our
products and services or affect our cost structure; and
o economic and other external market factors, such as a general
decline in market prices due to poor economic indicators or investor
distrust.
OBTAINING ADDITIONAL CAPITAL THROUGH THE FUTURE SALE OF COMMON STOCK AND
DERIVATIVE SECURITIES WILL RESULT IN DILUTION OF SHAREHOLDER INTERESTS.
We plan to raise additional funds in the future by issuing additional
shares of common stock, or securities such as convertible notes, options,
warrants or preferred stock that are convertible into common stock. Any such
sale of common stock or other derivative securities will lead to further
dilution of the equity ownership of existing holders of our common stock.
OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS
OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK.
Shares of our common stock may be deemed to be "low-priced" or "penny
stock," resulting in increased risks to our investors and certain requirements
being imposed on some brokers who execute transactions in our common stock. In
general, a low-priced stock is an equity security that:
o Is priced under five dollars;
o Is not traded on a national stock exchange, the Nasdaq National
Market or the Nasdaq SmallCap Market;
o May be listed in the OTC Pink Sheets or the OTC Bulletin Board;
o Is issued by a company that has less than $5 million in net tangible
assets (if it has been in business less than three years) or has
less than $2 million in net tangible assets (if it has been in
business for at least three years); and
o Is issued by a company that has average revenues of less than $6
million for the past three years.
We believe that our common stock is presently a "penny stock." At any time
the common stock qualifies as a penny stock, the following requirements, among
others, will generally apply:
o Certain broker-dealers who recommend penny stock to persons other
than established customers and accredited investors must make a
special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to
sale.
o Prior to executing any transaction involving a penny stock, certain
broker-dealers must deliver to certain purchasers a disclosure
schedule explaining the risks involved in owning penny stock, the
broker-dealer's duties to the customer, a toll-free telephone number
for inquiries about the broker-dealer's disciplinary history and the
customer's rights and remedies in case of fraud or abuse in the
sale.
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o In connection with the execution of any transaction involving a
penny stock, certain broker-dealers must deliver to certain
purchasers the following:
o bid and offer price quotes and volume information;
o the broker-dealer's compensation for the trade;
o the compensation received by certain salespersons for the trade;
o monthly accounts statements; and a written statement of the
customer's financial situation and investment goals.
ITEM 3. CONTROLS AND PROCEDURES
(a) Based on the evaluation of our "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e))
required by paragraph (b) of Rules 13a-15 or 15d-15, our chief executive officer
and our chief financial officer have concluded that, as of December 31, 2006,
our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods required by governing rules and forms.
(b) There have been no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings that,
singly or in the aggregate, would reasonably be expected to have a material
adverse effect on our business, financial condition, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding all equity securities sold
Subsequent to September 30, 2006 (unless previously reported).
Between October and December 2006, the Company issued 58,182 shares of
common stock for $32,000 in cash to individual investors. The offer and sale of
such shares of our common stock were effected in reliance upon the exemptions
for sales of securities not involving a public offering, as set forth in Section
4(2) of the Securities Act and rules promulgated thereunder, based upon the
following: (a) the investors confirmed to us that they were "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
15
In November 2006, we issued 100,000 shares of our common stock valued at
$82,500, or $0.55 per share to Marrs & Smith, Ltd. in connection with our
two-year with buyout option lease agreement for a 4-acre retail location in
Odessa, Texas. The offer and sale of such shares of our common stock were
effected in reliance upon the exemptions for sales of securities not involving a
public offering, as set forth in Rule 506 promulgated under the Securities Act
and in Section 4(2) of the Securities Act, based upon the following: (a) the
investors confirmed to us that they were "accredited investors," as defined in
Rule 501 of Regulation D promulgated under the Securities Act and had such
background, education and experience in financial and business matters as to be
able to evaluate the merits and risks of an investment in the securities; (b)
there was no public offering or general solicitation with respect to each
offering; (c) the investors were provided with certain disclosure materials and
all other information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
In October 2006, we issued 8,572 shares of our common stock valued at
$15,585, or $0.55 per share. The shares are related to a private placement that
closed in the prior quarter and were issued voluntarily in order to preserve
shareholder confidence and relations. The offer and sale of such shares of our
common stock were effected in reliance upon the exemptions for sales of
securities not involving a public offering, as set forth in Rule 506 promulgated
under the Securities Act and in Section 4(2) of the Securities Act, based upon
the following: (a) the investors confirmed to us that they were "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
On January 3, 2007, we entered into a conversion request with the holder
of a $150,000 Promissory Note pursuant to which it was converted, at the rate of
$0.30 per share, for a total of 500,000 shares. The offer and sale of such
shares of our common stock were effected in reliance upon the exemptions for
sales of securities not involving a public offering, as set forth in Section
4(2) of the Securities Act and rules promulgated thereunder, based upon the
following: (a) the investors confirmed to us that it was an "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investor was provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investor acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
On January 3, 2007, we entered into a conversion request with the holder
of a $50,000 Promissory Note pursuant to which it was converted, at the rate of
$0.55 per share, for a total of 90,909 shares. The offer and sale of such shares
of our common stock were effected in reliance upon the exemptions for sales of
securities not involving a public offering, as set forth in Section 4(2) of the
Securities Act and rules promulgated thereunder, based upon the following: (a)
the investor confirmed to us that it was an "accredited investor," as defined in
Rule 501 of Regulation D promulgated under the Securities Act and had such
background, education and experience in financial and business matters as to be
able to evaluate the merits and risks of an investment in the securities; (b)
there was no public offering or general solicitation with respect to each
offering; (c) the investor was provided with certain disclosure materials and
all other information requested with respect to our company; (d) the investor
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 1, 2006 we executed a Promissory Note Extension of Trust for
four unsecured Promissory Notes, one originally entered into and than extended
on August 15, 2006 and three originally entered into between July 28, 2006 and
August 11, 2006 between Penge Corp and Rocky Fischer. Under the Modification,
the holder agreed to extend the terms on a month to month basis with the ability
to call the notes due with 30 days notice.
On December 1, 2006 we executed a Promissory Note Extension of Trust for a
Promissory Note dated October 2006 between Penge Corp and Swan & Gardiner, Ltd.
Under the Modification, the holder agreed to extend the terms on a month to
month basis with the ability to call the note due with 30 days notice.
On December 1, 2006 we executed a Promissory Note Extension of Trust for a
Promissory Note dated June 2006 between Penge Corp and Philip Oleson. Under the
Modification, the holder agreed to extend the terms on a month to month basis
with the ability to call the note due with 30 days notice and holder also
requested that the 2nd trust deed on San Angelo be recorded and a copy be
provided.
On January 30, 2007 we executed a $25,000 secured Promissory Note between
Penge Corp and Corky and Linda Bosworth. The note is secured by trees at S&S
Plant Farm valued at a wholesale value of $100,000.
ITEM 6. EXHIBITS
See the Exhibit Index attached hereto following the signature page.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penge Corp
-----------------------------------------
February 13, 2007 By: /s/ Kirk Fischer
----------------------- -----------------------------------------
Date Kirk Fischer, Chief Executive Officer
February 13, 2007 By: /s/ KC Holmes
----------------------- -----------------------------------------
Date KC Holmes, Chief Financial Officer
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EXHIBIT INDEX
INCORPORATED BY REFERENCE/
EXHIBIT NO. EXHIBIT FILED HEREWITH
------------- --------------------------------------------------- ---------------------------
10.1 Extension of four unsecured Promissory Notes Filed herewith
between Penge Corp and Rocky Fischer, dated
November 2006.
10.2 Extension of unsecured Promissory Note between Filed herewith
Penge Corp and Phillip Oleson, dated December
2006.
10.3 Extension of unsecured Promissory Note between Filed herewith
Penge Corp and Phillip Oleson, dated December
2006.
10.4 Extension of unsecured Promissory Note between Filed herewith
Penge Corp and Swan & Gardiner, dated December
2006.
10.5 Promissory Note between Penge Corp and Corky Filed herewith
and Linda Bosworth, dated January 2007.
31.1 Section 302 Certification of Chief Executive Filed herewith
Officer
31.2 Section 302 Certification of Chief Financial Filed herewith
Officer
32.1 Section 906 Certification of Chief Executive Filed herewith
Officer
32.2 Section 906 Certification of Chief Financial Filed herewith
Officer
-----------------------------------------
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