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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 MARCH 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________
TO _________________
PENGE CORP.
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(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
------------------------------------------------------------
(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 March 31, 2007 the issuer had 24,682,745 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENGE CORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
CONTENTS
PAGE
-- Unaudited Condensed Consolidated Balance Sheets,
March 31, 2007 and June 30, 2006 1
-- Unaudited Condensed Consolidated Statements of
Operations, for the three and nine months ended
March 31, 2007 and 2006 3
-- Unaudited Condensed Consolidated Statements of
Cash Flows, for the nine months ended
March 31, 2007 and 2006 4
-- Notes to Unaudited Condensed Consolidated Financial
Statements 8
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2007 2006
---------- ----------
CURRENT ASSETS:
Cash $ 74,967 $ 111,915
Accounts receivable, net of $16,315 and $6,193 of
allowance for doubtful accounts for March 31, 2007
and June 30, 2006 59,153 89,062
Inventories 3,100,701 2,442,469
Prepaid expenses 6,997 4,769
---------- ----------
Total Current Assets 3,241,818 2,648,215
PROPERTY, PLANT AND EQUIPMENT, net 4,309,320 4,710,650
---------- ----------
LAND HELD FOR SALE 1,636,675 1,636,675
---------- ----------
OTHER ASSETS:
Deferred loan costs 10,245 229
Goodwill 150,000 150,000
Definite-life intangible assets, net 5,706 13,490
---------- ----------
Total Other Assets 165,951 163,719
---------- ----------
$9,353,764 $9,159,259
========== ==========
[Continued]
The accompanying notes are an integral part of these financial statements.
1
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
March 31, June 30,
2006 2006
----------- -----------
CURRENT LIABILITIES:
Current portion of notes payable 1,579,139 940,272
Current portion of related party notes payable 300,000 266,863
Current portion of convertible notes payable 1,815,149 918,125
Current portion of related party convertible notes payable 600,000 150,000
Current Portion of Lease Liability 76,561 63,700
Accounts payable 1,033,830 1,320,214
Related party accounts payable 237,827 217,590
Current derivative liabilities 64,053 56,203
Other accrued liabilities 542,865 284,040
----------- -----------
Total Current Liabilities 6,249,424 4,217,007
LONG-TERM DEBT:
Notes payable, less current portion 1,380,121 1,500,154
Related party notes payable, less current portion 488,341 771,760
Convertible notes payable, less current portion 484,319 1,578,156
Related party convertible notes payable,
less current portion -- 550,000
Long-term capital lease obligations, less current portion 201,463 255,597
Deferred income 16,157 23,310
----------- -----------
Total Long-term Debt 2,570,401 4,678,977
----------- -----------
8,819,825 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, 24,682,745 and 24,515,730 shares
issued and outstanding, respectively 28,956 24,516
Additional paid-in capital 5,502,902 3,637,593
Treasury stock, at cost (408,299 shares, respectively)
Accumulated (Deficit) (4,997,920) (3,398,834)
----------- -----------
Total Stockholders Equity (Deficit) 533,938 263,275
----------- -----------
$ 9,353,763 $ 9,159,259
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
------------------------------ ------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
NET REVENUES:
Sales, net $ 531,539 $ 274,815 $ 1,553,360 $ 1,707,552
COST OF GOODS SOLD 245,419 129,020 781,737 1,197,099
------------ ------------ ------------ ------------
GROSS PROFIT 286,120 145,795 771,623 510,453
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries, Wages and Related
Expenses 210,736 192,995 580,715 453,036
Consulting -- 10,000 -- 26,125
Advertising 466 1,351 15,523 3,277
Other General and Administrative 116,534 67,093 326,859 221,965
Depreciation & Amortization 39,035 5,781 94,583 24,601
------------ ------------ ------------ ------------
Total Operating Expenses 366,771 277,221 1,017,680 729,004
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (80,651) (131,426) (246,057) (218,551)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income -- 14 56 162
Interest expense related party (47,671) (19,988) (171,213) (78,182)
Interest expense (221,479) (279,931) (604,239) (560,948)
Note Conversion/Stock Expense (459,235) -- (491,449) --
Other income (expense) (16,700) -- (86,184) --
------------ ------------ ------------ ------------
Total Other (Expense) (745,085) (299,905) (1,353,029) (638,968)
------------ ------------ ------------ ------------
NET LOSS $ (825,736) $ (431,331) $ (1,599,086) $ (857,519)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.03) $ (0.02) $ (0.06) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 25,485,062 23,171,832 24,949,435 23,479,928
============ ============ ============ ============
[Continued]
The accompanying notes are an integral part of these financial statements.
3
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended March 31,
----------------------------
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,599,086) $ (857,519)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 31,442 57,258
Amortization of discounts -- 9,924
Change in deferred loan costs (13,940) --
Change in allowance for bad debts 10,344 2,177
Depreciation and amortization 104,471 218,301
Contingent derivative liabilities 6,043 23
Non-cash expenses related to equity instruments 459,235 131,157
Accounts receivable (60,435) 58,152
Inventories (323,828) (914,956)
Prepaid expenses (3,644) 843
Refundable deposits -- (4,440)
Accounts payable (122,005) 485,616
Accrued liabilities 490,609 100,575
Customer deposits 80,000 --
----------- -----------
Net Cash Used by Operating Activities (940,794) (712,889)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment -- (1,771,917)
Payments for land held for sale -- (20,193)
Proceeds from sale of equipment 80,422 72,500
----------- -----------
Net Cash Provided (Used) by Investing Activities 80,422 (1,719,610)
----------- -----------
[Continued]
The accompanying notes are an integral part of these financial statements.
4
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Nine Months
Ended March 31,
----------------------------
2007 2006
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in related party advances 23,038 182,689
Payments on related party advances -- (65,618)
Proceeds from notes payable 547,500 775,000
Payments on notes payable (32,365) (273,595)
Proceeds from related party notes payable 125,000 100,000
Payments on related party notes payable (26,139) (240,852)
Proceeds from convertible notes payable 150,000 1,054,500
Payments on convertible notes payable (11,337) --
Proceeds from related party convertible notes payable -- 450,000
Payments on capital lease obligations (41,273) (22,425)
Proceeds from issuance of common stock 89,000 350,477
----------- -----------
Net Cash Provided by Financing Activities 823,424 2,310,176
----------- -----------
INCREASE IN CASH AND EQUIVALENTS (36,948) (122,323)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD 111,915 338,291
----------- -----------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 74,967 $ 215,968
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 431,153 $ 342,860
Income Taxes $ -- $ --
[Continued]
The accompanying notes are an integral part of these financial statements.
5
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FOR THE NINE MONTHS ENDED MARCH 31, 2007
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.
Between January and March 2007, notes payable and interest of
$1,234,299 were converted into 4,131,904 shares of stock and a
conversion expense of $459,235 was recorded as the conversion price was
decreased from between $0.95-$0.55 to between $0.55-$0.25.
The accompanying notes are an integral part of these financial statements.
6
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(CONTINUED)
FOR THE NINE MONTHS ENDED MARCH 31, 2006
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 November 2005, the Company purchased fixed assets under capital
leases with a value of $360,181.
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 reduced the conversion price on certain
convertible notes payable and recorded interest expense of $85,657.
In December 2005, the Company assumed a note of a related party and
reduced the related party's note by $132,718.
In January 2006, the Company issued 50,000 shares of common stock for
employee services rendered value at $35,000
In March 2006, the Company issued 15,000 shares of common stock for
payment of services rendered valued at $10,500.
The accompanying notes are an integral part of these financial statements.
7
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 March 31, 2007.
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.
Continued
8
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 March 31, 2007 and June 30,
2006, the Company has an allowance for doubtful accounts of $16,315 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
Continued
9
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 retail sites for
one year from purchase. At March 31, 2007 and June 30, 2006, the Company
has established a reserve for future warranty expense of $7,791 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 $466
and $1,351 for the three months ended March 31, 2007 and March 31, 2006
respectively and $15,523 and $3,277 for the nine months ended March 31,
2007 and March 31, 2006, 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 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
Continued
10
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
transition method and the disclosures that follow are based on applying
SFAS No. 123R. Under this transition method, compensation expense
recognized 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
March 2007 and 2006 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:
March 31, 2006
---------------
Net loss, as reported $ (857,519)
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 (857,519)
---------------
Loss per common share, as reported $ (0.04)
Loss per common share, pro forma $ (0.04)
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
Continued
11
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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]
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
March 31, 2007 have been reclassified to conform to the headings and
classifications used in the March 31, 2007 financial statements.
RECENTLY ENACTED ACCOUNTING STANDARDS - In June 2006, the Financial
Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN)
48, "Accounting for Uncertainty in Income Taxes," which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. The Company is required to adopt FIN 48 beginning in fiscal year
2008 and the impact that the adoption of FIN 48 will have on its
consolidated financial statements and notes thereto is expected to be
immaterial.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. SFAS 157 SFAS No. 158
will have not have a material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R)." SFAS No. 158 requires
employers that
Continued
12
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ENACTED ACCOUNTING STANDARDS (CONTINUED)
sponsor defined benefit pension and postretirement benefit plans to
recognize previously unrecognized actuarial losses and prior service costs
in the statement of financial position and to recognize future changes in
these amounts in the year in which changes occur through comprehensive
income. As a result, the statement of financial position will reflect the
funded status of those plans as an asset or liability. Additionally,
employers are required to measure the funded status of a plan as of the
date of its year-end statement of financial position. SFAS No. 158 will
have no impact on the Company's 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:
March 31, June 30,
2007 2006
----------- -----------
Raw Materials $ 19,566 $ 97,904
Finished Goods 3,113,926 2,369,565
Allowance for obsolete / slow
moving inventory (25,000) (25,000)
Warranty Reserve (7,791) --
----------- -----------
$ 3,100,701 $ 2,442,269
----------- -----------
Most of the Company's inventories are collateral on various notes payable
[See Notes 7, 8, 9 and 10].
13
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 March 31, June 30,
Assets (Years) 2007 2006
--------------- --------------- ---------------
Office furniture and equipment 1 - 10 $ 78,325 $ 78,944
Retail furniture and equipment 1 - 10 643,989 613,113
Leasehold Improvements 1 - 10 60,800 -
Farm equipment 2 - 15 2,353,403 2,540,857
Buildings 20 - 30 1,401,356 1,394,278
Land not applicable 592,753 592,753
Construction in Progress not applicable 33,622 15,539
--------------- ---------------
Total 5,164,248 5,235,484
Less accumulated depreciation (854,928) (524,834)
--------------- ---------------
Property, Plant and Equipment, net $ 4,309,320 $ 4,710,650
--------------- ---------------
Depreciation expense for the nine months ended March 31, 2007 and 2006 was
$94,583 and $24,601, 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 March 31, 2007, 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 March 31, 2007,
the land is held as collateral on a note payable [See Note 9].
14
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:
March 31, June 30,
2007 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 (52,108) (44,324)
--------- ---------
Net Definite-Life Intangible Assets $ 5,706 $ 13,490
--------- ---------
The Company estimates that its amortization expense will approximately be
as follows for the twelve month periods ended:
Amortization
March 31, Expense
------------ ------------
2007 5,706
Thereafter -
------------
5,706
Definite Life Intangible Assets - The Company is amortizing their
definite-life intangible assets on a straight-line basis over five years.
Amortization expense of $7,784 and $8,672 was recorded for the nine months
ended March 31, 2007 and 2006, 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.
15
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:
March 31, June 30,
2007 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 28,000 228,000
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 625,000 750,000
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 402,500 452,500
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
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,
Continued
16
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
secured by 119.47 acres in Midland, TX; refinanced
March 2007; 9% Note payable, maturing April
2012; monthly payments of $1,928.29. 214,319 225,656
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 2,299,468 2,496,281
Less Current Portion (1,815,149) (918,125)
------------ ------------
$ 484,319 $ 1,578,156
------------ ------------
The convertible notes payable mature as follows for the twelve-month
periods ended:
Principle
March 31, Due
------------ --------------
2008 $ 1,815,149
2009 274,234
2010 4,631
2011 5,064
2012 5,540
Thereafter 194,850
--------------
$ 2,299,468
--------------
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the nine months
ended March 31, 2007 and 2006, the Company amortized $0 and $18,691,
respectively, for the discounts on notes payable as interest expense.
At March 31, 2007, the Company had a total of $10,245 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 nine months ended March 31, 2007, the Company amortized
$29,232 of the deferred loan costs as interest expense.
Continued
17
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
For the nine months ended March 31, 2007 and 2006, interest expense on the
convertible notes payable amounted to $238,062 and $181,697, respectively.
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:
March 31, June 30,
2007 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
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 600,000 700,000
Less Current Portion (600,000) (150,000)
------------- -------------
$ - $ 550,000
------------- -------------
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
Principle
March 31, Due
------------ --------------
2008 $ 600,000
Thereafter -
--------------
$ 600,000
--------------
Continued
18
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 nine months
ended March 31, 2007 and 2006, the Company amortized $938 and $3,616,
respectively, of the discounts on notes payable as interest expense.
At March 31, 2007, 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 nine months ended March 31, 2007 and 2006, the Company amortized $229
and $1,375 respectively, of the deferred loan costs as interest expense.
For the nine months ended March 31, 2007 and 2006, interest expense on the
related party convertible notes payable amounted to $52,035 and $32,284,
respectively.
NOTE 9 NOTES PAYABLE
The Company had the following notes payable summarized in groups with
similar attributes at:
March 31, June 30,
2007 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 15,730 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 332,007 280,646
Continued
19
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 114,421 99,851
12% Notes payable, balloon payment due upon
maturity, matures in 2007, secured by inventory - 85,577
6.75% Note payable, monthly payments of
$3,355, matures in 2021, secured by TLC's building
and land 363,955 376,632
7% Note payable, monthly payments of $1,370,
mature in 2008, secured by S&S' land and office
building 124,848 129,551
24% Notes payable, maturing November 2006,
unsecured. - -
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 -
24% Notes payable, maturing August 2007,
unsecured. 25,000 -
24% Notes payable, maturing September 2007,
unsecured. 100,000 -
9% Notes payable, maturing September 2007,
unsecured. 146,170 -
Continued
20
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
12% Notes payable, maturing September 2008,
unsecured. 73,660 -
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 2,959,260 2,440,426
Less Current Portion (1,579,139) (940,272)
------------- -------------
$ 1,380,121 $ 1,500,154
------------- -------------
The notes payable mature as follows for the twelve-month periods ended:
Principle
March 31, Due
------------ --------------
2008 $ 1,579,139
2009 233,718
2010 193,714
2011 660,947
2012 21,301
Thereafter 270,441
--------------
$ 2,959,260
--------------
At March 31, 2007, the Company had a total of $0 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 nine
months ended March 31, 2007, the Company amortized $11,653 of the deferred
loan costs as interest expense.
For the nine months ended March 31, 2007 and 2006, interest expense on the
notes payable amounted to $252,079 and $128,575, respectively.
21
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:
March 31, June 30,
2007 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 264,760 271,198
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, matures in 2010, secured by all of the
issued and outstanding shares of S&S Plant Farm, Inc.'s capital
stock; refinanced March 2007 - 367,282
12% Note payable, quarterly interest
payments beginning April 2006, maturing
January 10, 2007, unsecured; refinanced March 2007 - 100,000
24% Notes payable, maturing June 2007,
unsecured. 25,000 -
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. 10,000 -
Continued
22
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE (CONTINUED)
8% Note payable, payments of $20,000 in April,
May & June; monthly payments of $3,500 July 2007 through June
2009, matures July 2009, secured by all of the issued and
outstanding
shares of S&S Plant Farm, Inc.'s capital stock. 194,289 -
------------- -------------
Total 788,341 1,038,623
Less Current Portion (300,000) (266,863)
------------- -------------
$ 488,341 $ 771,760
------------- -------------
At March 31, 2007, the Company had a total of $0 in loan fees and costs
from establishing these notes payable. For the three months ended March 31,
2007 and 2006, the Company amortized $0 and $2,063, respectively, of the
deferred loan costs as interest expense.
For the nine months ended March 31, 2007 and 2006, interest expense on the
related party notes payable amounted to $85,859 and $62,198, respectively.
The notes payable mature as follows for the twelve-month periods ended:
Principle
March 31, Due
------------ --------------
2008 $ 300,000
2009 165,000
2010 323,341
Thereafter -
--------------
$ 788,341
--------------
The discounts due to the options issued with the notes are being amortized
over the term of the respective notes. For the nine months ended March 31,
2007 and 2006, the Company amortized $938 and $5,424, respectively, of the
discounts on notes payable as interest expense.
23
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 CAPITAL LEASES OBLIGATION
The Company leases equipment under capital leases 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:
March 31,
2007
---------------
Farm equipment $ 360,181
---------------
Total 360,181
Less accumulated depreciation (113,784)
---------------
Net Leased Equipment $ 246,397
---------------
The Company amortizes its lease obligations over the term of each lease.
Amortization expense was $70,515 for the nine months ended March 31, 2007.
The future minimum lease payments are as follows for the twelve-month
periods ended:
Amortization
March 31, Amount Due
------------ --------------
2008 $ 97,630
2009 97,630
2010 92,901
2011 53,019
Thereafter -
--------------
Total minimum obligations 341,180
Executory costs and interest (63,156)
--------------
PV of minimum obligations 278,024
Current portion (76,561)
--------------
Long-term obligations $ 201,463
--------------
24
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 2007 and
June 30, 2006, no preferred shares were issued and outstanding.
COMMON STOCK - In January 2007, the Company issued 90,909 shares of their
previously authorized but unissued common stock for the conversion of a
$50,000 note payable, or $0.55 per share.
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.
Between January 2007 and March 2007, the Company issued 3,451,922 shares of
their previously authorized but unissued common stock for the conversion of
$1,035,577 in notes payable, or $0.30 per share and 29,073 shares of their
previously authorized but unissued common stock for the conversion of
$8,722 in interest expense, or $0.30 per share. The Company recorded an
additional $342,568 in non cash, stock conversion fees for adjusting the
conversion price from between $0.95-$0.55 to between $0.55-$0.30 per share.
In March 2007, the Company issued 560,000 shares of their previously
authorized but unissued common stock for the conversion of $140,000 in
notes payable, or $0.25 per share. The Company recorded an additional
$116,667 in non cash, stock conversion fees for adjusting the conversion
price from $0.55 to $0.25 per share.
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.
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 $4,715 or $0.55 per share.
Continued
25
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
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.
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.
Continued
26
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
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 March 31, 2007 and
2006, 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 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.
Continued
27
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
A summary of the status of options granted at March 31, 2007, and changes
during the period then ended are as follows:
For the Nine Months Ended
March 31, 2007
------------------------------------------------------------------------------------------------------------------
Weighted Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value
------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 845,000 $ 0.25 4.43 years $253,500
Granted - -
Exercised - -
Forfeited -
Expired (300,000) -
Outstanding at end of period 545,000 $ 0.23 6.55 years $176,250
Vested and expected to vest in the future 545,000 $ 0.23 6.55 years $176,250
Exercisable at end of period 545,000 $ 0.23 6.55 years $176,250
Weighted average fair value of options
granted - $ -
------------------------------------------------------------------------------------------------------------------
The Company had no non vested options at the beginning of the period. At
March 31, 2007 the Company had no non vested options resulting in no
unrecognized compensation expense.
The total intrinsic value of options exercised during the nine months ended
March 31, 2007 and 2006 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 March 31, 2007 and 2006 (for outstanding options), less
the applicable exercise price.
During the nine months ended March 31, 2007 and 2006, 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 March 31, 2007, the Company
has no plans to repurchase common shares issued upon exercise of options.
Continued
28
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
A summary of the status of stock options outstanding at March 31, 2007 is
presented below:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$ 0.10 200,000 5.59 years $ 0.10 200,000 $ 0.10
0.30 345,000 6.80 years 0.30 345,000 0.30
----------------- ----------------- ------------------- ------------------ ----------------- ------------------
$0.10-0.30 545,000 6.55 years $ 0.23 545,000 $ 0.23
----------------- ----------------- ------------------- ------------------ ----------------- ------------------
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 March 31, 2007 and June 30, 2006, the total of all deferred tax assets
is approximately $658,000 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 March 31, 2007 and June 30, 2006. The change in the
valuation allowance for the nine months ended March 31, 2007 was
approximately $27,000.
At March 31, 2007 and June 30, 2006, the Company has available unused net
operating loss carryforwards of approximately $4,550,877 and $3,725,141
respectively, which may be applied against future taxable income and which
expire in various years through 2027. Also, the Company has unused capital
loss carryovers at March 31, 2007 and June 30, 2006 of approximately
$83,812 and $83,812, respectively, which expire in various years through
2011.
29
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
------------------------------ ------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Loss from operations available to
common shareholders (numerator) $ (825,736) $ (431,331) $ (1,599,086) $ (857,519)
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 25,485,062 23,171,832 24,949,435 23,479,928
------------ ------------ ------------ ------------
At March 31, 2007, the Company had outstanding options to purchase 545,000
shares and notes payable convertible into 5,021,405 shares which were not
used in the computation of loss per share because their effect would be
anti-dilutive. At March 31, 2006, the Company had outstanding options for
850,000 shares and notes payable convertible into 5,890,370 shares which
were not used in the computation of loss per share because their effect
would be anti-dilutive
NOTE 15 RELATED PARTY TRANSACTIONS
RELATED PARTY ADVANCES - During the nine months ended March 31, 2007 and
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 nine months ended March 31, 2007
officers/shareholders of the Company and their relatives made advances and
held paychecks totaling $111,633 and the company repaid advances totaling
$58,186. 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 March 31, 2007 is $237,827.
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.
30
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONCENTRATIONS
ACCOUNTS RECEIVABLE - At March 31, 2007, 31.7% of the Company's accounts
receivable was owed by two customers. 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 March 31,
2007 and June 30, 2006 respectively:
March 31, 2007 June 30, 2006
-------------- -------------
Customer A 18% 14%
Customer B 14% *
Customer C * 14%
Customer D * 10%
* Customer did not account for 10% or more of total accounts
receivable
REVENUES - During the three month period ended March 2007 and 2006
respectively, the Company had a significant customer which accounted for
30% and 18% of the Company's total sales. The loss of this significant
customer could adversely affect the Company's business and financial
condition.
During the nine months ended March 2007 and 2006, respectively, the Company
had a significant customer which accounted for 17% and 44% of the Company's
total sales. The loss of this significant customer could adversely affect
the Company's business and financial condition.
Our revenue increased in the three and nine month periods ended March 2007
due to the addition of sales from Texas Landscape Center in Midland and one
month's worth of sales from the Texas Landscape Center in Odessa.
Cost of goods sold increased during the three month period ended March 31,
2007 due to higher sales and decreased in the nine month period ended March
31, 2006 due to the cessation of the low margin sales at S&S Plant Farm.
Cost of goods sold as a percentage of sales remained relatively unchanged
at 46% for the three month period ended March 31, 2007 and decreased from
70% to 50% respectively during the nine month period ended March 2007 and
2006. Cost of Goods Sold as a percentage of sales has decreased as a result
of eliminating low margin sales at S&S Plant Farm and having higher margins
sales at the Texas Landscape Centers.
31
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 March 31, 2007, the Company owed $411,215 in principal and
$15,808 in accrued interest on the note. If the note had been converted
into stock on March 31, 2007, then the Company would have issued 1,423,408
shares of common stock which would have been redeemable at the creditor's
option for $491,076. The Company has recorded a remaining contingent
derivative liability of $1,807 associated with the option.
NOTE 18 SUBSEQUENT EVENTS
On May 2, 2007, Penge Corp (the "Company"), disposed of the approximately
7-acre commercial property in San Angelo, Texas by returning the parcel to
the note holder, the San Angelo Banking Center, the First National Bank of
Sonora, Texas. The note had a principal balance of $1,166,319 and an
interest balance of $55,149 for a total of $1,221,468 as of May 2, 2007.
The book value of the asset was $1,394,675 as of May 2, 2007 which amounts
to an approximately $173,207 loss on disposal.
32
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 our wholesale and retail
business will be done at this retail center and any future retail centers.
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
33
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 comparable 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.
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
34
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 and an approximately 4-acre retail nursery in Odessa,
Texas. Midland is a town of just over 100,000 people in western Texas and Odessa
is a town of approximately 120,000 people in western Texas which is located
approximately 20 miles from Midland.
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.
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 our wholesale and retail
business will be done this and other retail centers.
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 March 31,
2007.
LESS THAN AFTER
1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
(4/1/07 TO (4/1/08 TO (4/1/10 TO (AFTER
CONTRACTUAL OBLIGATIONS TOTAL 3/31/08) 3/31/10) 3/31/12) 4/1/12)
---------------------------------- ------------ ---------------- ---------------- --------------- --------------
Operating leases -- -- -- -- --
Capital leases 278,024 76,561 159,491 41,972 --
Retail office lease 80,000 48,000 32,000 -- --
Contractual service agreements -- -- -- -- --
Notes payable 6,647,069 4,294,288 1,194,637 692,853 465,291
------------ ---------------- ---------------- --------------- --------------
Total contractual cash obligations 7,005,093 4,418,849 1,386,128 734,825 465,291
------------ ---------------- ---------------- --------------- --------------
During the nine months ended March 31, 2007, we entered into
convertible and nonconvertible notes in an aggregate principal amount of
$150,000 with interest rates ranging from 9% per annum to 24% per annum. As of
March 31, 2007, the total amount owed under outstanding notes payable was
$6,647,069 in the aggregate, $4,294,288 of which is due and payable within a
period of one year. Of such notes, as of March 31, 2007, a note payable of
$77,150 is in default.
On May 2, 2007, we sold our approximately 7-acre commercial property in
San Angelo, Texas by returning the parcel to the note holder, the San Angelo
Banking Center, the First National Bank of Sonora, Texas. The note had a
principal balance of $1,166,319 and an interest balance of $55,149 for a total
of $1,221,468 as of May 2, 2007, resulting in a reduction in debt in such
amount. The book value of the asset was $1,394,674.54 as of May 2, 2007, which
amounts to an approximately $173,207 loss on disposal.
35
As of March 31, 2007, we had $74,967 in cash and cash equivalents. This
represents a decrease of $36,948 compared to June 30, 2006. Cash used during the
nine months ended March 31, 2007 includes approximately $940,795 used in
operations as well as approximately $80,423 provided by investing activities.
Sources of cash during the nine months ended March 31, 2007 included a net
amount of approximately $823,000 from financing activities. Of the approximately
$823,000 of net cash provided by financing activities, approximately $752,000
was from net cash received less payments made on notes, and $89,000 represented
the proceeds from issuance of common stock less offering costs. The difference
between the approximately $823,000 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 March
31, 2007.
We anticipate making capital expenditures during the remainder of the
fiscal year ending June 30, 2007 ("Fiscal 2007"). Specifically, resources
permitting, we plan to spend approximately $500,000 for inventory sold during
this past year, 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 March 31, 2007:
MARCH 31, 2007
--------------
BALANCE SHEET DATA:
Cash and cash equivalents.................... 74,967
Working capital (deficit).................... (3,007,606)
Total assets................................. 9,353,764
Retained deficit............................. (4,997,920)
Stockholders' equity......................... 533,938
As of March 31, 2007, we had $74,967 in cash and cash equivalents,
total current assets of $3,241,818 and current liabilities of $6,249,424,
representing a current working capital deficit of ($3,007,606). Our current
liabilities as of March 31, 2007 include a $2,415,149 balance on secured
convertible notes due within one year, and a $1,879,139 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.
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. Portions of this debt are 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
36
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 March 31, 2007.
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 our 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 businesses have 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
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.
37
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 NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE AND NINE MONTHS
ENDED MARCH 31, 2006
The following table reflects selected operational results for the Three and the
Nine Months Ended March 31, 2007 compared to the Three and the Nine Months Ended
March 31, 2006:
Three Months Ended Nine Months Ended
March 31 March 31
---------------------------- ----------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Statement of Operations Data:
Revenue $ 531,539 $ 274,815 $ 1,553,360 $ 1,707,552
Cost of goods sold (245,419) (129,020) (781,737) (1,197,099)
----------- ----------- ----------- -----------
Gross profit 286,120 145,795 771,623 510,453
Operating expenses (366,771) (277,221) (1,017,680) (729,004)
----------- ----------- ----------- -----------
Loss from operations (80,651) (131,426) (246,057) (218,551)
Interest and other expense (745,085) (299,905) (1,353,029) (638,968)
----------- ----------- ----------- -----------
Net loss $ (825,736) $ (431,331) $(1,599,086) $ (857,519)
----------- ----------- ----------- -----------
Loss Per Common Share (0.03) (0.02) (0.06) (0.04)
----------- ----------- ----------- -----------
Our results of operations for the nine months ended March 31, 2007 included the
operations of our Major Trees Houston Farm, Major Trees Tucson Farm, S&S Plant
Farm and the Texas Landscape Center in Midland and one month of the Texas
Landscape Center in Odessa. Our results of operations for the nine months ended
March 31, 2006 included our three farms but not either of the Texas Landscape
Centers. We anticipate out future mix of sales to only include Texas Landscape
Centers and Major Trees.
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of plants, trees, shrubs and other retail nursery products. Revenues
increased from $274,815 for the three months ended March 2006 to $531,539 for
the three months ended March 2007. Costs of Good Sold increased from $129,020
for the three months ended March 2006 to $245,419 for the three months ended
March 2007.
Revenues increased due to the addition of sales through Texas Landscape
Center in Midland as well as the addition of one month worth of sales through
Texas Landscape Center in Odessa. Due to discontinued sales to the Texas region
of Home Depot for the quarter ended December 2006, Major Trees had product
available to sell to the wholesale landscape market. Sales at Major Trees
individually increased from $66,181 for the three months ended March 2006 to
$142,195 for the three months ended March 2007. We were also able to sell the
additional trees through our Texas Landscape Centers at a higher margin.
38
Cost of goods sold increased due to higher sales, and cost of goods
sold as a percentage of sales remained relatively unchanged decreasing from 47%
for the three months ended March 2006 to 46% for the three months ended March
2007. Overall, our cost of goods sold has improved for Fiscal 2007 as a result
of eliminating low margin sales at S&S Plant Farm, having higher margins sales
through the Texas Landscape Centers, and increasing sales through our Major
Trees Arizona location.
Revenues decreased from $1,707,552 for the nine months ended March 2006
to $1,553,360 for the nine months ended March 2007. Costs of good sold decreased
from $1,197,099 for the nine months ended March 2006 to $781,737 for the nine
months ended March 2007. 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.
Cost of goods sold decreased due to cessation of lower margin sales at
the S&S Plant Farm location and an increase in higher margin sales through the
Texas Landscape Centers and Major Trees Arizona. Cost of goods sold as a
percentage of sales decreased from 70% for the nine months ended March 2006 to
50% for the nine months ended March 2007.
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 $277,221 for the three months ended March 2006 to
$366,771 for the three months ended March 2007. Operating expenses as a
percentage of revenue decreased from 101% for the three months ended March 2006
to 69% for the three months ended March 2007. Operating expenses decreased
substantially due to increased sales in the quarter. We expect our operating
expenses as a percentage of revenue to decrease through the remainder of Fiscal
2007.
Operating expenses increased from $729,004 for the nine months ended
March 2006 to $1,017,680 for the nine months ended March 2007. Operating
expenses as a percentage of revenue increased from 42.6% for the nine months
ended March 2006 to 65.5% for the nine months ended March 2007. 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 two Texas Landscape Centers. We expect our operating
expenses as a percentage of revenue to decrease through the remainder of Fiscal
2007.
OTHER EXPENSE. Other expense consists of interest paid on outstanding
notes payable, amortization of deferred loan costs, noncash notes payable costs,
conversion of notes payable into stock and losses on the disposal of fixed
assets. Other expense increased from $299,905 for the three months ended March
2006 to $745,085 for the three months ended March 2007. The increase in other
expenses was due to the conversion of $1,234,299 in notes payable and interest
expense during the current three months ended March 2007 over the prior year's
three months ended March 2006. 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.
Other expense increased from $638,968 for the nine months ended March
2006 to $1,353,029 for the nine months ended March 2007. An increase in other
expenses was attributed to the conversion on notes payable and interest during
the current nine months ended March 2007 over the prior year's nine months ended
March 2006.
NET LOSS. Our net loss increased from $431,331 for the three months
ended March 2006 to $825,736 for the three months ended March 2007. The increase
in net loss is due primarily to the conversion on notes payable and interest
during the three months ended March 2007. 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 $857,519 for the nine months ended March
2006 to $1,599,086 for the nine months ended March 2007. The increase in net
loss is due primarily to the conversion on notes payable and interest during the
three months ended March 2007. 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.
39
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 Risk Factors below.
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 and our other Reports filed with the SEC 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.
We were formed and began operations in 2002, have made several acquisitions of
businesses and assets in the last four years and are in the process of expanding
the focus of our business to include retail, as well as wholesale, nursery
operations. 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;
40
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 $4,997,920 as of March 31, 2007. 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, OR AT ALL, WE MAY BE
UNABLE TO MEET EXISTING OBLIGATIONS OR ADEQUATELY EXPLOIT EXISTING OR FUTURE
OPPORTUNITIES.
As of March 31, 2007, we had $74,967 in cash and cash equivalents and a
working capital account deficit of $3,007,606. 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
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. For example, we recently sold, rather
than developed, commercial property in San Angelos, Texas because of a shortage
of working capital. If we are unable to obtain capital for an extended period of
time, we may be forced to discontinue operations.
41
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 in 2006 and our
second retail nursery in Odessa, Texas in 2007. We 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 effect 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 businesses. The failure of our retail businesses 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 harm 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 $6,647,069 as of March 31, 2007. Of these notes,
$6,081,509 are secured by our farming and commercial properties, by inventory at
our commercial locations and by trees contained in inventory. As of March 31,
2007, our monthly interest payment with respect to such notes was approximately
$62,000 per month, and we are required to begin paying down principal on these
notes at various times beginning in 2007.
The amounts payable under our outstanding notes in the current fiscal
year exceeds 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.
42
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 Depot stores 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 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 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.
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.
43
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 CENTERS ARE OUR PRIMARY SOURCES OF REVENUE AND THE COMPETITIVENESS OF
OUR PRICES IS DEPENDENT UPON OUR FARMS' ABILITIES TO PROVIDE A SUBSTANTIAL
AMOUNT OF OUR INVENTORY.
Our retail centers are 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 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.
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.
44
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 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.
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.
45
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 March 31, 2007, 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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Penge Corp is currently in default on a $300,000 note dated September
27, 2002, held by Steve Sutherland with a principal balance of $77,149 and
interest balance of approximately $26,330.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
See the Exhibit Index attached hereto following the signature page.
46
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
-------------------------------------------
May 15, 2007 By: /s/ Kirk Fischer
--------------------- -------------------------------------------
Date Kirk Fischer, Chief Executive Officer
May 15, 2007 By: /s/ KC Holmes
--------------------- -------------------------------------------
Date KC Holmes, Chief Financial Officer
47
EXHIBIT INDEX
INCORPORATED BY REFERENCE/
EXHIBIT NO. EXHIBIT FILED HEREWITH
---------------- --------------------------------------------------- --------------------------
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
48