U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
[mark
one]
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
| |
For
the quarterly period ended: September
30, 2006
|
| o |
TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
| |
For
the transition period from ______________ to
______________
|
PETALS
DECORATIVE ACCENTS, INC.
(Exact
name of small business issuer as specified in its charter)
|
Delaware
|
0-24641
|
84-1016435
|
|
(State
or other jurisdiction of incorporation or organization)
|
(Commission
file number)
|
(IRS
Employer
Identification
No.)
|
Executive
Pavilion, 90 Grove Street, Ridgefield, Connecticut
06877
(Address
of principal executive offices)
(203)
431-3300
(Issuer’s
telephone number, including area code)
NA
(Former
name, former address, if changed since last report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
Number
of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 32,049,842 shares
of
common stock, $0.00001 par value per share, as of November 17,
2006.
Transitional
Small Business Disclosure Format (check one): Yes o No
x
PETALS
DECORATIVE ACCENTS, INC.
QUARTERLY
REPORT ON FORM 10-QSB
TABLE
OF CONTENTS
|
PART
I. FINANCIAL INFORMATION
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|
| |
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|
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Item
1.
|
Financial
Statements
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3
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|
Item
2.
|
Management’s
Discussion and Analysis of Plan of Operation
|
14
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|
Item
3.
|
Controls
and Procedures
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26
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| |
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PART
II. OTHER INFORMATION
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|
| |
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Item
1.
|
Legal
Proceedings
|
26
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|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
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|
Item
3.
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Defaults
Upon Senior Securities
|
27
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|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
27
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|
Item
5.
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Other
Information
|
27
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|
Item
6.
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Exhibits
|
28
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PART
1
Item
1 Financial Statements.
Index
to Financial Statements
Page
|
Balance
Sheet at September 30, 2006
|
4
|
| |
|
|
Statements
of Operations for the three months ended September 30, 2006 and September
30, 2005
|
6
|
| |
|
|
Statements
of Cash Flows for the for the three months ended September 30, 2006
and
September 30, 2005
|
7
|
| |
|
|
Notes
to Financial Statements
|
8
|
PETALS
DECORATIVE ACCENTS, INC.
Balance
Sheet
September
30, 2006
(UNAUDITED)
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
202,765
|
|
|
Restricted
cash
|
|
|
338,912
|
|
|
Accounts
receivable
|
|
|
43,832
|
|
|
Inventories
|
|
|
4,586,041
|
|
|
Prepaid
catalog expenses
|
|
|
946,380
|
|
|
Other
prepaid expenses and other current assets
|
|
|
907,260
|
|
| |
|
|
|
|
|
Total
current assets
|
|
|
7,025,190
|
|
| |
|
|
|
|
|
Equipment
|
|
|
669,194
|
|
|
Accumulated
depreciation
|
|
|
(276,692
|
)
|
|
Net
|
|
|
392,502
|
|
| |
|
|
|
|
|
Customer
list
|
|
|
290,959
|
|
|
Accumulated
amortization
|
|
|
(158,438
|
)
|
|
Net
|
|
|
132,521
|
|
| |
|
|
|
|
|
Other
long-term assets
|
|
|
81,467
|
|
| |
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,631,680
|
|
PETALS
DECORATIVE ACCENTS, INC.
Balance
Sheet (cont.)
September
30, 2006
(UNAUDITED)
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
| |
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
Note
payable - bank
|
|
$
|
1,500,000
|
|
|
Notes
payable
|
|
|
121,326
|
|
|
Loan
payable to affiliate
|
|
|
2,285,000
|
|
|
Accounts
payable and accrued expenses
|
|
|
3,900,736
|
|
|
Accrued
dividends
|
|
|
216,000
|
|
|
Total
current liabilities
|
|
|
8,023,062
|
|
| |
|
|
|
|
|
Notes
payable to affiliate
|
|
|
5,000,000
|
|
| |
|
|
|
|
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Bridge
notes payable - face amount
|
|
|
2,975,000
|
|
|
Less
original issue discount
|
|
|
(727,494
|
)
|
|
Total
liabilities
|
|
|
15,270,568
|
|
| |
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
Preferred
stock, par value $0.00001; 9,988,960 shares authorized;
none outstanding
|
|
|
—
|
|
|
Series
A Preferred Stock, par value $0.00001 per share, 10,800 shares designated,
issued and outstanding (aggregate liquidation value equal to $10,800,000)
|
|
|
—
|
|
|
Series
B Preferred Stock, par value $0.00001 per share, 240 shares designated,
issued and outstanding
|
|
|
—
|
|
|
Common
Stock, par value $0.00001 per share; 100,000,000 shares authorized;
32,050,000 shares issued and outstanding
|
|
|
320
|
|
|
Additional
paid-in capital
|
|
|
10,456,581
|
|
|
Accumulated
deficit
|
|
|
(18,095,789
|
)
|
|
Total
stockholders’ deficit
|
|
|
(7,638,888
|
)
|
| |
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
7,631,680
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Statements
of Operations
(UNAUDITED)
| |
|
Three
Months Ended
|
|
| |
|
September
30, 2006
|
|
September
30, 2005
|
|
| |
|
(unaudited)
|
|
(unaudited)
|
|
| |
|
|
|
|
Net
revenue
|
|
$
|
2,731,712
|
|
$
|
3,306,940
|
|
|
Cost
of sales
|
|
|
1,679,232
|
|
|
1,964,000
|
|
|
Gross
profit
|
|
|
1,052,480
|
|
|
1,342,940
|
|
| |
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
(951,832
|
)
|
|
(1,004,112
|
)
|
|
Selling
and marketing expense
|
|
|
(1,104,249
|
)
|
|
(1,269,641
|
)
|
|
Administrative
expense
|
|
|
(1,166,662
|
)
|
|
(803,907
|
)
|
|
Depreciation
& Amortization
|
|
|
(43,349
|
)
|
|
96,195
|
|
| Operating
loss |
|
|
2,213,612
|
|
|
1,638,525
|
|
|
Interest
expense
|
|
|
(263,230
|
)
|
|
(75,450
|
)
|
|
Net
loss
|
|
$
|
(2,476,842
|
)
|
$
|
(1,713,975
|
)
|
| |
|
|
|
|
|
|
|
|
Dividends
on preferred interests
|
|
|
216,000
|
|
|
185,067
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(2,692,842
|
)
|
$
|
(1,899,042
|
)
|
|
Basic
and diluted net loss per share attributable to common
stockholders
|
|
$
|
(.08
|
)
|
$
|
(.06
|
)
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
32,050,000 |
|
|
32,050,000 |
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Statements
of Cash Flows
(UNAUDITED)
| |
|
Three
Months Ended
September
30,
|
|
Three
Months Ended
September
30,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
(unaudited)
|
|
(unaudited)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,476,842
|
)
|
$
|
(1,713,975
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
43,349
|
|
|
(96,195
|
)
|
|
Amortization
of original issue discount
|
|
|
122,506
|
|
|
—
|
|
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
558,152
|
|
|
(58,572
|
)
|
|
Decrease
(increase) in accounts receivable
|
|
|
67,927
|
|
|
(18,806
|
)
|
|
Increase
in inventories
|
|
|
(684,619
|
)
|
|
(1,804,310
|
)
|
|
(Increase)
in prepaid expenses and other
|
|
|
(997,982
|
)
|
|
(695,795
|
)
|
|
Increase
in accounts payable and accrued expenses
|
|
|
727,679
|
|
|
1,262,024
|
|
|
Net
cash used in operating activities
|
|
|
(2,639,830
|
)
|
|
(3,125,629
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(23,816
|
)
|
|
(16,999
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
bank overdraft
|
|
|
(19,152
|
)
|
|
—
|
|
|
Increase
in loans payable to affiliates
|
|
|
2,285,000
|
|
|
3,146,298
|
|
|
Increase
in bridge notes payable
|
|
|
600,000
|
|
|
—
|
|
|
Net
cash provided by financing activities
|
|
|
2,865,848
|
|
|
3,146,298
|
|
| |
|
|
|
|
|
|
|
|
INCREASE
IN CASH:
|
|
|
202,202
|
|
|
3,670
|
|
| |
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
563
|
|
|
17,334
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
202,765
|
|
$
|
21,004
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH FLOW ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash
Paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
35,156.72
|
|
$
|
28,447.90
|
|
| |
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
at September 30, 2006 and for the three-month periods
ended
at September 30, 2006 and at September 30, 2005 is
unaudited)
| NOTE
1. |
OPERATIONS
AND ORGANIZATION
|
Operations
Petals
sells decorative
silk flowers, plants and trees, along with complimentary decorative accents,
which include mirrors, small furniture pieces, figurines, lamps and rugs through
its mail order catalog and website.
Organization
Petals
Decorative Accents, Inc. (formerly ImmunoTechnology
Corporation)
Petals
Decorative Accents, Inc., formerly, ImmunoTechnology Corporation, a Delaware
corporation, was incorporated on March 8, 1989. Prior to June 30, 2006, the
date
of the Acquisition (defined below), the Company was inactive and considered
a
“shell company” (as such term is defined by the Securities Exchange Act of 1934.
On September 20, 2006, the Company changed its name to Petals Decorative
Accents, Inc.
Petals
Decorative Accents, LLC (“Petals LLC”)
Petals
LLC was organized on November 4, 2003 to acquire the assets of Petals, Inc.
(“Old
Petals”),
which
had filed for protection from creditors under Chapter 11 of the Bankruptcy
Code
in May 2003. Petals LLC initially was organized as a Delaware corporation.
In
December 2003, Petals LLC was reorganized as a limited liability company under
the laws of Delaware.
The
Acquisition of the Petals LLC Business
On
June
23, 2006, ImmunoTechnology Corporation, a Delaware corporation (“Immuno”
or
the
“Company”)
and
Petals Decorative Accents LLC, a privately held Delaware limited liability
company (“Petals LLC”),
entered into a Contribution Agreement (the “Contribution
Agreement”)
pursuant to which Immuno agreed to acquire substantially all the assets of
Petals LLC in exchange for the assumption by Immuno of all but certain specified
liabilities of Petals LLC and the issuance to Petals LLC of shares of Immuno’s
capital stock. In connection with the proposed acquisition, Immuno also entered
into debt restructuring agreements with certain creditors (the “Debt
Restructuring Agreements”).
The
transactions contemplated by the Contribution Agreement were consummated on
June
30, 2006 (the “Acquisition”).
Because
the shares issued to Petals LLC in the Acquisition represent a controlling
interest, the Acquisition has been accounted for as a reverse acquisition for
financial reporting purposes. The net assets of Petals LLC (the accounting
acquirer) have been carried forward to Immuno (the legal acquirer and the
reporting entity) at their carrying value before the combination. Although
Petals LLC was deemed to have been the acquiring corporation for financial
accounting and reporting purposes, the legal status of Immuno as the surviving
corporation does not change. The assets and assumed liabilities of Petals LLC
acquired in the Acquisition by the Company were recorded at historical cost.
In
the accompanying financial statements, Petals LLC is the operating entity for
financial reporting purposes and the financial statements for all periods
presented represent Petals LLC’s financial position and historical results of
operations. The equity of Immuno presented on the accompanying balance sheet
retroactively gives effect to the equity issued in connection with the
Acquisition. The operations of the Company (the legal acquirer), to the extent
they exist, are included prospectively from the date of
acquisition.
The
Contribution Agreement provided that at the effective time of the Acquisition
there would be issued to Petals LLC 10,800 shares of Series A Convertible
Preferred Stock, $.00001 par value (the “Series
A Shares”),
240
shares of Series B Convertible Preferred Stock, $.00001 par value (the
“Series
B Shares”)
and
30,000,000 (post-reverse split) shares of Common Stock, $.00001 par value
(“Common
Stock”)
of
Immuno.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
at September 30, 2006 and for the three-month periods
ended
at September 30, 2006 and at September 30, 2005 is
unaudited)
In
addition, the Contribution Agreement and the Debt Restructuring Agreements
provided that at the effective time of the Acquisition:
|
|
o
|
Immuno
would acquire $1.35 million of cash held by Petals, representing
the
proceeds of a private placement of unsecured promissory notes (the
“Petals
Bridge Notes”)
effected by Petals on June 16,
2006;
|
|
|
o
|
Immuno
would use approximately $245,000 of that cash to repay in part certain
loans payable to officers, convertible promissory notes and accrued
expenses of Immuno;
|
|
|
o
|
Immuno
would issue an aggregate of 343,328 (post-reverse split) shares of
Immuno
Common Stock to such officers, holders of convertible notes and other
creditors in partial satisfaction of the indebtedness of Immuno to
such
persons; and
|
|
|
o
|
the
balance of the indebtedness of Immuno to such persons would remain
outstanding, with the majority of such remaining indebtedness payable
by
Immuno in six monthly installments beginning October 1, 2006, together
with interest at the rate of 7% per
annum.
|
The
accompanying financial statements for the three-month period ended September
30,
2006 and September 30, 2005 are unaudited, and include all adjustments,
consisting only of normal recurring adjustments, considered necessary by
management for a fair presentation. The results of operations realized during
this three-month period are not necessarily indicative of results to be expected
for a full year.
| NOTE
2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
| (a) |
Basis
of Presentation
|
The
accompanying unaudited financial statements and related notes have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the rules and regulations
of the Securities and Exchange Commission for Form 10-QSB. Accordingly, they
do
not include all of the information and footnotes required by generally accepted
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
of
the financial position, results of operations and cash flows for the interim
periods have been included. Operating results for the three months ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2007. For further information, refer
to
the financial statements and footnotes thereto included in the Company's Form
10-KSB dated June 30, 2006.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
at September 30, 2006 and for the three-month periods
ended
at September 30, 2006 and at September 30, 2005 is
unaudited)
The
Company values inventories, consisting of components and finished goods, at
the
lower of average cost or market. To the extent that inventory is considered
to
be obsolete or unmarketable, reserves are provided to reflect the estimated
loss
in value, in an amount equal to the difference between the cost of inventory
and
the estimated market value based upon assumptions about future demand, market
conditions, and sales forecasts. At September 30, 2006, the Company had recorded
reserves of $370,110 for excess and obsolete inventory.
Inventories,
net of reserves, consist of:
| |
|
September
30, 2006
|
|
|
Components
|
|
$
|
1,588,285
|
|
|
Finished
goods
|
|
|
2,557,003
|
|
| |
|
|
|
|
|
Total
|
|
$
|
4,145,288
|
|
| (d) |
Impact
of New Accounting Standards.
|
Management
does not believe that there are any recently issued but not yet effective
accounting pronouncements that, if adopted by the company, would have a
material
effect on the accompanying financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
at September 30, 2006 and for the three-month periods
ended
at September 30, 2006 and at September 30, 2005 is
unaudited)
The
Company computes net loss per share in accordance with SFAS No. 128,
Earnings
per Share (SFAS 128),
and
related interpretations. Under the provisions of SFAS 128, basic net loss
per common share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding.
Diluted net loss per common share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common shares and
dilutive common share equivalents then outstanding. Common share equivalents
consist of the common shares issuable upon the conversion of preferred stock,
shares issuable upon the exercise of stock options and the conversion of
preferred stock upon the exercise of warrants. The Company has excluded the
impact of all convertible preferred stock, stock options and warrants from
the
calculation of historical diluted net loss per common share because all such
securities are antidilutive for all periods presented. All share and per share
amounts have been retroactively adjusted to reflect the reverse stock
split.
Shares
of
common stock that could potentially dilute basic earnings (loss) per share
in
the future, and that were not included in the computation of diluted loss per
share because to do so would have been anti-dilutive for the periods presented,
consists of the following:
| |
|
Shares
Potentially
Issuable
at
September
30, 2006
|
|
|
Series
A Preferred Stock
|
|
|
6,000,000
|
|
|
Series
B Preferred Stock
|
|
|
8,000,000
|
|
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As reflected in the accompanying financial
statements, the Company had an accumulated deficit of $18,095,789 at September
30, 2006 and had a net loss and cash used in operations of $2,476,842 and
$2,781,488, respectively, in the three month period ended September 30, 2006.
These factors raise substantial doubt about the Company’s ability to continue as
a going concern. The Company’s current cash position may not be adequate to
support the Company’s continuing operations. Management intends to attempt to
raise additional funds by way of debt or equity financing. The ability of the
Company to continue as a going concern is dependent on improving the Company’s
profitability and cash flow and securing additional financing. While the Company
believes in the viability of its strategy to increase revenues and profitability
and in its ability to raise additional funds, and believes that the actions
presently being taken by the Company provide the opportunity for it to continue
as a going concern, there can be no assurances to that effect. The accompanying
financial statements do not include any adjustments that might be necessary
if
the Company is unable to continue as a going concern.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
at September 30, 2006 and for the three-month periods
ended
at September 30, 2006 and at September 30, 2005 is
unaudited)
| NOTE
4. |
NOTES
AND LOANS PAYABLE
|
Bank.
The
Company has a $1,500,000 revolving line of credit with a bank through December
2009 and requires monthly payments of interest. Interest is charged at the
rate
of one percentage point above the prevailing interest rate, as defined, per
annum. This line of credit is guaranteed by the Company’s president and chairman
and an entity controlled by him and is collateralized by all of the Company’s
business assets and a building owned by an affiliate of the Company’s president
and chairman. The credit line requires an annual 30-day cleanup period. The
Company was unable to effect a cleanup period in the ten months ended June
30,
2006. The Company’s average month-end balance outstanding during the ten month
period ended June 30, 2006 was $1,500,000.
Notes
Payable. In
connection with the Debt Restructuring Agreements, notes payable in the
principal amount of $121,326 will be payable by in six monthly installments
beginning October 1, 2006, with interest at the rate of 7% per annum.
Affiliated.
In
connection with the Contribution Agreement and the Acquisition, the Company
assumed two term notes with an aggregate face value of $5,000,000 payable to
two
entities that are affiliates of the Company’s president/chairman. The notes
mature and interest at the rate of two percentage points above prime, per
annum, are payable on December 31, 2008.
Bridge
Notes. On
June
16, 2006, Petals LLC sold nonnegotiable unsecured term promissory notes in
the
aggregate principal amount of $2,135,000 to fifteen investors (the “Bridge
Notes”).
The
Bridge Notes do not bear interest, but instead were issued at an aggregate
discount of $610,000. The Bridge Notes, are payable in quarterly installments
on
the 15th
day of
January, April, July and October, beginning on January 15, 2007 and continuing
until the
earlier of the Bridge Notes being paid in full or December 31, 2007. On each
quarterly payment date, each Bridge Note holder will receive its pro-rata
portion (based on the aggregate amount of the outstanding principal of all
of
the Bridge Notes) of the amount equal to the (i) the number of orders shipped
by
the Company during the previous quarter multiplied by (ii) $2.00.
On
August
17, 2006 and September 26, 2006, we sold two nonnegotiable unsecured term
promissory notes in the aggregate principal amount of $840,000 in two private
placements to two accredited investors. The aggregate gross proceeds of the
sales were $600,000. The notes do not bear interest, but instead were issued
at
a discount to their face amount. Each note has a principal amount due at
maturity equal to one hundred forty percent (140%) of the amount paid to
purchase the note. The notes are due in full on June 30, 2008. Pursuant to
terms
of the notes, we shall prepay the notes in quarterly installments on the
15th
day of
January, April, July and October, beginning with January 15, 2007 and continuing
until the earlier of the notes being paid in full or the maturity date. On
each
quarterly prepayment date, each note holder will receive in cash two and one
half percent (2.5%) of the face amount of the note at maturity.
As
of
September 30, 2006, there was an aggregate of $2,975,000 in principal amount
(face value at maturity) of nonnegotiable unsecured term promissory notes
outstanding.
Revolving
Credit Facilities with Affiliated Parties.
On
July
15, 2006, we entered into a Loan and Security Agreement and two Revolving Credit
Notes with Southshore Capital Fund, Ltd. and Southridge Partners, LP, two
entities affiliated with our president and chairman Stephen Hicks, which allow
for us to borrow up to $5,000,000. The notes bear interest at the rate of five
percent per year and are secured, on a subordinated basis, by a blanket lien
on
all of our assets. As of November 13, 2006 we owed approximately $2,285,000
under these notes. Copies of the Loan and Security Agreement and the two
Revolving Credit Notes are attached to this Quarterly Report as Exhibits 10.3,
10.4 and 10.5 respectively and are incorporated by reference in their entirety
herein.
Item
2 Management’s Discussion and Analysis.
MANAGEMENT
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following management’s discussion and analysis of financial condition and
results of operations relates to our historical financial statements for the
three month periods ended September 30, 2005 and September 30, 2006, and should
be read in conjunction with those financial statements and the notes thereto.
For accounting purposes, the acquisition of the Petals LLC business is accounted
for as a reverse acquisition of us (legal acquirer) by Petals LLC (accounting
acquirer). As a result, following the Acquisition, the historical financial
statements of Petals LLC became the historical financial statements of the
Company. We intend to operate the business formerly carried on by Petals LLC,
however, the historical operating results of Petals LLC are not necessarily
indicative of our future results.
The
following management's discussion and analysis of financial condition and
results of operations is organized as follows:
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Overview.
This section provides a general description of our business, as well
as
recent developments and events that have occurred since September
30, 2006
that we believe are important in understanding the results of operations
and financial condition and to anticipate future trends. In addition,
we
have provided a brief description of significant transactions and
events
that impact the comparability of the results being
analyzed.
|
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·
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Results
of Operations.
This section provides an analysis of our results of operations for
the
three month periods ended September 30, 2005 and September 30, 2006.
This
analysis is presented on a consolidated basis. From an historical
perspective, Petals LLC was deemed to have been the acquirer in the
Acquisition and Petals LLC is deemed the survivor of the reorganization.
Accordingly, the financial statements presented reflect the historical
results of Petals LLC prior to the Acquisition, and of the combined
entities following the Acquisition, and do not include the historical
financial results of us prior to the consummation of the
Acquisition.
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Financial
Condition And Liquidity.
This section provides an analysis of our cash flows for the three
month
periods ended September 30, 2005 and September 30, 2006, as well
as a
discussion of recent financing
arrangements.
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Critical
Accounting Policies.
This section discusses certain critical accounting policies that
we
consider important to our financial condition and results of operations,
and that required significant judgment and estimates on the part
of
management in application. Our significant accounting policies, including
the critical accounting policies discussed in this section, are summarized
in the notes to the accompanying consolidated financial
statements.
|
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·
|
New
Accounting Pronouncements.
This section discusses newly issued accounting standards and the
impact we
expect they may have on our financial
statements.
|
Overview
We
sell
decorative silk flowers, plants and trees, along with complimentary decorative
accents, which include mirrors, small furniture pieces, figurines, lamps and
rugs. We sell our products through our mail order catalog and website. We import
most of the floral stems and other materials used in our products, primarily
from China, and assemble them in our facility in Portland, Tennessee. Our order
fulfillment is performed on an outsourced basis by a third party at a call
center in Martinsville, Virginia and a distribution facility in Portland,
Tennessee.
Operations
from inception to the Acquisition
Petals
LLC acquired control of the assets that now constitute the Petals business
in
November 2003. Its first priority was to rapidly re-establish the operations
of
the business. Its goals were to reactivate as many customers as possible from
the Old Petals customer database and establish purchasing and distribution
systems as quickly as it could.
To
accelerate this process, Petals LLC initially outsourced all its assembly and
order fulfillment operations. During this start-up period, Petals LLC sought
to
preserve what it believed to be the company’s core strategic asset, its large
direct mail customer database, while developing an operating plan to capitalize
on this asset while controlling our cost structure.
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During
the winter and spring of 2004, Petals LLC re-established contact
with its
customer base, mailing catalogs in January, March, April, May and
June.
Due to the initial challenges in procurement of inventory, these
catalogs
offered a limited number of products and included very few proprietary
floral arrangements or decorative accent products.
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In
the summer of 2005, Petals LLC assumed responsibility for the assembly
of
its finished products, within its outsourced vendor’s warehouse facility.
In the fall of 2005, Petals LLC established a new assembly facility
in
leased premises in Portland, Tennessee, giving it complete control
over
the product assembly process.
|
Description
of revenues, costs and expenses
Net
revenue.
Our net
revenue is comprised of product sales derived from mailing of catalogs and
from
visitors to our Internet site, shipping and handling charged on product sales,
and revenue from the renting of our mailing list less reductions for bad debt
and promotional discounts offered. Net revenues are reduced by credits for
product returns and chargebacks that may arise as a result of shipping errors,
product damaged in transit or other reasons that can only become known
subsequent to recognizing the revenue.
Cost
of sales.
Our cost
of sales includes the cost of finished goods bought directly from the
manufacturer or components purchased from our suppliers and assembled at our
plant, labor for product assembly, freight associated with the transport of
finished goods or components from the manufacturing vendor to our plant,
packaging materials used to box and secure our products during shipping to
our
customers and the freight expense associated with shipping finished products
to
our customers.
Operating
expense.
Our
operating expense includes credit card fees, telephone expense for its toll
free
number, order entry fees for telemarketing representatives to take phone calls,
answer customer questions relating to products for sales and record any orders,
customer service fees to handle after sales questions or concerns, labor related
to receiving inventory, inventory storage charges, labor related to picking,
packing and shipping of each order and the cost of invoices that get mailed
along with the product. We utilize and pay a third party provider for these
services at contracted rates. Also included in operating expense is the fixed
portion of our manufacturing overhead, including rent, taxes, utilities and
equipment rental.
Selling
and marketing expense.
Our
selling and marketing expense consists primarily of the cost of producing,
printing and mailing our catalogs. It also includes the cost of commissions
paid
to affiliate advertising programs, cost of e-mail campaigns and paid search
advertising fees, and amortization of the customer database we acquired from
Petals LLC.
Administrative
expense.
Our
administrative expense includes salaries and related payroll cost for our
executive officers, outside professional consulting and professional fees,
insurance, rent and related facilities costs for our Ridgefield, Connecticut
headquarters, travel, technology consulting and bank charges and depreciation
on
equipment.
Interest
Expense.
Our
interest expense includes interest on our bank revolving line of credit,
revolving credit facilities with affiliated parties, term loans and bridge
notes.
Factors,
trends and challenges that have affected our results of
operations
In
reading our financial statements, you should be aware of the following factors,
trends and challenges that management believes are important in understanding
our financial performance, and actions we have taken and plan to take in
response.
Initiatives
to improve customer acquisition and retention and increase demand per
catalog.
The cost
of producing and mailing catalogs is substantial, amounting to nearly $6 million
in fiscal 2006. In order to meet our business objectives, we must leverage
this
investment by continuing to improve our gross product demand per catalog mailed.
Gross product demand is the total value of orders we receive, before deduction
for product returns and orders we are unable to fill. Gross product demand
per
catalog mailed is the gross product demand for any period divided by the total
number of catalogs we mail during that period. On an annual basis, this is
a key
measure of the success of our marketing and merchandising efforts. However,
comparisons of gross product demand per catalog on a quarter to quarter basis
are seldom indicative of actual performance or future trends because the actual
mailings of catalogs are almost never consistently distributed throughout the
quarter. Large mailings that occur at or near the cut off for the shortened
period can cause dramatic swings in the calculation of gross product demand
per
catalog on a quarterly basis. Therefore, we believe measuring product demand
for
the quarter on an aggregate basis is a more reliable measure of our success
for
the quarter.
During
the three months ended September 30, 2006, we mailed 2.2 million catalogs and
generated gross product demand of $3.3 million, an 11% decrease from the $3.7
million we achieved during the corresponding period of 2005. The period over
period decrease was primarily due to having mailed 20% fewer catalogs during
the
three-month period ended September 30, 2006 than we did in the corresponding
period of 2005. In addition, gross product demand was impacted by our decrease
in marketing discounts offered. During the three-months ended September 30,
2006
we offered discounts in 21% of our catalogs mailed during the period as opposed
to approximately 45% offered in the prior year.
Our
plan
to achieve an increase in gross product demand over the course of the remaining
portion of fiscal 2007 will include changing the mix of product to include
a
higher percentage of products that are not currently available in the
marketplace. Catalog creative will continue to present our product in lifestyle
settings with marketing copy that connects the product to our target customer’s
home décor needs and overall lifestyles. In addition, we continue to look to
introduce successful new floral designs.
Initiatives
to enhance and maintain our catalog yields.
Our merchandising planning cycle typically takes about nine months, including
product planning and design, manufacture of components by our suppliers in
Asia,
transport to our assembly facility, and product assembly in our facility. We
currently plan each catalog nine or more months in advance in order to meet
our
manufacturers’ lead times, so as to have sufficient quantities of appropriate,
high quality merchandise on hand with which to fill orders.
Our
ability to plan and choose the product assortment and to obtain the necessary
merchandise in the correct quantity is an area we continually strive to improve.
We believe that a typical product return rate in our industry is in the range
of
4% to 6% and that typical fill rates are in the range of 92% to 94%. In order
to
achieve our business objectives, we need to achieve and then maintain our yields
at or near those levels. For the three months ended September 30, 2006, our
return rate was nearly 10% of gross revenue shipped and our order fill rate
was
approximately 79% of product demanded by our customers. In comparison, for
the
three months ended September 30, 2005, returns were 7% and order fill was 83%.
The increased in product returns was primarily due to quality issues we
experienced with several of our non-floral accessory products and the packaging
of these products. The increase in our lost fill percentage is mostly due to
unfilled demand for our sale products included in our July 2006 catalog. In
addition, we continued to see lost fill in July which was attributable to the
disruption of our outbound shipping which occurred with the bankruptcy of prior
third party shipping vendor, TLS.
We
are
working toward implementing vendor packaging standards to help reduce product
return rates. Product fill levels are anticipated to improve once we transition
to our new warehouse management system, targeted for January 2007. This will
provide management with increased visibility to product inventory
levels.
Initiatives
to reduce order fulfillment costs.
Upon
commencing operations in 2003, Petals LLC used an outside vendor for its product
distribution and call center functions. We have entered into a three- year
lease, starting August of 2006, to utilize a 75,000 scalable facility in
Portland, Tennessee to serve as our own distribution center. The facility is
scheduled to be fully operational by January of 2007. Our goal is to reduce
warehouse and product distribution cost per order, although no assurances can
be
given that we will achieve this goal. This facility was financed by the proceeds
of a private placement of unsecured promissory notes completed on June 16,
2006,
which is described in more detail under the heading “Recent Developments”
below.
Initiatives
to reduce cost of sales and improve the efficiency of our supply
chain.
We
purchase most of the components we use in assembling our floral products, as
well certain decorative accessory products, from suppliers in China. Although
the cost of the products that we purchase is advantageous in China, the long
lead times associated with the manufacturing and shipping of the goods to the
United States often require us to commit capital resources for as long as three
months before inventory is received.
The
long
lead times for components from our suppliers in China also require us to buy
in
larger quantities than are optimal, resulting in higher inventory levels, and
low inventory turns.
We
are
currently looking to expand our overseas floral vendor base in an effort to
reduce our cost of goods sold. In addition, our purchases of existing core
floral stems are being put out to bid to multiple existing vendors to help
reduce the cost of our current product assortment.
Initiatives
to tighten inventory controls.
We are
in the process of implementing measures to improve inventory management and
control. A warehouse management system is being installed that will increase
management’s visibility to inventory levels, along with optimizing the
efficiency of how product is shipped to customers. We also plan to improve
inventory management by developing systems that provide for all customer order
information to be captured in our internal software system. Both internal and
external information technology personnel are currently executing this
initiative.
Our
inventory management initiatives are scheduled for completion by the end of
December 2006. Successful completion is critical to our plan to transition
product fulfillment from our current third party provider to managing these
processes in-house.
Initiative
to reduce telemarketing costs. We
will
continue to outsource telemarketing operations for the foreseeable future.
On
November 14, 2006, we entered into a three year contract to move our
telemarketing services from Accretive Commerce to Inktel Direct Corporation,
or
Inktel, effective in January 2007. We believe that the successful transition
to
Inktel will generate significant cost savings, while providing the Petals
customer with premium service. The timely and successful transition of this
function is critical to business operations. For more information concerning
our
agreement with Inktel, please see the Section titled “Other Items” beginning at
page 27 of this Quarterly Report. In addition, a copy of our agreement with
Inktel has been attached to this Quarterly Report as Exhibit 10.6.
Initiatives
to enhance our internet website. Recent
enhancements have been made to our consumer website in an effort to increase
online sales. Our print catalog was launched electronically on the Petals.com
website in August of 2006. Electronic catalogs will enable customers to shop
coordinated collections of products in an easy manner, as they can view product
collections in a single page view. We hope that this will help increase online
sales conversion and average order levels.
In
July
of 2006, we launched online product zoom functionality, allowing shoppers the
ability to view products in greater detail than typically available through
traditional website and print catalog images. Product zoom should help
accentuate the fine craftsmanship and quality of our products and give customers
added confidence that our silk florals are accurate reproductions of fresh
florals.
Critical
accounting policies and estimates
The
preparation of financial statements and related notes in conformity with
accounting principles generally accepted in the United States of America
requires us to make judgments, estimates, and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to bad debts, inventories,
income taxes, restructuring, impairments, contingencies and litigation. We
base
our estimates on historical experience and on 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.
The
accounting policies discussed below are those that we consider to involve
estimates based on assumptions about matters that are highly uncertain at the
time the estimate is made, and where different estimates that reasonably could
have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially affect its financial statements.
Revenue
recognition. Our
revenue is comprised of product sales derived from:
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product
sales derived from mailing of catalogs to our core customer base
and to
prospective customers and from visitors to our Internet site,
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shipping
and handling revenue charged on product sales, and
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revenue
from the renting of our mailing list.
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Generally,
sales orders are received via signed customer orders to our call center or
via
the Internet with stated fixed prices based on published prices set forth in
our
catalogs and on our Web site. We record estimated reductions to product revenue
for customer promotional programs, which may include special volume incentives,
free shipping and handling, percent off purchase, free gift with purchase and
other promotions. Should market conditions decline, we may increase customer
incentives with respect to future sales.
We
also
record estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise as a result
of
shipping errors, product damage in transit or for other reasons that can only
become known subsequent to recognizing the revenue. Purchased products may
be
returned by customers for a period of 30 days. Our sales
returns, as a percentage of product revenue shipped, have typically run between
5 to 10%. If
the
amount of actual customer returns and chargebacks were to increase significantly
from the estimated amount, revisions to the estimated allowance would be
required and made.
Approximately
90% of all sales are made by charging customer credit cards at the time of
shipment. Shipment is not made if the charge to the credit card is not accepted.
Approximately 10% of orders are paid by check. Revenues from the rental of
our
mailing list are recognized when the party renting the list is invoiced by
our
third party list manager.
Inventory
valuation. Inventories
are valued at the lower of cost or market. Cost is determined by the average
cost method. We record reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, market
conditions, and sales forecasts. If market acceptance of our existing products
or the successful introduction of new products should significantly decrease,
inventory write-downs could be required. Any such write-downs would increase
our
cost of sales. Potential additional inventory write-downs could result from
unanticipated additional quantities of obsolete finished goods and raw
materials, and/or from lower disposition values offered by the parties who
normally purchase surplus inventories. At September 30, 2005 and September
30,
2006, we had obsolete inventory reserves totaling approximately
$300,000.
Long-lived
assets, including intangible assets. Petals
LLC acquired the customer database as part of the assets purchased from the
creditors of Old Petals in 2003. The customer database is being amortized on
a
straight-line basis over 5 years. In accordance with Financial Accounting
Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”)
No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review
the carrying value of its long-lived assets, including intangible assets subject
to amortization, for impairment whenever events and circumstances indicate
that
the carrying value of the assets may not be recoverable. Recoverability of
these
assets is measured by comparison of the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those assets over their
remaining economic life. If the undiscounted cash flows are not sufficient
to
recover the carrying value of such assets, the assets are considered impaired.
The impairment loss is measured by comparing the fair value of the assets to
their carrying values. Fair value is determined by either a quoted market price
or a value determined by a discounted cash flow technique, whichever is more
appropriate under the circumstances involved.
Recent
Developments
New
Telemarketing Service Provider.
On
November 14, 2006, we signed a three year contract with Inktel Direct
Corporation to assume responsibility as our new telemarketing provider,
effective January of 2007. Our current third party telemarketing vendor will
continue to handle telemarketing services through the January 2007. The vendor
change is anticipated to yield significant operating cost savings. The
successful implementation of this vendor change is critical to the company’s
2007 operating results.
Adoption
of Stock Incentive Plan.
On
August 2, 2006, our board of directors and the requisite number of stockholders,
acting by written consent in lieu of a meeting, approved the adoption of the
Stock Incentive Plan. Under the Code, stockholder approval of the Plan is
necessary for stock options relating to the shares issuable under the Stock
Incentive Plan to qualify as incentive stock options under Section 422 of the
Code. The Stock Incentive Plan authorizes the grant of stock options to purchase
common stock intended to qualify as incentive stock options, as defined in
Section 422 of the Internal Revenue Code, nonstatutory stock options, awards
of
restricted stock, unrestricted stock, performance share awards and stock
appreciation rights. Our
officers, directors, employees, consultants and advisors are eligible to receive
awards under the Stock Incentive Plan. The
Stock
Incentive Plan initially authorizes the issuance of awards for up to 15,000,000
pre-split (or 5,000,000 post-split) shares of our Common Stock.
Revolving
Credit Facility. On
July
15, 2006, we entered into a Loan and Security Agreement and two Revolving Credit
Notes with Southshore Capital Fund, Ltd. and Southridge Partners, LP, two
entities affiliated with our president and chairman Stephen Hicks, which allow
for us to borrow up to $5,000,000. The notes bear interest at the rate of five
percent per year and are secured, on a subordinated basis, by a blanket lien
on
all of our assets. As of November 13, 2006 we owed approximately $2,908,907
under these notes. Copies of the Loan and Security Agreement and the two
Revolving Credit Notes are attached to this Quarterly Report as Exhibits 10.3,
10.4 and 10.5 respectively and are incorporated by reference in their entirety
herein.
New
Distribution Center. In
July
2006, we entered into a lease and equip a 75,000 square foot scalable facility
in Portland, Tennessee to serve as our own distribution center. Our goal is
to
reduce our warehouse and product distribution cost per order by approximately
35%, although no assurances can be given that we will achieve this goal. The
capital expense for this transition is estimated at $600,000. In addition,
we
anticipate approximately $200,000 of additional costs to be incurred in
connection with transitioning our fulfillment functions from our outside vendor
to our new facility. A majority of the proceeds of the Bridge Notes will be
utilized to finance the commissioning of this new facility and the transitioning
of our fulfillment function to the new facility. We do not anticipate this
facility to be operational before the beginning of February 2007.
Change
in Control - Transaction with Petals LLC.
On
June
23, 2006, we entered into the Contribution Agreement, pursuant to which we
agreed to acquire substantially all the assets of Petals LLC in exchange for
the
assumption by us of all but certain specified liabilities of Petals LLC and
the
issuance to Petals LLC of shares of our capital stock. On
June
30, 2006, pursuant to the Contribution Agreement, we completed the Acquisition.
At the effective time of the Contribution Agreement, we issued to Petals shares
of our Series A Preferred Stock and Series B Preferred Stock, and shares of
our
Common Stock, as follows:
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10,800
shares of Series A Preferred Stock;
|
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240
shares of Series B Preferred Stock;
and
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90,000,000
shares of Common Stock.
|
The
assets acquired by us consist of cash in the amount of approximately $1.0
million, and all of the assets and property, real, personal and mixed, tangible
and intangible, used in or forming a part of the business of Petals LLC. The
liabilities assumed by us consisted of substantially all of the liabilities
of
Petals LLC, including, trade payables and obligations of Petals LLC for borrowed
money, but excluded term indebtedness of Petals LLC to certain of its equity
holders identified in the Contribution Agreement. For more information regarding
the assets and liabilities of Petals LLC assumed by us in the Acquisition,
please see our current report on Form 8-K filed with the SEC on July 7, 2006,
which is incorporated herein by reference.
Amendment
to Master Services Agreement with NewRoads, Inc.
Since
commencing operations in 2003, Petals LLC has used an outside vendor, Newroads,
Inc. (recently renamed Accretive Commerce), for warehouse and product
distribution functions. On May 4, 2006, Petals LLC was notified by NewRoads
that
NewRoads believed that Petals LLC had defaulted under the terms of the Master
Services Agreement between the two parties and that Petals LLC owed NewRoads
approximately $845,000, which included a retroactive consumer price index
adjustment to fees paid and owed over the past sixteen months. On May 11, 2006,
Petals LLC agreed to pay NewRoads in accordance with the demand letter and
entered into an amendment to the Master Services Agreement. Pursuant to this
amendment, Petals LLC provided NewRoads with an irrevocable bank letter of
credit for $200,000 to secure future payment of fees. In addition, the payment
terms of the Master Services Agreement were changed such that weekly fees would
be billed in advance and would later be reconciled to actual billings and
adjusted accordingly. The amendment also provided that the term of the Master
Services Agreement would be changed such that NewRoads would have the option
of
extending the contract to January 31, 2007 and if terminated earlier, Petals
LLC
would be required to pay a termination payment equal to the product of (a)
the
greater of (i) $35,000, or (ii) the average weekly billing for the last 12
months pursuant to the Master Services Agreement, multiplied by (b) the number
of weeks remaining in the contract.
Temporary
Disruption of our Outbound Shipping. In
January of 2006, Petals LLC hired Total Logistic Services, or TLS, as its
principal package consolidator partner responsible for the transport and
delivery of customer packages to United Postal facilities throughout the
country. Soon thereafter, Petals LLC’s third party inbound telemarketing service
provider began receiving high numbers of complaints from customers, with
customers complaining that they received product shipments late, or hadn’t
received product orders at all. Petals LLC terminated its contract with this
vendor in late April and reshipped thousands of customer orders with a new
package-shipping vendor in an effort to satisfy customer demand..
Petals
LLC was subsequently informed that TLS had failed to transport over 13,000
customer packages into the postal system. Petals LLC successfully recovered
unshipped packages from the vendor’s warehouses and returned them to inventory.
We now use FedEx as our package consolidator vendor.
Customer
service problems arising from TLS delivery issues had a significant impact
on
operating results for the ten months ended June 30, 2006. We experienced higher
product return rates due to TLS’s inability to service our customers and had a
higher cost of goods sold due to the need to reship thousands of customer orders
that were either delivered late, or never delivered. In addition, customer
service calls were elevated, as customers inquired as to the status of
undelivered packages. We were required to pay our operations vendor significant
telemarketing fees and overtime operation labor fees in order to handle excess
customer service calls and the replacement of product orders.
It
is
estimated that the TLS problems increased losses for the ten months ended June
30, 2006. It is anticipated that these problems will continue to impact
operating results through the first quarter of our 2007 fiscal
year.
Executive
Summary
The
primary objective for the three months ended September 30, 2006 were to work
towards a January, 2007 transition of our picking, packing and shipping
operations from our current third party vendor to our own new fulfillment
center. Also during the quarter, we selected a new provider for our outsourced
telemarketing call center who we expect will provide us with the best
combination of quality customer service at a competitive price. For the coming
quarter we remain focused on preparing for the transition of our pick/pack/ship
operations and the transition to our new telemarketing provider.
Given
our
current high variable cost structure, marketing objectives for the quarter
consisted of targeting catalog circulation to current buyers, as we reduced
total catalog circulation by approximately 20% as compared with last year’s
comparable quarter. We also limited the prevalence of discount promotional
offers. The 20% reduction in catalog circulation resulted in a 10% decline
in
gross product demand, as compared with last year. Net revenue for the quarter
was 17% lower than the same period in 2005, as we experienced a lower conversion
of gross product demand to net revenue due to higher product return rates and
a
decrease in our ability to fill product orders for certain sale and promotional
products.
Results
of Operations
Three
month periods ended September 30, 2006 and September 30,
2005
The
following table sets forth our results of operations data for the three months
ended September 30, 2006 and September 30, 2005 as a percentage of our net
revenue, and the percentage change in the dollar amount of each item from the
three months ended September 30, 2005 to the three months ended September 30,
2006.
| |
|
Three
Months Ended
|
|
|
|
| |
|
September
30,
2006
|
|
September
30,
2005
|
|
Percentage
change 2005 to 2006
|
|
| |
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
(17.39
|
)%
|
|
Cost
of sales
|
|
|
61.47
|
%
|
|
59.39
|
%
|
|
(14.50
|
)%
|
|
Gross
profit
|
|
|
38.53
|
%
|
|
40.61
|
%
|
|
(21.63
|
)%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
34.84
|
%
|
|
30.36
|
%
|
|
(5.21
|
)%
|
|
Selling
and marketing expense
|
|
|
40.42
|
%
|
|
38.39
|
%
|
|
(13.03
|
)%
|
|
Administrative
expense
|
|
|
42.71
|
%
|
|
24.31
|
%
|
|
45.12
|
%
|
|
Interest
expense
|
|
|
9.64
|
%
|
|
2.28
|
%
|
|
248.88
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(90.67
|
)%
|
|
(51.83
|
)%
|
|
44.51
|
%
|
Net
revenue.
Net
revenue decreased 17.39%, from $3.3 million in the three months ended September
30, 2005 to $2.7 million in the three months ended September 30, 2006. The
decrease was due primarily to a 20% decrease in the number of catalogs mailed,
from $2.8 million in the three-months ended September 30, 2005 to $2.2 million
in the comparable period in 2006, along with a decrease in the percent of
catalogs which contained discount promotions from 45% in the three months ended
September 30, 2005 to 21% in the three months ended September 30, 2006.
Costs
of sales.
Cost of
sales decreased 14.5%, from $2.0 million in the three months ended September
30,
2005 to $1.7 million in the three months ended September 30, 2006. The decrease
in dollar amount was primarily attributable to a decrease in volume of products
shipped in 2006 in addition to lower labor cost realized from having assumed
responsibility for our assembly operations.
Gross
profit.
Gross
profit decreased 21.63%, from $1.3 million in the three months ended September
30, 2005 to $1.1 million in the three months ended September 30, 2006. Our
gross
margin, or gross profit as a percentage of net revenue, decreased from 40.61%
in
the three months ended September 30, 2005 to 38.53% in the three months ended
September 30, 2006. The decrease in our gross margin was due primarily to the
cost of outbound shipping.
Operating
expense.
Our
operating expense decreased 5.2%, from $ 1.0 million in the three months ended
September 30, 2005 to $0.95 million in the three months ended September 30,
2006. Operating expense as a percentage of net revenue increased from 30.36%
in
the three months ended September 30, 2005 to 34.84% in the three months ended
September 30, 2006. The increase as a percentage of sales was primarily due
to a
retroactive consumer price index adjustment charged by our third party
operations vendor along with the costs associated with servicing customer orders
resulting from the TLS delivery problems, both of which are described in more
detail under the heading “Recent Developments” beginning at page 19
herein.
Selling
and marketing expense.
Our
selling and marketing expense decreased 13.02%, from $1,269,643 in the three
months ended September 30, 2005 to $1,104,249 in the three months ended
September 30, 2006. The dollar decrease was due to the reduction in catalog
circulation. Selling and marketing expense as a percentage of net revenue
increased from 38.39% in the three months ended September 30, 2005 to 40.42%
in
the three months ended September 30, 2006. The increase as a percent of net
revenue was primarily due to rate increases in catalog postage and paper.
Administrative
expense.
Administrative expense increased 45.12%, from $803,908 in the three months
ended
September 30, 2005 to $1,166,662 in the three months ended September 30, 2006.
Administrative expense as a percentage of net revenue increased from 24.31%
in
the three months ended September 30, 2005 to 42.71% in the three months ended
September 30, 2006. The increase in dollar amount and administrative expense
as
a percentage of net revenue was due primarily due to legal and accounting
expenses related to the acquisition of the Petals LLC business, an increase
in
corporate personnel to manage our growing operations and the monthly rent
expense for our new warehouse facility.
Interest
expense.
Interest expense increased 248.8%, from $75,450 in the three months ended
September 30, 2005 to $263,230 in the three months ended September 30, 2006.
The
increase was primarily attributable to the conversion of $5,000,000 by Petals
LLC from their revolving credit line carrying interest at the rate of 2.5%
into
term notes, which we acquired from Petals LLC in the Acquisition, carrying
interest at the rate of Prime +2%, plus higher outstanding debt balances carried
throughout the period.
Seasonality
The
Petals business is highly seasonal. Approximately 40% of revenues are generated
during the months of October through December. We typically realize about 33%
of
annual marketing expense during the same time period. Our operating results
are
thus dependent on the success of sales and through-put during such time
period.
Liquidity
and Capital Resources
Revolving
Credit Facilities with Affiliated Parties:
On July
15, 2006, we entered into a Loan and Security Agreement and two Revolving Credit
Notes with Southshore Capital Fund, Ltd. and Southridge Partners, LP, two
entities affiliated with our president and chairman Stephen Hicks, which allow
for us to borrow up to $5,000,000. The notes bear interest at the rate of five
percent per year and are secured, on a subordinated basis, by a blanket lien
on
all of our assets. As of September 30, 2006 we owed approximately $2,285,000
under these notes. Copies of the Loan and Security Agreement and the two
Revolving Credit Notes are attached to this Quarterly Report as Exhibits 10.3,
10.4 and 10.5 respectively and are incorporated by reference in their entirety
herein.
Bank.
We have
assumed a five-year $1,500,000 revolving line of credit from a bank that matures
in December 2009 and requires monthly payments of interest. Interest is charged
at the rate of one percentage point above the prevailing interest rate, as
defined. This credit facility is guaranteed by our president and chairman and
an
entity controlled by him and is collateralized by all of business assets
acquired in the Acquisition and real estate owned by an entity controlled by
our
president and chairman. The revolving credit line requires an annual 30-day
cleanup period. Petals LLC was unable to effect a cleanup period in 2005. Our
average month-end balance outstanding for the three months ended September
30,
2006 under the line of credit was $1,500,000. The outstanding principal balance
at September 30, 2006 was $1,500,000, and no amount was available for additional
borrowing under the line of credit.
Term
Loans.
We have
assumed from Petals LLC two (2) three-year term notes in the aggregate principal
amount of $5,000,000 extended by two entities that are affiliated with our
president and chairman that mature in December 2008 and bear interest at the
rate of two percentage points above prime. Interest accruing on these term
notes
is payable, at the election of the lenders, in our common equity. Our
indebtedness under these term notes is reflected as long-term debt due to
affiliate on the accompanying balance sheets. The term notes require us to
obtain the lenders’ consent to enter into certain agreements and transactions,
including mergers, declaring dividends on our common stock, or make any changes
in accounting principles except those required under accounting principles
generally accepted in the United States. The term notes become due upon the
occurrence of (1) the issuance of any debt or equity securities (in any
combination) by Petals in one or more related transactions in exchange for
cash
consideration of at least $15,000,000, (2) a sale or transfer of all or
substantially all of its assets to another person, or (3) a transaction that
results in a change in control.
Unsecured
Term Promissory Notes: On
June
16, 2006, Petals LLC sold nonnegotiable unsecured term promissory notes in
the
aggregate principal amount of $2,135,000 in a private placement to fifteen
accredited investors (the “Bridge
Notes”).
The
aggregate gross proceeds of the offering were $1,525,000. The Bridge Notes
do
not bear interest, but instead were issued at a discount to their face amount.
Each Bridge Note has a principal amount due at maturity equal to one hundred
forty percent (140%) of the amount paid to purchase the Bridge Note. On August
17,2006 and September 26, 2006, we sold two additional Bridge Notes, due June
30, 2008, in the aggregate principal amount of $840,000 to two accredited
investors with aggregate gross proceeds to us of $600,000. As of September
30,
2006, there was an aggregate of $2,975,000 in principal amount (face value
at
maturity) of the Bridge Notes outstanding.
The
Bridge Notes are due in full on December 31, 2007. Pursuant to terms of the
Bridge Notes, Petals shall prepay the Bridge Notes in quarterly installments
on
the 15th
day of
January, April, July and October, beginning with January 15, 2007 and continuing
until the earlier of the Bridge Notes being paid in full or the maturity date.
On each quarterly prepayment date, each Bridge Note holder will receive its
pro-rata portion (based on the aggregate amount of the outstanding principal
of
all of the Bridge Notes) of the amount equal to the product of the (i) the
number of orders shipped by the Company during the previous quarter multiplied
by (ii) $2.00. For example, if we were to ship 70,000 orders between September
1, 2006 and December 31, 2006, the aggregate amount of the first payment due
to
the holders of the Bridge Notes on January 15, 2007 would be $140,000.
The
Form
of Note Subscription Agreement and the Form of Nonnegotiable Unsecured
Promissory Note sold in these offering are attached to our Current Report on
Form 8-K filed on July 7, 2006, as Exhibits 10.21 and 10.22 respectively.
Sources
and uses of cash
Operating
activities. Net
cash
used by operating activities for the three months ended September 30, 2006
was
$2.6 million. The main use of funds was to finance our operating loss of $2.5
million.
Investing
activities
Net cash
used in investing activities was $23,816 for the three months ended September
30, 2006, which was primarily attributable to fixed asset acquisitions,
principally computer equipment and software.
Financing
activities.
Our
financing activities provided net cash in the amount of $2.9 million the three
months ended September 30, 2006, consisting of borrowings of $2.3 million under
our revolving credit facility from entities affiliated with our president and
chairman and $600,000 from the sale of unsecured promissory notes.
Off-Balance
Sheet Arrangements
We
do not
have any special purpose entities or off-balance sheet financing arrangements.
Contractual
Obligations
The
following table summarizes our contractual cash obligations at September 30,
2006 and the effect such obligations are expected to have on our liquidity
and
cash flow in future periods:
| |
Total
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
|
Debt
|
$11,031,326
|
$121,326
|
$9,410,000
|
$1,500,000
|
|
Interest
on Debt
|
2,870,077
|
1,077,077
|
1,733,000
|
60,000
|
|
Operating
Leases
|
1,402,510
|
255,000
|
1,147,510
|
—
|
|
Purchase
Obligations
|
980,000
|
980,000
|
—
|
—
|
|
Employment
Contracts
|
$1,400,000
|
$350,000
|
$840,000
|
$210,000
|
Recently
Issued Accounting Pronouncements
SFAS
No. 155
In
February 2006, FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments”.
SFAS
No. 155 amends SFAS No 133, “Accounting
for Derivative Instruments and Hedging Activities”,
and
SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”.
SFAS
No. 155, permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006.
SFAS
No. 155 is not expected to have a material effect on our consolidated financial
position or our results of operations.
FIN
No. 48
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109
(FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in accordance with SFAS No. 109, Accounting
for Income Taxes
and
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. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 will become effective for the Company
beginning in fiscal 2008. We are currently evaluating the impact of the adoption
of FIN 48 on our financial statements.
SFAS
No. 157
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements,
to
eliminate the diversity in practice that exists due to the different definitions
of fair value and the limited guidance for applying those definitions in GAAP
that are dispersed among the many accounting pronouncements that require fair
value measurements. SFAS No. 157 retains the exchange price notion in earlier
definitions of fair value, but clarifies that the exchange price is the price
in
an orderly transaction between market participants to sell an asset or liability
in the principal or most advantageous market for the asset or liability.
Moreover, the SFAS states that the transaction is hypothetical at the
measurement date, considered from the perspective of the market participant
who
holds the asset or liability. Consequently, fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants at the measurement date (an
exit
price), as opposed to the price that would be paid to acquire the asset or
received to assume the liability at the measurement date (an entry price).
SFAS
No.
157 also stipulates that, as a market-based measurement, fair value measurement
should be determined based on the assumptions that market participants would
use
in pricing the asset or liability, and establishes a fair value hierarchy that
distinguishes between (a) market participant assumptions developed based on
market data obtained from sources independent of the reporting entity
(observable inputs) and (b) the reporting entity's own assumptions about market
participant assumptions developed based on the best information available in
the
circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
about the use of fair value to measure assets and liabilities in interim and
annual periods subsequent to initial recognition. Entities are encouraged to
combine the fair value information disclosed under SFAS No. 157 with the fair
value information disclosed under other accounting pronouncements, including
SFAS No. 107,
Disclosures about Fair Value of Financial Instruments,
where
practicable. The guidance in this Statement applies for derivatives and other
financial instruments measured at fair value under SFAS No. 133 ,
Accounting for Derivative Instruments and Hedging Activities,
at
initial recognition and in all subsequent periods.
SFAS
No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years, although
earlier application is encouraged. Additionally, prospective application of
the
provisions of SFAS No. 157 is required as of the beginning of the fiscal year
in
which it is initially applied, except when certain circumstances require
retrospective application.
The
Company is currently evaluating the effect of adopting SFAS No. 157 on their
consolidated financial statements.
SFAS
No. 158
In
September 2006, the FASB issued SFAS No. 158,
Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans,
to
require an employer to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare, and other
postretirement plans in their financial statements. Previous standards required
an employer to disclose the complete funded status of its plan only in the
notes
to the financial statements. Moreover, because those standards allowed an
employer to delay recognition of certain changes in plan assets and obligations
that affected the costs of providing benefits, employers reported an asset
or
liability that almost always differed from the plan's funded status. Under
SFAS
No. 158, a defined benefit postretirement plan sponsor that is a public or
private company or a nongovernmental not-for-profit organization must (a)
recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for the plan's underfunded status, (b) measure
the plan's assets and its obligations that determine its funded status as of
the
end of the employer's fiscal year (with limited exceptions), and (c) recognize,
as a component of other comprehensive income, the changes in the funded status
of the plan that arise during the year but are not recognized as components
of
net periodic benefit cost pursuant to SFAS No. 87,
Employers' Accounting for Pensions,
or SFAS
No. 106,
Employers' Accounting for Postretirement Benefits Other Than
Pensions.
SFAS No.
158 also requires an employer to disclose in the notes to financial statements
additional information on how delayed recognition of certain changes in the
funded status of a defined benefit postretirement plan affects net periodic
benefit cost for the next fiscal year. SFAS No.158 is effective for fiscal
years ending after December 15, 2006. . SFAS No. 158 is not expected to have
a
material effect on our financial position or our results of
operations.
SAB
108
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (“SAB
108”).
SAB
108 addresses how the effects of prior year uncorrected misstatements should
be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires companies to quantify misstatements using a balance sheet
and
income statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. When the effect of initial adoption is material, companies
will record the effect as a cumulative effect adjustment to beginning of year
retained earnings. The provisions of SAB 108 are effective for the Company’s
interim reporting period beginning August 1, 2007. The Company does not believe
the adoption of SAB 108 will have a material impact on its financial position
or
results of operations.
Management
does not believe that there are any recently issued but not yet effective
accounting pronouncements that, if adopted by the Company, would have a material
effect on the accompanying financial statements.
Item
3 Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures.
Petals
maintains disclosure controls and procedures designed to ensure that information
required to be disclosed in the Company’s filings under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported accurately within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to management
as
appropriate, to allow timely decisions regarding required disclosure. As of
the
end of the period covered by this report, an evaluation was performed under
the
supervision and with the participation of management, including our President,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon
this
evaluation, the Company’s management concluded that the Company’s disclosure
controls and procedures are effective as of September 30, 2006.
Changes
in internal controls over
financial reporting.
On
August 27, 2006, Stephen Hieber tendered his resignation as Chief Financial
Officer of the Company. To the knowledge of the Company’s executive officers,
Mr. Hieber’s resignation was not due to any disagreement with the Company’s
operations, policies or practices. On October 23, 2006, our board of directors
appointed Gregory Powell to the position of Chief Financial Officer. Management
does not expect that the resignation of Mr. Hieber or the appointment of Mr.
Powell will change Petals’ internal control over financial reporting in a manner
that would materially affect, or reasonably be likely to materially affect,
the
Company’s internal control over financial reporting.
PART
II
Item
1. Legal
Proceedings.
None.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
| |
(c)
|
Issuer
Purchases of Equity Securities.
|
|
Period
(1)
|
Total
Number of Shares Purchased
|
Average
Price Paid (3)
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
|
Maximum
Number of Shares the May be Purchased under the Plans
|
|
September
20, 2006
|
158
|
$0.90
|
158
|
―
|
| |
(1)
|
On
September 20, 2006 we effected a 1-for-3 reverse stock split of our
outstanding shares of Common Stock (the “Reverse
Stock Split”).
All fractional shares that resulted from the reverse split were canceled
and the holders were paid cash in lieu
thereof.
|
| |
(2)
|
Fractional
shares resulting from the Reverse Stock Split were cashed out at
$0.90 per
whole share, the closing price of our Common Stock on September 20,
2006,
as quoted on the OTC Bulletin
Board.
|
| |
(3)
|
The
Reverse Stock Split was approved by our board of directors and the
requisite number of shareholders on August 2, 2006. We filed a preliminary
information statement on Schedule 14C on august 7, 2006 and we filed
a
definitive information statement on Schedule 14C on August 29,
2006.
|
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
On
August
2, 2006, our board of directors and the
requisite number of stockholders, acting by written consent in lieu of a
meeting,
approved the following: (i) the approval of an amendment to our Certificate
of
Incorporation to effect a 1-for-3 reverse split of our outstanding shares of
common stock; (ii) the approval of an amendment to our Certificate of
Incorporation to create a classified board of directors; (iii) the approval
of
an amendment to our Certificate of Incorporation to change our name from
“ImmunoTechnology Corporation” to “Petals Decorative Accents, Inc.”; and (iv)
the ratification of the adoption of the Petals Decorative Accents, Inc. 2006
Stock Incentive Plan. These actions became effective on September 20, 2006.
For
more information regarding these actions, please see our Definitive Schedule
14C, filed with the SEC on August 29, 2006 (file no. 000-24641).
Item
5. Other
Information.
New
Telemarketing Service Agreement with Inktel Direct Corporation.
On
November 14, 2006, we signed a three year contract with Inktel Direct
Corporation to assume responsibility as our new telemarketing provider,
effective January of 2007. Our current third party telemarketing vendor will
continue to handle telemarketing services through the January 2007. The vendor
change is anticipated to yield significant operating cost savings. The
successful implementation of this vendor change is critical to the company’s
2007 operating results.
Loan
and Security Agreement with Southshore Capital Fund, Ltd. and Southridge
Partners, LP
On
July
15, 2006, we entered into a Loan and Security Agreement and two Revolving Credit
Notes with Southshore Capital Fund, Ltd. and Southridge Partners, LP, two
entities affiliated with our president and chairman Stephen Hicks, which allow
for us to borrow up to $5,000,000. The notes bear interest at the rate of five
percent per year and are secured, on a subordinated basis, by a blanket lien
on
all of our assets. As of November 13, 2006 we owed approximately $2,285,000
under these notes. Copies of the Loan and Security Agreement and the two
Revolving Credit Notes are attached to this Quarterly Report as Exhibits 10.3,
10.4 and 10.5 respectively and are incorporated by reference in their entirety
herein.
Private
Placements of Unsecured Promissory Notes
On
August
17,2006 and September 26, 2006, we sold two nonnegotiable unsecured term
promissory notes in the aggregate principal amount of $840,000 in two private
placements to two accredited investors. The aggregate gross proceeds of the
sales were $600,000. These notes are part of a series and identical in terms
to
the unsecured notes we acquired from Petals LLC in the Acquisition. The notes
do
not bear interest, but instead were issued at a discount to their face amount.
Each note has a principal amount due at maturity equal to one hundred forty
percent (140%) of the amount paid to purchase the note. As of November 13,
2006,
there was an aggregate of $600,000 in principal amount of the notes outstanding.
The
notes
are due in full on June 30, 2008. Pursuant to terms of the notes, we shall
prepay the notes in quarterly installments on the 15th
day of
January, April, July and October, beginning with January 15, 2007 and continuing
until the earlier of the notes being paid in full or the maturity date. On
each
quarterly prepayment date, each note holder will receive in cash two and one
half percent (2.5%) of the face amount of the note at maturity.
The
Form
of Note Subscription Agreement and the Form of Nonnegotiable Unsecured
Promissory Note sold in these offering are attached to our Current Report on
Form 8-K filed on July 7, 2006, as Exhibits 10.21 and 10.22 respectively.
Item
6. Exhibits.
Petals
hereby files as part of this quarterly report report on Form 10-QSB the exhibits
listed in this Item 6 below. Exhibits which are incorporated herein by reference
can be inspected and copied at the public reference rooms maintained by the
Securities and Exchange Commission in Washington, D.C., New York, New York,
and
Chicago, Illinois. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms. Securities
and Exchange Commission filings are also available to the public from commercial
document retrieval services and at the Web site maintained by the Securities
and
Exchange Commission at http://www.sec.gov.
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Filed
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Incorporated
by Reference
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Exhibit
No.
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Description
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this
Form 10-QSB
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Form
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Filing
Date
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Exhibit
No.
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3.1
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Certificate
of Incorporation of ImmunoTechnology Corporation, as
amended.
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Schedule
14C
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August
29.2006
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Annex
A
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3.2
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Amended
and Restated Bylaws of ImmunoTechnology Corporation, as adopted by
the
Board of Directors on June 30, 2006.
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8-K
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August
4, 2006
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3.3
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10.1
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Lease
Agreement dated July 17, 2006, by and between Petals Decorative Accents
LLC and Smith and Cheynne Properties, LLC.
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10-KSB
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October
4, 2006
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10.24
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10.2
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Petals
Decorative Accents, Inc. 2006 Stock Incentive Plan.
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Schedule
14C
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August
29, 2006
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Annex
B
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10.3
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Loan
and Security Agreement by and among Petals Decorative Accents, Inc.
and
Southshore Capital Fund, Ltd. and Southridge Partners, LP, dated
July 15,
2006.
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X
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10.4
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Revolving
Credit Note issued by ImmunoTechnology Corporation to Southshore
Capital
Fund, Ltd., dated July 15, 2006.
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X
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10.5
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Revolving
Credit Note issued by ImmunoTechnology Corporation to Southridge
Partners,
LP, dated July 15, 2006.
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X
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10.6
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Master
Service Agreement by and between Petals Decorative Accents, Inc.
and
Inktel Direct corporation, dated November 14, 2006.
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X
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31.1
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Certification
by President of Periodic Report Pursuant to Rule 13a-14(a) or Rule
15d-14(a).
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X
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31.2
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Certification
by Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a)
or Rule 15d-14(a).
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X
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32.1
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Certification
by President of Periodic Report Pursuant to 18 U.S.C. Section
1350.
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X
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32.2
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Certification
by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
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X
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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Petals
Decorative Accents, Inc.
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Date:
November 20, 2006
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By: |
/s/
Stephen M. Hicks
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Stephen
M. Hicks
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President
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