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 SEPTEMBER 30, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________
TO _________________
PENGE CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 000-52180 71-0895709
-------- --------- ----------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1501 NORTH FAIRGROUNDS
MIDLAND, TEXAS 79705
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (423) 683-8800
Check mark whether the issuer (1)filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES [X] NO
[_].
Indicate by check mark whether the issuer is a shell company (as defined in
Rule 12b-2 of the Act):
YES [_] NO [X]
As of September 30, 2006 the issuer had 24,561,740 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PENGE CORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
PENGE CORP. AND SUBSIDIARIES
CONTENTS
PAGE
-- Unaudited Condensed Consolidated Balance Sheets,
September 30, 2006 and June 30, 2006 1
-- Unaudited Condensed Consolidated Statements of
Operations, for the three months ended
September 30, 2006 and 2005 3
-- Unaudited Condensed Consolidated Statements of
Cash Flows, for the three months ended
September 30, 2006 and 2005 4
-- Notes to Unaudited Condensed Consolidated Financial
Statements 7
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2006 2006
----------- -----------
CURRENT ASSETS:
Cash $ 49,912 $ 111,915
Accounts receivable, net of $8,385 and $6,193 of allowance
for doubtful accounts for September 30, 2006 and
June 30, 2006, respectively 38,537 89,062
Inventories, net 2,712,192 2,442,469
Prepaid expenses 1,498 4,769
----------- -----------
Total Current Assets 2,802,139 2,648,215
PROPERTY, PLANT AND EQUIPMENT, net 4,468,240 4,710,650
LAND HELD FOR SALE 1,636,675 1,636,675
OTHER ASSETS:
Deferred loan costs 32,219 229
Goodwill 150,000 150,000
Definite-life intangible assets, net 11,468 13,490
----------- -----------
Total Other Assets 193,687 163,719
----------- -----------
$ 9,100,741 $ 9,159,259
=========== ===========
[Continued]
1
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY
(CONTINUED)
September 30, June 30,
2006 2006
----------- -----------
CURRENT LIABILITIES:
Current portion of notes payable 1,168,041 940,272
Current portion of related party notes payable 455,000 266,863
Current portion of convertible notes payable 1,656,602 918,125
Current portion of related party convertible notes payable 250,000 150,000
Current Portion of Lease Liability 67,439 63,700
Accounts payable 1,231,783 1,320,214
Related party accounts payable 207,900 217,590
Current derivative liabilities 62,076 56,203
Other accrued liabilities 381,082 284,040
----------- -----------
Total Current Liabilities 5,479,923 4,217,007
LONG-TERM DEBT:
Notes payable, less current portion 1,562,580 1,500,154
Related party notes payable, less current portion 730,627 771,760
Convertible notes payable, less current portion 868,873 1,578,156
Related party convertible notes payable,
less current portion 450,000 550,000
Long-term capital lease obligations, less current portion 239,077 255,597
Deferred income 20,786 23,310
----------- -----------
Total Long-term Debt 3,871,943 4,678,977
----------- -----------
9,351,866 8,895,984
----------- -----------
STOCKHOLDERS' EQUITY:
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, 24,561,444 and 24,515,730 shares
issued and outstanding, respectively 24,562 24,516
Additional paid-in capital 3,669,547 3,637,593
Accumulated (deficit) (3,945,234) (3,398,834)
----------- -----------
Total Stockholders Equity (251,125) 263,275
----------- -----------
$ 9,100,741 $ 9,159,259
=========== ===========
2
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended September 30,
--------------------------
2006 2005
--------- ---------
NET REVENUES:
Sales, net $ 301,776 $ 202,783
COST OF GOODS SOLD 233,627 183,021
--------- ---------
GROSS PROFIT 68,149 19,762
OPERATING EXPENSES:
Salaries, Wages and Related Expenses 236,112 162,802
Advertising 10,013 1,555
Other General and Administrative 123,585 85,091
--------- ---------
Total Operating Expenses 369,710 249,448
LOSS FROM OPERATIONS (301,561) (229,686)
OTHER INCOME (EXPENSE):
Interest income 56 140
Interest expense related party (49,568) (10,313)
Interest expense (164,251) (121,728)
Other income (expense) (31,076) (6,072)
--------- ---------
Total Other (Expense) (244,839) (137,973)
--------- ---------
LOSS BEFORE INCOME TAXES (546,400) (367,659)
CURRENT TAX EXPENSE -- --
CURRENT TAX (BENEFIT) -- --
--------- ---------
NET LOSS $(546,400) $(367,659)
========= =========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.02) $ (0.02)
========= =========
3
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended September 30,
-----------------------
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(546,400) $(367,659)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 19,082 20,433
Change in allowance for bad debts 2,974 800
Depreciation and amortization 49,400 105,892
Contingent derivative liabilities 5,871 2
Changes in assets and liabilities:
Accounts receivable 47,551 113,005
Inventories (217,506) (346,419)
Prepaid expenses 3,271 (14,592)
Refundable deposits -- 560
Accounts payable (88,431) (6,555)
Accrued liabilities 97,042 5,603
Customer deposits
--------- ---------
Net Cash Used by Operating Activities (627,146) (488,929)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment -- (483,133)
Proceeds for property and equipment 140,293 --
--------- ---------
Net Cash Used by Investing Activities 140,293 (483,133)
--------- ---------
[Continued]
4
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 342,500 200,000
Payments on notes payable (13,958) (437)
Proceeds from related party notes payable 100,000 112,982
Payments on related party notes payable (13,624) (2,669)
Proceeds from convertible notes payable -- 290,000
Payments on convertible notes payable (9,287) --
Payments on capital lease obligations (12,781) --
Proceeds from stock subscription receivables -- 143,277
Proceeds from issuance of common stock 32,000 1,500
--------- ---------
Net Cash Provided by Financing Activities 424,850 744,653
--------- ---------
INCREASE IN CASH AND EQUIVALENTS (62,003) (277,409)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD 111,915 338,291
--------- ---------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 49,912 $ 110,882
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 185,474 $ 120,138
Income Taxes $ -- $ --
[Continued]
5
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the three months ended September 30, 2006
During the three months, the Company paid $6,000 towards and a related
party assumed $50,000 of a $56,000 notes payable.
For the three months ended September 30, 2005
During the year, a related party paid $72,169 from the sale of personal
property against a note payable of the Company.
6
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Penge Corp., ("Parent") was organized under the laws
of the State of Nevada and was reincorporated in Delaware by a Merger
on May 17, 1987.
Penge Corp. ("Penge") was organized under the laws of the State of
Nevada on August 6, 2002.
Major Trees, Inc. ("MT Subsidiary") was organized under the laws of the
State of Arizona on December 29, 1993.
S&S Plant Farms, Inc. ("S&S Subsidiary") was organized under the laws
of the State of Texas on February 23, 1995.
Texas Landscape Center, Inc. ("TLC Subsidiary") was organized under the
laws of the State of Texas on September 1, 2005. The subsidiary was
organized by the Parent and as such, became a wholly owned subsidiary
of the Parent. The financial statements include operations of Texas
Landscape Center, Inc from September 1, 2005 through September 30,
2006.
Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary ("the
Company") grow landscaping and garden plants, flowers, shrubs, trees
and other agricultural products for sale to retail nurseries, landscape
professionals, and the general public in Southwestern United States.
The Company has, at the present time, not paid any dividends and any
dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
CONSOLIDATION -The financial statements presented reflect the accounts
of Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary;
all significant inter-company transactions have been eliminated in
consolidation.
AGRICULTURAL PRODUCTION - The Company accounts for their agricultural
activities in accordance with Statement of Position 85-3, "Accounting
by Agricultural Producers and Agricultural Cooperatives". All direct
and indirect costs of growing crops are either accumulated as inventory
or expensed as cost of goods sold. Permanent land development costs are
capitalized and not depreciated. Limited-life land development costs
and the development costs to bring long-life and intermediate-life
plants into production are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
debt investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had $0 and $0 in excess of
federally insured limits at September 30, 2006 and September 30, 2005,
respectively.
7
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE - Accounts receivable consist of trade receivables
arising in the normal course of business. At September 30, 2006 and
June 30, 2006, the Company has an allowance for doubtful accounts of
$8,385 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.
8
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS - The Company accounts for their intangible assets in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 establishes three
classifications for intangible assets including definite-life
intangible assets, indefinite-life intangible assets and goodwill and
requires different accounting treatment and disclosures for each
classification. In accordance with SFAS No. 142, the Company
periodically reviews their intangible assets for impairment.
PRODUCT WARRANTY - The Company does not warranty their agricultural
products against damage that may occur prior to delivery to the
customer. The Company does warrant trees and shrubs sold through the
one retail site. At September 30, 2006 and June 30, 2006, the Company
has established a reserve for future warranty expense of $1,410 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
$10,013 and $1,555 for September 30, 2006 and September 30, 2005,
respectively.
LEASE COMMITTMENTS - The Company accounts for lease commitments in
accordance with SFAS 98, wherein the underlying assets are capitalized
and the capital lease obligation recorded if the lease commitments meet
the requirement for capitalization. All other lease obligations 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.
9
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the periods presented in the accompanying financial statements,
the Company has granted options under its 2002 Stock Incentive Plan.
The Company has adopted the provisions of SFAS No. 123R using the
modified-prospective transition method and the disclosures that follow
are based on applying SFAS No. 123R. Under this transition method,
compensation expense recognized 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 September 2006 and
2005 respectively. In accordance with the modified-prospective
transition method, the Company's financial statements for the prior
year have not been restated to reflect, and do not include, the impact
of SFAS 123R. Had compensation cost for the Company's stock option
plans and agreements been determined based on the fair value at the
grant date for awards in 2005 consistent with the provisions of SFAS
No. 123R, the Company's net loss and basic net loss per common share
would have been increased to the pro forma amounts indicated below:
September 30,
2005
--------------
Net loss, as reported $ (367,659)
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 (367,659)
--------------
Loss per common share, as reported $ (0.02)
Loss per common share, pro forma $ (0.02)
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" [SEE NOTE 13].
10
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE - The Company calculates loss per share in accordance
with the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share."
Basic loss per common share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per
common share when presented are based on shares outstanding as computed
under basic EPS and potentially dilutive common shares. Potential
common shares included in the diluted earnings per share calculation
include in-the-money stock options that have been granted but have not
been exercised and convertible notes payable. [SEE NOTE 14]
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 September 30, 2006 have been reclassified to conform to the headings
and classifications used in the September 30, 2006 financial
statements.
RECENTLY ENACTED ACCOUNTING STANDARDS - In May 2005, the FASB issued
Statement of Financial Accounting Standards No. 154 ("SFAS 154"),
"Accounting Changes and Error Corrections" which replaces APB Opinion
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements--An Amendment of APB Opinion
No. 28". SFAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principal
unless it is not practicable. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005 and is required to be adopted by the Company in the
first quarter of fiscal 2006. The impact that the adoption of SFAS 154
will have on Penge Corp results of operations and financial position
will depend on the nature of future accounting changes adopted by Penge
Corp and the nature of transitional guidance provided in future
accounting pronouncements.
11
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles of the United States of
America, which contemplate continuation of the Company as a going
concern. However, the Company has current liabilities in excess of
current assets, incurred significant, recurring losses and has not
generated positive cash flow from operating activities. These factors
raise substantial doubt about the ability of the Company to continue as
a going concern. In this regard, management is proposing to raise any
necessary additional funds not provided by operations through loans or
through additional sales of their common stock or through possible
business combinations. There is no assurance that the Company will be
successful in raising this additional capital or in achieving
profitable operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 3 INVENTORIES
Inventories consist of the following at:
September 30, June 30,
2006 2006
------------ -----------
Raw Materials $ 78,070 $ 97,904
Finished Goods 2,660,532 2,369,565
Allowance for obsolete / slow
moving inventory (25,000) (25,000)
Warrant Reserve (1,410) --
------------ -----------
$ 2,712,192 $ 2,442,269
Most of the Company's inventories are collateral on various notes payable
[See Notes 7, 8, 9 and 10].
12
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following at:
Estimated
Useful Lives of September 30, June 30,
Assets (Years) 2006 2006
--------------- ------------ ------------
Office furniture and equipment 1 - 10 $ 80,886 $ 78,944
Retail furniture and equipment 1 - 10 620,645 613,113
Farm equipment 2 - 15 2,370,869 2,540,857
Buildings 20 - 30 1,397,138 1,394,278
Land not applicable 592,753 592,753
Construction in Progress not applicable 32,901 15,539
------------ ------------
Total 5,095,192 5,235,484
Less accumulated depreciation (626,952) (524,834)
------------ ------------
Property, Plant and Equipment, net $ 4,468,240 $ 4,710,650
------------ ------------
Depreciation expense for the three months ended September 30, 2006 and
2005 was $23,076 and $3,805, respectively. All of the Company's
property and equipment are collateral for certain notes payable [See
Notes 7, 8, 9 and 10].
NOTE 5 LAND HELD FOR RESALE
FARM LAND - On December 21, 2005, the Company purchased a 119 acre
parcel in Midland, Texas for $242,000. At September 30, 2006, the land
is held as collateral on a note payable [See Note 9].
COMMERCIAL PROPERTY - In 2005, the Company also purchased 7 acres of
commercial property in San Angelo, Texas for $1,394,675. At September
30, 2006, the land is held as collateral on a note payable [See Note
9].
13
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS
The following is a summary of goodwill and definite-life intangible
assets:
September 30, June 30,
2006 2006
------------- ------------
GOODWILL
Goodwill $ 150,000 $ 150,000
------------- ------------
DEFINITE-LIFE INTANGIBLES 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 (46,346) (44,324)
------------- ------------
Net Definite-Life Intangible Assets $ 11,468 $ 13,490
------------- ------------
The Company estimates that its amortization expense will be approximately
as follows for the twelve month periods ended:
Amortization
September 30, Expense
------------- ------------
2007 11,468
Thereafter --
------------
11,468
14
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS (CONTINUED)
Definite Life Intangible Assets - The Company is amortizing their
definite-life intangible assets on a straight-line basis over five
years. Amortization expense of $2,022 and $2,022 was recorded for the
three months ended September 30, 2006 and 2005, respectively, and has
been included in general and administrative expense.
Goodwill - The Company recorded goodwill of $150,000 in connection with
the acquisition of Profile Diagnostic Sciences, Inc. as the purchase
price of $150,000 exceeds the $0 net book value of the assets acquired.
NOTE 7 CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable summarized in
groups with similar attributes at:
Sept. 30, June 30,
2006 2006
----------- ----------
12% Note payable, maturing in May to June 2007, convertible at
$.65 per share for the first twelve months and $.75 per share
for the second twelve months, secured by UCC-1 lien against
inventory 270,000 270,000
12% Note Payable, maturing in February 2007, convertible at $.30
per share through February 2007, secured by UCC-1 lien
against inventory 228,000 228,000
12% Note Payable, maturing in June to October 2007, convertible at
$.65 per share for the first twelve months and $.75 per share
for the second twelve months, secured by UCC-1 lien against
inventory 750,000 750,000
12% Note payable, maturing in October 2007 to May 2008,
convertible at $.95 per share for the first twelve months and
$1.05 for the second twelve months, secured by UCC-1 lien
against inventory 452,500 452,500
Continued
15
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
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 408,605 370,125
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, secured by 119.47 acres in Midland, TX 216,370 225,656
----------- ----------
Total 2,525,475 2,496,281
Less Current Portion (1,656,602) (918,125)
----------- ----------
$ 868,873 $1,578,156
----------- ----------
The convertible notes payable mature as follows for the twelve-month
periods ended:
Principle
September 30, Due
------------- ------------
2007 $ 1,656,602
2008 868,873
2009 -
Thereafter -
------------
$ 2,525,475
------------
16
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 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 three
months ended September 30, 2006 and 2005, the Company amortized $0 and
$900, respectively, the discounts on notes payable as interest expense.
At September 30, 2006, the Company had a total of $38,476 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 three months ended September 30, 2006, the
Company amortized $9,059 of the deferred loan costs as interest
expense.
For the three months ended September 30, 2006 and 2005, interest
expense on the convertible notes payable amounted to $78,843 and
$50,096, 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:
September 30, June 30,
2006 2006
------------- ----------
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
UCC-1 lien against inventory 100,000 100,000
12% Notes payable, maturing in 2008, convertible at $.65 per share
for the first twelve months and $.75 per share for the second
twelve months, secured by UCC-1 lien against inventory 50,000 50,000
Unsecured 12% Note payable, quarterly interest
payments beginning April 2006, maturing January 10, 2007 100,000 100,000
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by inventory 100,000 100,000
Continued
17
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 RELATED PARTY CONVERTIBLE NOTES PAYABLE (CONTINUED)
12% Notes Payable, maturing in 2008, convertible
at $.70 per share through January 31, 2008,
secured by TLC's building and land in Midland, TX 450,000 450,000
------------- ----------
Total 700,000 700,000
Less Current Portion (250,000) (150,000)
------------- ----------
$ 450,000 $ 550,000
------------- ----------
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
Principle
September 30, Due
------------- -----------
2007 $ 250,000
2008 450,000
Thereafter -
-----------
$ 700,000
-----------
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the three
months ended September 30, 2006 and 2005, the Company amortized $938
and $1,808, respectively, of the discounts on notes payable as interest
expense.
At September 30, 2006, the Company had a total of $0 in loan fees and
costs from establishing these convertible notes payable. These costs
have been deferred and are being amortized over the term of the
respective notes. For the three months ended September 30, 2006 and
2005, the Company amortized $229 and $688, respectively, of the
deferred loan costs as interest expense.
For the three months ended September 30, 2006 and 2005, interest
expense on the related party convertible notes payable amounted to
$13,854 and $7,561, respectively.
18
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE
The Company had the following notes payable summarized in groups with
similar attributes at:
September 30, June 30,
2006 2006
------------ ------------
7% Notes payable, yearly payments of $50,000, mature in 2007,
secured by Major Tree's outstanding shares of capital stock,
financial books and records, equipment, and furniture $ 77,150 $ 77,150
Unsecured 6% Notes payable, maturing
2007 20,000 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. 200,000 147,500
14% Notes payable maturing in 2006, secured by MT
Subsidiary's land in Cochise County, AZ 287,003 280,646
14% Notes payable, maturing in 2007, secured by the property of an
officer in Clark County, Nevada. In September 2005 an officer
of the Company paid $72,169 in behalf of the Company and the
lien on the property was released by the holder
of the note 105,147 99,851
12% Notes payable, balloon payment due upon
maturity, matures in 2007, secured by inventory 85,577 85,577
6.75% Note payable, monthly payments of
$3,355, matures in 2021, secured by TLC's building
and land 371,647 376,632
7% Note payable, monthly payments of $1,370,
mature in 2008, secured by S&S' land and office
building 127,777 129,551
Continued
19
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
24% Notes payable, maturing November 2006,
unsecured. 150,000 --
24% Notes payable, maturing December 2006,
unsecured. 60,000 --
24% Notes payable, maturing January 2007,
unsecured. 80,000 --
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 2,730,620 2,440,426
Less Current Portion (1,168,040) (940,272)
------------ ------------
$ 1,562,580 $ 1,500,154
------------ ------------
The notes payable mature as follows for the twelve-month periods ended:
Principle
September 30, Due
------------- ------------
2007 $ 1,168,041
2008 98,236
2009 219,461
2010 106,611
2011 114,690
Thereafter 1,023,581
------------
$ 2,730,620
------------
20
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
At September 30, 2006, the Company had a total of $11,653 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 three months ended September 30, 2006, the Company amortized
$8,851 of the deferred loan costs as interest expense.
For the three months ended September 30, 2006 and 2005, interest
expense on the notes payable amounted to $63,563 and $38,113,
respectively.
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:
September 30, June 30,
2006 2006
------------ -------------
7% Note payable, yearly payments of $75,000,
maturing in 2009, secured by Major Tree's
farmland, buildings, and equipment $ 201,081 $ 201,081
8% Note payable, monthly payments of $2,500,
maturing in 2009, secured by land and inventory 269,152 271,198
7% Note payable, quarterly payments of $11,660 through March
2007, quarterly payments of $13,527 from March 2007 through
March 2009, quarterly payments of $15,483 from March 2009
through March 2010, mature in 2010, secured by all of the
issued and outstanding shares of S&S Plant Farm, Inc.'s
capital stock 365,394 367,282
12% Note payable, quarterly interest payments beginning April
2006, maturing January 10, 2007, unsecured. 100,000 100,000
10% Note payable, maturing in 2007, secured by
UCC-1 lien against inventory, net discount for
options issued of $0 and $938 50,000 49,062
12% Notes payable, balloon payment due upon
maturity, mature in 2007, secured by inventory 50,000 50,000
Continued
21
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE
24% Notes payable, balloon payments due upon
maturity, mature in 2008, unsecured. 150,000 --
------------ -------------
Total 1,185,627 1,038,623
Less Current Portion (455,000) (266,863)
------------ -------------
$ 730,627 771,760
------------ -------------
At September 30, 2006, the Company had a total of $0 in loan fees and
costs from establishing these notes payable. For the three months ended
September 30, 2006 and 2005, the Company amortized $229 and $688,
respectively, of the deferred loan costs as interest expense. For the
three months ended September 30, 2006 and 2005, interest expense on the
related party notes payable amounted to $24,955 and $20,081,
respectively.
The notes payable mature as follows for the three-month periods ended:
September 30, Principle Due
------------- -------------
2007 $ 455,000
2008 118,918
2009 562,073
2010 49,636
2011 -
Thereafter -
-------------
$ 1,185,627
-------------
The discounts due to the options issued with the notes are being
amortized over the term of the respective notes. For the three months
ended September 30, 2006 and 2005, the Company amortized $229 and $688,
respectively, of the discounts on notes payable as interest expense.
22
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 CAPITAL LEASES OBLIGATION
The Company leases equipment under capital leases and that expire on
October 2009 and July through November 2010. The gross amount of assets
recorded under capital leases and the associated accumulated
depreciation are included under property and equipment and are as
follows:
September 30,
2006
-------------
Farm equipment $ 360,181
-------------
Total 360,181
Less accumulated depreciation (67,723)
-------------
Net Leased Equipment $ 292,458
-------------
The Company amortizes its lease obligations over the term of each
lease. Amortization expense was $22,753 for the three months ended
September 30, 2006.
NOTE 11 CAPITAL LEASES OBLIGATION (CONTINUED)
The future minimum lease payments are as follows for the twelve-month
periods ended: Amortization
September 30, Amount Due
------------- ----------
2007 $ 102,316
2008 97,630
2009 97,630
2010 76,686
2011 6,256
Thereafter -
----------
Total minimum obligations 380,517
Executory costs and interest (74,001)
----------
PV of minimum obligations 306,516
Current portion (67,439)
----------
Long-term obligations $ 239,077
----------
23
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
September 30, 2006 and June 30, 2006, no preferred shares were issued
and outstanding.
COMMON STOCK - In September 2006, the Company issued 45,714 shares of
their previously authorized but unissued common stock for cash of
$32,000, or $.70 per share
In March and June 2006, the Company issued 59,286 shares of their
previously authorized but unissued common stock for services and
supplies valued at $41,500 or $.70 per share.
In April 2006, the Company issued 35,715 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per
share.
In March 2006, the Company issued 15,000 shares of their previously
authorized but unissued common stock for services and supplies valued
at $10,500 or $.70 per share.
In February and March 2006, the Company issued 142,860 shares of their
previously authorized but unissued common stock for cash of $100,000,
or $.70 per share.
In January 2006, the Company issued 50,000 shares of their previously
authorized but unissued common stock for employee services rendered
valued at $35,000 or $.70 per share.
In December 2005, the Company issued 666,667 shares of their previously
authorized but unissued common stock for the conversion of $200,000
note payable, or $.30 per share.
In December 2005, the Company issued 308,921 shares of their previously
authorized but unissued common stock for the conversion of $75,000 note
payable and $2,230 interest, or $.25 per share. The Company recorded an
additional $55,117 in interest for the adjusting the conversion price
to $0.25 per share.
In December 2005, the Company issued 116,407 shares of their previously
authorized but unissued common stock for the conversion of $25,000 note
payable and $110 interest, or $.22 per share. The Company recorded an
additional $45,632 in interest for the adjusting the conversion price
to $0.22 per share.
Continued
24
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
In November 2005, the Company issued 35,714 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per
share
In August 2005, the Company issued 5,000 shares of their previously
authorized but unissued common stock for the exercise of options at
$.30 per share.
SUBSCRIPTION RECEIVABLE - During fiscal 2006, the Company received cash
of $233,977 in payment of subscriptions receivable due from officers of
the Company. Also during 2006, the Company received 408,296 common
shares valued at $0.88 per share in payment of $359,300 in
subscriptions receivable from officers of the Company. The 408,296
common shares were held in treasury until canceled during June 2006.
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with
a maximum of 8,000,000 shares of common stock reserved for issuance
under the Plan. The Plan provides for both the direct award of shares
and for the grant of options to purchase shares to employees, officers,
directors, agents, consultants, advisors and independent contractors.
Awards under the Plan will be granted as determined by the Board of
Directors and the Board of Directors shall determine which eligible
persons are to receive Incentive Stock Options, Non-Statutory Stock
Options or stock issuances. The Board of Directors also sets the number
of shares, the exercise price and the exercise terms for grants.
Options granted to non-exempt employees are required to have an
exercise price of at least 85% of the fair market value of the common
stock at the time of grant. Incentive Stock Options must be granted
with an exercise price of at least 100% (110% for shareholders who own
at
Continued
25
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
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 September 30, 2006 and 2005,
total awards available to be granted from the plan amounted to
3,150,000 and 3,150,000, respectively.
The fair value of each of the Company's stock option awards is
estimated on the date of grant using a Black-Scholes option-pricing
model that uses the assumptions noted in the table below. The fair
value of the Company's stock Option awards is expensed on a graded
vesting straight-line basis over the vesting period of the options,
which is generally immediate. Expected volatility is based on an
average of historical volatility of the company's stock. The risk-free
interest rate for periods within the contractual life of the stock
option award is based on the yield curve of a zero-coupon U.S. Treasury
bond on the date the award is granted with a maturity equal to the
expected term of the award. The expected term of awards granted is
derived from historical experience under the Company's stock-based
compensation plans and represents the period of time that awards
granted are expected to be outstanding. The fair value of each option
granted is estimated on the date granted using the Black-Scholes option
pricing model with the following weighted-average assumptions used for
grants during the three months ended September 30, 2005: expected
dividend yields of zero, expected life of 5.6 years, expected
volatility of 302.4%, and risk-free interest rates of 3.9%.
Continued
26
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 September 30, 2006, and
changes during the period then ended are as follows:
For the Three Months Ended Ended
September 30, 2006
----------------------------------------------------------
Weighted Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value
----------------------------------------------------------
Outstanding at beginning of period 845,000 $ 0.25 4.7 years $378,000
Granted - -
Exercised - -
Forfeited -
Expired -
Outstanding at end of period 845,000 $ 0.25 4.7 years $378,000
Vested and expected to vest in the future 845,000 $ 0.25 4.7 years $378,000
Exercisable at end of period 845,000 $ 0.25 4.7 years $378,000
Weighted average fair value of options
granted - $ -
-------
The Company had no non vested options at the beginning of the period.
At September 30, 2006 the Company had no non vested options resulting
in no unrecognized compensation expense.
The total intrinsic value of options exercised during the three months
ended September 30, 2006 and 2005 was $0 and $2,000 respectively.
Intrinsic value is measured using the fair market value at the date of
exercise (for shares exercised) or at September 30, 2006 and 2005 (for
outstanding options), less the applicable exercise price.
During the three months ended September 30, 2006 and 2005, the Company
received cash of $0 and $1,500 and recorded a subscription receivable
of $0 and $0 upon the exercise of awards. The Company realized no tax
benefit due to the exercise of options as the Company had a loss for
the period and historical net operating loss carry forwards.
Common shares issued upon exercise of options are issued from available
authorized but unissued common shares. As of September 30, 2006, the
Company has no plans to repurchase common shares issued upon exercise
of options.
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 stock options outstanding at September 30,
2006 is presented below:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-----------------------------------------------------------------------
$ 0.10 200,000 6.3 years $ 0.10 200,000 $ 0.10
0.30 645,000 4.4 years 0.30 645,000 0.30
========== =========== =========== ========= =========== ==========
$0.10-0.30 845,000 4.7 years $ 0.25 845,000 $ 0.25
---------- ----------- ----------- --------- ----------- ----------
NOTE 13 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
Which requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of
temporary reporting differences between book and tax accounting methods
and any available operating loss or tax credit carryforwards.
At September 30, 2006 and June 30, 2006, the total of all deferred tax
assets is approximately $887,000 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 $695,000 and $613,000 at September 30, 2006
and June 30, 2006. The change in the valuation allowance for the three
months ended September 30, 2006 was approximately $82,000.
At September 30, 2006 and June 30, 2006, the Company has available
unused net operating loss carryforwards of approximately $5,200,000 and
$4,650,000 respectively, which may be applied against future taxable
income and which expire in various years through 2026. Also, the
Company has unused capital loss carryovers at September 30, 2006 and
June 30, 2006 of approximately $81,000 and $81,000, respectively, which
expire in various years through 2009.
28
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
Ended September 30,
------------------------
2006 2005
----------- -----------
Loss from operations available to
common shareholders (numerator) $ (546,400) $ (367,659)
----------- -----------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 24,024,922 18,375,738
----------- -----------
At September 30, 2006, the Company had outstanding options to purchase
845,000 shares and notes payable convertible into 4,703,767 shares
which were not used in the computation of loss per share because their
effect would be anti-dilutive. At September 30, 2005, the Company had
outstanding options 850,000 shares and notes payable convertible into
5,188,623 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 three months ended September 30,
2006 and 2005, officers/shareholders of the Company and their relatives
have made advances to the Company and the Company has repaid the
advances as funds have been available. During the three months ended
September 30, 2006 officers/shareholders of the Company and their
relatives made advances totaling $23,520 and the Company repaid
advances totaling $0. Since the Company owed $184,380 from prior-year
advances, the remaining balance owed to the officers/shareholders of
the Company and their relatives at September 30, 2006 is $207,900.
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
Continued
29
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 RELATED PARTY TRANSACTIONS (CONTINUED)
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.
CONSULTING SERVICES - During the three months ended September 30, 2006
and 2005, respectively, the Company paid a relative of an
officer/shareholder of the Company $0 and $0 for consulting services.
MANAGEMENT COMPENSATION - For the three months ended September 30, 2006
and 2005, respectively, the Company expensed $35,800 and $34,000 as
salary to the Company's Chief Executive Officer. At September 30, 2006
and June 30, 2006, respectively, the Company owed $11,925 and $10,620
to the Chief Executive Officer for accrued salary.
For the three months ended September 30, 2006 and 2005, respectively,
the Company expensed $35,800 and $34,000 as salary to the Company's
Chief Financial Officer. At September 30, 2006 and June 30, 2006,
respectively, the Company owed $11,925 and $15,930 to the Chief
Financial Officer for accrued salary.
EMPLOYEES - For the three months ended September 30, 2006 and 2005,
respectively, the Company expensed $18,000 and $14,800 as salary to an
employee of the Company who is the spouse of an officer/shareholder of
the Company. At September 30, 2006 and June 30, 2006, respectively, the
Company owed $5,541 and $2,540 to this employee for accrued salary.
For the three months ended September 30, 2006 and 2005, the Company
expensed $18,750 and $16,760 as salary to an employee of the Company
who is a relative of an officer/shareholder. At September 30, 2006 and
June 30, 2006, respectively, the Company owed $3,125 and $3,282 to this
employee for accrued salary.
For the three months ended September 30, 2006 and 2005, the Company
expensed $17,740 and $19,790 as salary to employees of the Company who
are former owners of S&S Subsidiary and shareholders of the Company. At
September 30, 2006 and June 30, 2006, the Company owed $5,541 and
$4,100 to theses employees for accrued salary.
Continued
30
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONCENTRATIONS
ACCOUNTS RECEIVABLE - At September 30, 2006, 33% of the Company's
accounts receivable was owed by three customers. At June 30, 2006, 17%
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 September 30, 2006 and June 30, 2006 respectively:
September 30, 2006 June 30, 2006
------------------ -------------
Customer A 18% 14%
Customer B 14% *
Customer C * 17%
Customer D * 10%
* Customer did not account for 10% or more of total accounts receivable
REVENUES - During the three months ended September 30, 2006 and 2005,
respectively, the Company had a significant customer which accounted
for 9% and 23% of the Company's total sales. The loss of this
significant customer could adversely affect the Company's business and
financial condition.
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 September 30, 2006, the Company owed $408,602 in
principal and $5,239 in accrued interest on the note. If the note had
been converted into stock on September 30, 2006, then the Company would
have issued 1,379,469 shares of common stock which would have been
redeemable at the creditor's option for $475,917. The Company has
recorded a remaining contingent derivative liability of $62,076
associated with the option.
We have entered into employment agreements dated February 15, 2005 with
each of Kirk Fischer, our CEO and Chairman, and KC Holmes, our
President and a director, governing their employment with us. Under the
agreements, which have a fixed term of five years, we are required to
pay a base salary of $132,000 per year, subject to increase beginning
on July 1, 2006 of an amount equal to the greater of 3% of the prior
base salary or 1% of base salary for every 10% increase in revenues
over the prior fiscal year. We agreed to pay each a one-time bonus of
500,000 shares of common stock in 2005 (for bonuses not paid in 2002,
2003 and 2004), a bonus of
31
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 COMMITMENTS AND CONTINGENCIES (CONTINUED)
$2,000 for each $100,000 in revenue growth Fiscal 2005 over Fiscal
2004, and for Fiscal 2006 through the fiscal year ended June 30, 2009,
a bonus of $1,000 for each $.001 per share in earnings growth achieved
over the prior year (provided that the measurement shall begin at zero
if prior year earnings per share was negative). Each is also entitled
to standard employee benefits and a $500 monthly car allowance. Upon
termination by the Company of each of their employment with or without
cause, the Company is required to continue to pay the employee's
then-current base salary throughout the five-year term of the
agreement, and all of the employee's stock options immediately and
automatically vest in full.
We have entered into an employment agreement dated February 15, 2005
with James Fischer, our Vice President of Operations for Arizona Tree
Farm operations and a director, governing his employment with us. Under
the agreement, which has a fixed term of five years, we are required to
pay a base salary of $75,000, subject to a 5% increase per year. We
agreed to pay each a one-time bonus of 50,000 shares of common stock in
2005 (for bonuses not paid in 2002, 2003 and 2004), a bonus of $7,200
for Fiscal 2005 and a bonus of 10% of base salary condition upon
successful management of our Major Trees Tucson Farm. Mr. Fischer is
entitled to standard employee benefits and a $500 a month car
allowance. Upon termination by the Company of his employment with or
without cause, the Company is required to continue to pay the
employee's then-current base salary throughout the five-year term of
the agreement, and all of the employee's stock options immediately and
automatically vest in full.
We have entered into an employment agreement dated March 1, 2005 with
Curtis Schmid, the President of our S&S Plant Farm pursuant to which we
have agreed to pay him a base salary of $48,000 per year, pay bonuses
at our discretion and provide standard benefits. The agreement has a
fixed term of five years. Upon termination by the Company of his
employment with or without cause, the Company is required to continue
to pay the employee's then-current base salary throughout the five-year
term of the agreement, and all of the employee's stock options
immediately and automatically vest in full.
32
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 SUBSEQUENT EVENTS
COMMON STOCK ISSUANCE - In October 2006, the Company issued 8,572
shares of their previously authorized but unissued common stock for
services of $4,714.60 or $0.55 per share.
NOTES PAYABLE - In October, the Company issued $80,000 in notes
payable. The notes accrue interest at 24% per annum and are due in
December 2006 and February 2007.
In October 2006, the Company signed $185,815 in notes payable. The note
accrues interest at 9% per annum and is due September 2007.
In October 2006, the Company signed $11,011 in notes payable. The note
accrues interest at 0% per annum and is due January 2007.
In October 2006, the Company signed $30,000 in notes payable. The note
accrues interest at 24% per annum and is due December 2006.
In October 2006, the Company signed $50,000 in notes payable. The note
accrues interest at 24% per annum and is due February 2007.
33
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. Retail operations at the site commenced on
April 15, 2006, and in the first 10 weeks of operations we generated $617,000 in
retail business. We also did over $400,000 in business with our existing Midland
wholesale customers. Going forward both the wholesale and retail business will
be done at the retail center.
2
In 2005, we also purchased 7 acres of commercial property in San
Angelo, Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club.
We purchased the ground for $4.50 per foot. One-acre lots across the
street from Sam's Club have recently sold for $13.66 and $12.30 per square foot.
We believe that our property is currently worth more than we paid for it. We
plan to either sell or develop the property. We have not entered into any
agreements with respect to the sale or development of this site.
Going forward, our focus will be to create and to expand a vertically
integrated wholesale and retail nursery business. We expect that our tree, shrub
and plant farms will be able to provide a substantial portion of the inventories
for our recently opened and planned retail nurseries in the coming years. By
owning the tree, shrub and plant farms that provide much of the inventory for
the retail nurseries, we believe that we will be able to compete with, and even
undercut, the "big box stores" that have become the dominant force in the retail
nursery business. These big box stores have been driving many retail nurseries
out of business by buying nursery materials in large quantities at big discounts
from wholesale nursery growers in the United States. This allows them to sell at
a discount using smaller margins and to undercut the small nurseries by 30% to
50%. We believe that our vertically integrated wholesale/retail nursery business
model will allow us to compete with the big box stores on price, while providing
better selection and service.
For our wholesale business, our goal is to expand the number of trees
and shrubs planted on our farms in the next few years while holding down
increases in our administrative and other general operating expenses. As we
spread our production costs over a larger inventory, we also hope to experience
a decline in our per-unit production and sales costs. We do not plan to expand
our wholesale sales. Instead, we plan to provide most of what we grow to our
retail centers.
GENERAL OUTLOOK
---------------
OUR INDUSTRY AND WHOLESALE/RETAIL BUSINESS MODEL
The retail nursery business has been under attack for many years from
Home Depot, Lowe's and Wal-Mart. These big box stores buy nursery materials in
large quantities at big discounts from wholesale nursery growers. This allows
them to sell at a discount, using smaller margins, and to undercut the small
nurseries by 30%-50%. Small nurseries generally cannot compete on price and so
they try to compete by offering better service, better selection, and
convenience. Although this approach has worked for some small nurseries, it has
not worked for most of them, and a large number of small nurseries have gone out
of business in the last 10 years primarily because they are unable to compete on
price with the big box stores.
In the last 5 years, a new model has emerged in the nursery industry
that we believe is able to compete effectively with the big box stores. This
model requires a retail nursery to grow a substantial percentage its own plant
material (trees, shrubs, and flowers) instead of buying them from a wholesale
grower. It is capital intensive for a retail nursery to grow its own products
and it takes from 3-5 years to get up to speed. But, once the model is in place,
it can allow the retail nursery to offer products at prices that are lower than
or equal to those of the big box stores, while continuing to offer a level of
selection and service that the big box stores can not offer.
Over the last 4 years, we have purchased wholesale operations growing
trees, shrubs, and flowers and plan to continue to open retail operations in
addition to our Midland, Texas retail nursery. We believe that this new hybrid
retail/wholesale nursery business model will enable us to increase sales and
create and sustain a profitable operation. We also believe that the competition
in Texas and surrounding areas has not switched over to the new model, which
should give us at least a 3 - 5 year head start on rolling out the model in this
region.
3
Our Wholesale Business
----------------------
We currently own three wholesale nursery operations in Texas and
Arizona. At the end of 2002, we purchased a 272-acre tree farm near Tucson,
Arizona known as "Major Trees" and now referred to as our Major Trees Tucson
Farm. In May of 2004, we acquired a 17-acre farming property and certain
related assets 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 over 300,000 trees and shrubs planted on the three
wholesale farms, and enough infrastructure and equipment to grow trees, shrubs,
and flowers for multiple locations in west Texas.
Our wholesale operations are able to provide products to our retail
nurseries, which we believe will allow us to offer competitive pricing, service
and selection. Although we plan to divert our landscape trees, shrubs, plants
and flowers to our retail stores as demand at such stores grows, we plan to
continue our wholesale business for the foreseeable future. We currently grow a
variety of landscape trees, shrubs, bedding plants and flowers on three farms in
Texas and Arizona. Our major wholesale customers include retail nurseries, major
retail outlets and landscape companies located in the southwest United States.
We have experienced strong demand from retailers and landscape companies for our
landscape products in the southwest United States over the last three years,
even as our production capacity has continued to grow, and expect to be able to
maintain relationships with a sufficient number of our customers in order to be
able to sell inventory that is not shipped to our retail stores.
Our Retail Business
-------------------
Our current retail operations consist of a 4-acre retail nursery in
Midland, Texas and 7 acres of land for a second retail center in San Angelo,
Texas.
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. Retail operations at the site commenced on
April 15, 2006, and in the first 10 weeks of operations we generated $617,000 in
retail business. We also did over $400,000 in business with our existing Midland
wholesale customers. Going forward both the wholesale and retail business will
be done at the retail center.
In 2005, we also purchased 7 acres of commercial property in San
Angelo, Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club.
We purchased the ground for $4.50 per foot. One-acre lots across the street from
Sam's Club have recently sold for $13.66 and $12.30 per square foot. We believe
that our property is currently worth more than we paid for it. We plan to either
sell or develop the property. We have not entered into any agreements with
respect to the sale or development of this site.
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 September 30,
2006.
LESS THAN AFTER
1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
(10/1/06 TO (10/1/07 TO (10/1/09 TO (AFTER
CONTRACTUAL OBLIGATIONS TOTAL 9/30/07) 9/30/09) 9/30/11) 10/1/11)
-------------------------------- --------- --------- --------- --------- ---------
Operating leases -- -- -- -- --
Capital leases 306,516 67,439 159,238 79,840 --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 7,141,718 3,529,642 2,317,558 270,937 1,023,581
--------- --------- --------- --------- ---------
Total contractual cash obligations 7,488,235 3,597,081 2,476,796 360,777 1,023,581
========= ========= ========= ========= =========
7
The following table summarizes the material terms of our convertible
and non-convertible notes issued during the three months ended September 2006
(listed in order of ultimate maturity date); except as set forth in the notes to
the table below, we are current with all required payments and in compliance
with all material covenants with respect to such notes:
BALANCE AS OF CONVERSION
PRINCIPAL SEPTEMBER 30, ORIGINATION MATURITY DATE; INTEREST AND OTHER
AMOUNT 2006 DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------ ------------- ----------- ------------------ --------- ----------- ----------
$30,000 $30,000 7/28/06 10/28/06; extended 24% N/A Unsecured
$20,000 $20,000 8/4/06 11/4/06; extended 24% N/A Unsecured
$50,000 $50,000 8/11/06 11/11/06; extended 24% N/A Unsecured
$150,000 $150,000 7/12/06 11/12/06; extended 24% N/A Unsecured
$60,000 $60,000 8/17/06 12/15/06 24% N/A Unsecured
$80,000 $80,000 9/15/06 1/15/07 24% N/A Unsecured
As of September 30, 2006, we had $49,912 in cash and cash equivalents.
This represents a decrease of $62,003 compared to June 30, 2006. Cash used
during the three months ended September 30, 2006 includes approximately $628,000
used in operations as well as $140,000 received from investing activities.
Sources of cash during the quarter ended September 30, 2006 included a net
amount of approximately $425,000 from financing activities. Of the approximately
$425,0000 of net cash provided by financing activities, approximately $393,000
represents net cash received less payments made on non-convertible notes, and
approximately $32,000 represents the proceeds from issuance of common stock less
Offering costs. The difference between the approximately $425,000 of net cash
Provided by financing activities and the cash itemized above represents new
notes payable, advances from related parties, payments on related party advances
and loan costs and payments on capital lease obligations.
Our material capital expenditures for the quarter ended September 30,
2006 included net direct cost additions of approximately $217,000 to plant tree,
shrub, and flower inventory.
We anticipate making capital expenditures during the fiscal year ended
June 30, 2007 ("Fiscal 2007"). Specifically, resources permitting, we plan to
spend at least $1,500,000 to open a second retail nursery and to replace
inventory sold during the fiscal year ended June 30, 2006 ("Fiscal 2006").
Liquidity. The following table reflects selected balance sheet data as
of September 30, 2006:
SEPTEMBER 30, 2006
------------------
BALANCE SHEET DATA:
Cash and cash equivalents............................ 49,912
Working capital (deficit)............................ (2,677,784)
Total assets......................................... 9,100,741
Retained deficit..................................... (3,945,234)
Stockholders' equity................................. (251,125)
As of September 30, 2006, we had $49,912 in cash and cash equivalents,
total current assets of $2,802,139 and current liabilities of 5,479,923,
representing a current working capital deficit of ($2,677,784). Our current
liabilities as of September 30, 2006 include a $1,906,602 balance on secured
convertible notes due with one year, and a $1,623,041 principal balance on
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 $200,000 of short-term financing to us. Such financing bears
interest at 12% per annum. Management may demand payment on 30 days written
notice.
8
Other than the informal and nonbinding commitments from management, we
do not have any specific commitments from third parties to provide financing
needed to cover any capital shortfalls with respect to our operations, planned
capital expenditures or near-term debt obligations. We caution that,
particularly in light of the early stage of our business, such financing may not
be available on favorable terms, or at all. We may be compelled to divert
substantial portions of our existing cash and future cash flow to the repayment
of debt, which would limit our ability to replace or expand inventory and
acquire additional farms. This would have an adverse affect on revenues in the
coming years. Certain amounts of such debt is secured by our real property, and
holders of the unsecured debt have standard remedies available to 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.
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.
OFF-BALANCE SHEET ARRANGEMENTS
------------------------------
There were no off-balance sheet arrangements at September 30, 2006.
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.
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.
9
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 MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005
The following table reflects selected operational results for the Three Months
Ended September 30, 2006 compared to the Three Months Ended September 30, 2005:
PERIODS ENDED
SEPTEMBER 30
------------
2006 2005
--------- ---------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 301,776 $ 202,783
COST OF GOODS SOLD (233,627) (183,021)
--------- ---------
GROSS PROFIT 68,149 19,762
OPERATING EXPENSES (369,710) (249,448)
--------- ---------
LOSS FROM OPERATIONS (301,561) (229,686)
INTEREST AND OTHER EXPENSE (244,839) (137,973)
--------- ---------
NET LOSS $(546,400) $(367,659)
--------- ---------
LOSS PER COMMON SHARE (0.02) (0.02)
--------- ---------
Our results of operations for Fiscal 2006 included the operations of
our Major Trees Houston Farm, Major Trees Tucson Farm, S&S Plant Farm and the
Texas Landscape Center.
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of trees and other nursery products. Revenues increased from $202,783
for the three months ended September 2005 to $301,776 for the three months ended
September 2006. Costs of Good Sold increased from $183,021 for the three months
ended September 2005 to $233,627 for the three months ended September 2006. Our
revenue increased due to three months worth of revenue from the addition of
Texas Landscape Center. Cost of goods sold increased due to higher sales and the
cost of goods sold as a percentage of sales decreased from 90.3% for the three
months ended September 2005 to 77.4% for the three months ended September 2006
as a result of the higher margins associated with sales at Texas Landscape
Center.
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 $249,448 for the three months ended September 2005 to
$369,710 for the three months ended September 2006. Operating expenses as a
percentage of revenue for the three months ended September 2005 were not
materially changed from the current three months ended September 2006. The
increase in operating expense was due to increased wages and salaries,
advertising, accounting/legal fees, and other general and administrative
expenses associated with the addition of the Texas Landscape Center. We expect
our operating expenses as a percentage of revenue to continue to decrease.
10
OTHER EXPENSE. Other expense consists of interest paid on outstanding
notes payable, amortization of deferred loan costs, noncash notes payable costs,
stock conversions and losses on the disposal of fixed assets. Other expense
increased from $137,973 for the three months ended September 2005 to $244,839
for the three months ended September 2006. An increase in other expenses was
attributed to the additional financing during the current quarter ended
September 2006 over the prior quarter ended September 2005. The majority of the
increase in other expenses was a result of an increase in interest expense due
to an increase in indebtedness and interest on indebtedness, which primarily
funded our first retail center, as well as the expansion of inventory and farm
improvements. 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 or are converted to stock.
NET LOSS. Our net loss increased from $367,659 for the three months
ended September 2005 to $546,400 for the three months ended September 2006. The
increase in net loss is due primarily to an increase in salaries and wages,
interest expense and other general and administrative expenses. We expect our
net loss to decrease substantially in the Fiscal 2007 as a result of higher
sales, increased gross margins, and lower operating expenses as a percentage of
sales.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
---------------------------------------------------------
We consider all forward-looking statements contained in this Quarterly Report to
be covered by and to qualify for the safe harbor protection provided by Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. Stockholders and prospective stockholders
should understand that several factors govern whether the results described by
any such forward-looking statement will be or can be achieved. Any one of those
factors could cause actual results to differ materially from those projected in
this report.
The forward-looking statements contained in this report include plans and
objectives of management for future operations, plans relating to the products
and predictions regarding our economic performance. Assumptions applicable to
the foregoing involve judgments with respect to, among other things, future
economic, competitive, and market conditions, future business decisions, and the
time and money required to successfully complete development projects, all of
which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of those assumptions could prove
inaccurate. Therefore, we cannot assure that the results contemplated in any of
the forward-looking statements contained herein will be realized. The impact of
actual experience and business developments may cause us to alter our marketing,
capital expenditure plans, or other budgets, which may in turn affect our
results of operations. In light of the inherent uncertainties in forward-looking
statements, the inclusion of any such statement does not guarantee that our
objectives or plans will be achieved. Among other risk factors to consider are
the factors identified in the subsection entitled "Factors That May Affect
Future Results" below.
FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------
Our short and long-term success is subject to certain risks, many of which are
substantial in nature. The following risk factors should be carefully
considered, in addition to other risks identified in this report, when
evaluating an investment in our common stock. Any one of these factors could
cause actual results of operations to differ materially from projected results.
RISK FACTORS
------------
An investment in our common stock involves a high degree of risk. You should
consider the following discussion of risks in addition to the other information
in this Report before purchasing any shares of our common stock. In addition to
historical information, the information in this Report contains forward-looking
statements about our future business and performance. Our actual operating
results and financial performance may be very different from what we expect as
of the date of this Report. The risks described in this Report represent the
risks that management has identified and determined to be material to our
company. Additional risks and uncertainties not currently known to us, or that
we currently deem to be immaterial, may also materially and adversely affect our
business operations. Any of these risks could materially and adversely affect
our business, results of operations and financial condition.
11
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 4 years and are in the process of expanding
the focus of our business to include retail, as well as wholesale, nursery
operations. We began operating tree, shrub and plant farms less than four years
ago and are just entering into the retail nursery business. None of our key
management personnel have any experience in the retail nursery business. Our
limited operating history, recent acquisitions, and expanding business focus
make it difficult for you to evaluate our ability to generate revenues, manage
costs, create profits and generate cash from operations. Before investing in our
common stock, you should consider the risks and difficulties we may encounter as
a relatively new business, including risks related to our ability to implement
our business plan;
o obtain capital necessary to continue operations and implement our
business plan;
o anticipate and adapt to changes in the market;
o find, acquire and develop new wholesale and retail properties;
o administer and manage our operations; and
o successfully compete in the retail nursery industry.
If we fail to successfully manage these risks, our operations and
financial condition will suffer, and we may fail.
WE HAVE INCURRED SUBSTANTIAL LOSSES SINCE OUR INCEPTION AND MAY CONTINUE TO
INCUR LOSSES IN THE FUTURE.
We have experienced net losses in each twelve-month period since inception, with
a retained deficit of approximately $3,945,234 as of September 30, 2006. As we
continue to invest in the purchase of new properties or businesses, and to
expand our wholesale and retail operations, it is unlikely we will become
profitable in the near future. Even if we do become profitable, we may not be
able to maintain profitability or to increase profitability in the future.
OUR ACCOUNTANTS HAVE INCLUDED AN EXPLANATORY PARAGRAPH IN OUR FINANCIAL
STATEMENTS REGARDING OUR STATUS AS A "GOING CONCERN."
Our consolidated financial statements have been prepared on the
assumption that our Company will continue as a going concern. Our independent
registered public accounting firm has issued its report dated August 12, 2006
with respect to our financial statements for the fiscal year ended June 30,
2006 that includes an explanatory paragraph stating that recurring losses raise
substantial doubt about our ability to continue as a going concern. Our product
line is limited, and it has been necessary to rely upon financing from the
issuance of promissory notes and the sale of our equity securities to sustain
operations in the past. Additional financing will be required if we are to
continue as a going concern.
IF WE CANNOT RAISE SUFFICIENT CAPITAL AT REASONABLE PRICES, WE MAY BE UNABLE TO
MEET EXISTING OBLIGATIONS OR ADEQUATELY EXPLOIT EXISTING OR FUTURE
OPPORTUNITIES.
As of September 30, 2006, we had $49,912 in cash and cash equivalents
and a working capital account deficit of $2,677,784. 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. If we are unable to obtain capital for
an extended period of time, we may be forced to discontinue operations.
12
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.
OUR EXPANSION INTO THE RETAIL NURSERY BUSINESS CREATES NUMEROUS ADDITIONAL
RISKS.
We recently opened our first retail nursery in Midland, Texas and plan
to establish additional retail stores throughout Texas and the surrounding area
over the next several years. Our business plans anticipate our becoming an
integrated wholesale retail operation. Our foray into the retail nursery
business may fail for various reasons, including the following:
o We do not have experience in the retail nursery business and may
have failed to properly anticipate marketing needs, operating
costs, inventory costs, competition for retail employees 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 cost that will permit us to be
competitive with the big box stores on those items.
We have invested significantly in, and borrowed extensively in order to
fund, our new retail nursery business. The failure of our retail business to
grow as expected or for individual stores to become profitable within a
reasonable time after opening would likely create a significant liquidity
problem and otherwise materially adversely affect our business, our operations,
and our financial condition.
WE ARE REQUIRED TO MAKE PAYMENTS UNDER OUTSTANDING NOTES IN AMOUNTS EXCEEDING
OUR EXISTING CASH AND CASH EQUIVALENTS BEGINNING IN 2007.
We have issued convertible and nonconvertible notes to fund operations
having a principal amount of $7,141,718 as of September 30, 2006. Of these
notes, $6,381,719 are secured by our farming and commercial properties, and by
trees contained in inventory. As of September 30, 2006, our monthly interest
payment with respect to such notes was approximately $61,825 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 exceed our current cash and cash equivalents. If we default on payments
under these notes, the holders will have the right to accelerate principal and
interest payments and pursue remedies available at law and under governing
documents. The exercise of such remedies would likely result in our insolvency.
WE MAY BE UNABLE TO SELL A PORTION OF OUR PROPERTY IN SAN ANGELO, TEXAS OR
OTHERWISE OBTAIN CAPITAL IN ORDER TO BUILD A RETAIL STORE ON THAT SITE, WHICH IS
AN IMPORTANT COMPONENT OF OUR BUSINESS PLAN.
We own approximately 7 acres of commercial property in San Angelo,
Texas, a portion of which we plan to sell to partially fund the construction of
a retail store. We have not begun marketing such property and do not have any
commitments from any parties to purchase such property. Even if a portion of the
San Angelo property were sold, we would likely need additional capital in order
to complete the construction of a retail store on that site. We do not have the
capital in order to build the retail store and do not have any commitments to
provide capital. Because we are unprofitable and already highly leveraged, we
may be unable to obtain capital necessary to commence or complete construction
of a retail store. Even if we are able to obtain needed capital, we may not
obtain it on a timely basis and may be forced to pay a high price for capital.
13
Our business plan anticipates that we will be able to complete construction of,
and open, a store in San Angelo Texas by the spring of 2008, which is the
primary revenue store for a retail nursery. If we fail, because of the absence
of capital or for other reasons, to complete timely construction of that store,
our revenues for 2008 will be less than expected, and our results of operations
will be harmed, in part because we will continue to have debt obligations
associated with the San Angelo site but may not have a commensurate amount of
revenue in order to fund the debt.
WE MAY BE UNABLE TO CONTINUE TO IDENTIFY APPROPRIATE ACQUISITION TARGETS OR
CONSUMMATE ACQUISITIONS OF THOSE TARGETS, AND IF WE ARE UNABLE TO DO SO OUR
BUSINESS WILL NOT CONTINUE TO GROW AS PLANNED.
Our business plan anticipates growth in part through continued
acquisition of farming and retail properties or businesses. We may be unable to
implement that acquisition strategy for several reasons, including the
following:
o We may be unable to locate suitable nursery businesses or
properties for acquisition for various reasons, including:
o the absence of such businesses or properties;
o our lack of knowledge of such businesses or properties or the fact
that they are for sale;
o our lack of sufficient working capital to conduct an adequate
search for potential acquisition targets, and to conduct the due
diligence necessary to evaluate the appropriateness of a potential
target; and
o our lack of expertise or experience in evaluating or operating the
types of businesses or properties that are for sale.
o The owners of businesses and properties that we are interested in
acquiring may be unwilling to sell to us for various reasons,
including:
o an unwillingness to accept our restricted equity securities or a
promissory note as consideration;
o a desire to receive cash and a lack of confidence in our ability to
obtain the cash necessary to close;
o concerns with our ability to operate the business profitably or
appropriately, and
o a desire to be acquired by a larger company for strategic or
personal reasons (including the desire to be employed by a larger,
more stable acquirer).
o We may be unable to raise the capital necessary to purchase those
businesses or properties that we identify as potential acquisition
targets quickly enough or at all in order to be able to consummate
desired acquisitions.
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 business locations
from which we operate or expect to operate. Moreover, significant growth would
require an increase in the number of our personnel, particularly within sales,
accounting and management. The market for such personnel remains highly
competitive, and we may not be able to attract and retain the qualified
personnel required by our business strategy. If successful in expanding our
business, we may outgrow our present management capacity, placing additional
strains on our human resources in trying to locate, manage and staff multiple
locations. If we are unable to adequately manage our projected growth, our
operations and financial condition may fail to improve, or even deteriorate.
WE ARE DEPENDENT UPON KEY PERSONNEL, AND THE LOSS OF SUCH PERSONNEL COULD
SIGNIFICANTLY IMPAIR OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN.
We are highly dependent upon the efforts of management, particularly
Kirk Fischer, our Chairman and Chief Executive Officer, KC Holmes, our President
and Chief Financial Officer, Curtis Schmid, our President of S&S Plant Farm, 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.
14
OUR FARMS ARE CURRENTLY OUR PRIMARY SOURCE OF REVENUE AND ARE VULNERABLE TO
INSECTS, DISEASE, WEATHER, DROUGHT, FIRE AND OTHER NATURAL HAZARDS.
Our tree and shrub farms are currently our primary source of revenue.
In addition, as we expand into the retail business, our ability to offer
competitive prices will be dependent upon our ability to produce a substantial
portion of our inventory. The various plant varieties that we grow on the farms
are subject to risks associated with disease, insects, weather, drought, fire
and other natural hazards. We cannot prevent or predict the impact of disease,
insects, weather, drought, fire or other natural hazards on our trees, shrubs
and plants. If our trees, shrubs and plants we grow are damaged or destroyed by
any of those elements, we could suffer a significant loss of revenue and assets.
The loss would be particularly significant if the affected plants were the
Eldarica Pine, which accounted for approximately 46% of our revenue in Fiscal
2005 and 28% of our sales in Fiscal 2006.
TRADING IN OUR COMMON STOCK IS THIN, AND THERE IS A LIMIT TO THE LIQUIDITY OF
OUR COMMON STOCK.
Our common stock is quoted on the OTC Pink Sheets but experiences
extremely low volume and is traded on a sporadic basis. Trading in our common
stock is likely to be dominated by a few individuals. Because of the thinness of
the market for our stock, the price of our common stock may be subject to
manipulation by one or more stockholders and may increase or decrease
significantly because of buying or selling by a single stockholder. In addition,
the low volume of trading limits significantly the number of shares that one can
purchase or sell in a short period of time. Consequently, an investor may find
it more difficult to dispose of large numbers of shares of our common stock or
to obtain a fair price for our common stock in the market.
EVEN IF A BROADER MARKET FOR OUR COMMON STOCK DEVELOPS, THE MARKET PRICE FOR OUR
COMMON STOCK WILL LIKELY CONTINUE TO BE VOLATILE AND MAY CHANGE DRAMATICALLY AT
ANY TIME.
Our common stock is quoted on the OTC Pink Sheets, but experiences
extremely low volume and is traded on a sporadic basis. Even if a broader market
for our common stock develops, the market price of our common stock, like that
of the securities of other early-stage companies, can be expected to be highly
volatile. Our stock price may change dramatically as the result of announcements
of our quarterly results, the execution or termination of significant contracts,
significant litigation or other factors or events that would be expected to
affect our business or financial condition, results of operations and other
factors specific to our business and future prospects. In addition, the market
price for our common stock may be affected by various factors not directly
related to our business, including the following:
o intentional manipulation of our stock price by existing or future
shareholders;
o short selling of our common stock or related derivative securities;
o a single acquisition or disposition, or several related
acquisitions or dispositions, of a large number of our shares;
o the interest, or lack of interest, of the market in our business
sector, without regard to our financial condition or results of
operations;
o the adoption of governmental regulations and similar developments
in the United States or abroad that may affect our ability to offer
our products and services or affect our cost structure; and
o economic and other external market factors, such as a general
decline in market prices due to poor economic indicators or
investor distrust.
OBTAINING ADDITIONAL CAPITAL THROUGH THE FUTURE SALE OF COMMON STOCK AND
DERIVATIVE SECURITIES WILL RESULT IN DILUTION OF SHAREHOLDER INTERESTS.
We plan to raise additional funds in the future by issuing additional
shares of common stock, or securities such as convertible notes, options,
warrants or preferred stock that are convertible into common stock. Any such
sale of common stock or other derivative securities will lead to further
dilution of the equity ownership of existing holders of our common stock.
OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS
OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK.
Shares of our common stock may be deemed to be "low-priced" or "penny
stock," resulting in increased risks to our investors and certain requirements
being imposed on some brokers who execute transactions in our common stock. In
general, a low-priced stock is an equity security that:
15
o Is priced under five dollars;
o Is not traded on a national stock exchange, the NASDAQ Global
Market or the NASDAQ Capital Market;
o May be listed in the OTC Pink Sheets or the OTC Bulletin Board;
o Is issued by a company that has less than $5 million in net
tangible assets (if it has been in business less than three years)
or has less than $2 million in net tangible assets (if it has been
in business for at least three years); and
o Is issued by a company that has average revenues of less than $6
million for the past three years.
We believe that our common stock is presently a "penny stock." At any
time the common stock qualifies as a penny stock, the following requirements,
among others, will generally apply:
o Certain broker-dealers who recommend penny stock to persons other
than established customers and accredited investors must make a
special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to
sale.
o Prior to executing any transaction involving a penny stock, certain
broker-dealers must deliver to certain purchasers a disclosure
schedule explaining the risks involved in owning penny stock, the
broker-dealer's duties to the customer, a toll-free telephone
number for inquiries about the broker-dealer's disciplinary history
and the customer's rights and remedies in case of fraud or abuse in
the sale.
o In connection with the execution of any transaction involving a
penny stock, certain broker-dealers must deliver to certain
purchasers the following:
o bid and offer price quotes and volume information;
o the broker-dealer's compensation for the trade;
o the compensation received by certain salespersons for the
trade;
o monthly accounts statements; and a written statement of the
customer's financial situation and investment goals.
ITEM 3. CONTROLS AND PROCEDURES
(a) Based on the evaluation of our "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e))
required by paragraph (b) of Rules 13a-15 or 15d-15, our chief executive officer
and our chief financial officer have concluded that, for the reasons set forth
in the following paragraph as of September 30, 2006, our disclosure controls and
procedures were not 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.
In the course of preparing this Report, we were unable to complete, and
permit third parties to review and approve, all the financial statements and
other information necessary to ensure a complete and accurate filing prior to
the deadline for filing such Report. Because this is the first Quarterly Report
on Form 10-QSB we have filed under the Exchange Act since the registration of
our common stock on Form 10-SB, we initially underestimated the time and effort
necessary to timely complete and file the Report. We are reviewing the controls
and procedures necessary to ensure timely and accurate filing for future
reports.
(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.
16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Between July and September 2006, we issued 45,714 shares of common
stock to investors for $32,000. The offer and sale of such shares of our common
stock were effected in reliance upon the exemptions for sales of securities not
involving a public offering, as set forth in Section 4(2) of the Securities Act
and rules promulgated thereunder, based upon the following: (a) the investors
confirmed to us that they were "accredited investors," as defined in Rule 501 of
Regulation D promulgated under the Securities Act and had such background,
education and experience in financial and business matters as to be able to
evaluate the merits and risks of an investment in the securities; (b) there was
no public offering or general solicitation with respect to each offering; (c)
the investors were provided with certain disclosure materials and all other
information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 1, 2006 we entered into a Modification and Extension of Trust
Deed Note on a Trust Deed originally entered into August 22, 2003 between us,
Monitor Finance, L.C. and First Capital Funding, L.C. Under the Modification we
agreed that the current balance due is $284,291.07.
On July 1, 2006 we entered into a Modification and Extension of Trust
Deed Note on a Trust Deed originally entered into March 31, 2004 between us,
Monitor Finance, L.C. and First Capital Funding, L.C. Under the Modification we
agreed that the current balance due is $375,278.99.
On July 1, 2006 we entered into a Modification and Extension of Trust
Deed Note on a Trust Deed originally entered into February 24, 2005 between us,
Monitor Finance, L.C. and First Capital Funding, L.C. Under the Modification we
agreed that the current balance due is $101,147.82.
On July 12, 2006 we executed a Promissory Note with Gary Rowbotham in
the amount of $150,000 with a maturity date of November 12, 2006, with simple
interest of 24% per annum, and secured by common shares held by KC Holmes.*
On July 28, 2006 we executed an unsecured Promissory Note with Rocky
Fischer in the amount of $30,000 with a maturity date of October 28, 2006 and
with simple interest of 24% per annum.**
On August 4, 2006 we executed an unsecured Promissory Note with Rocky
Fischer in the amount of $20,000 with a maturity date of November 4, 2006 and
with simple interest of 24% per annum.**
On August 11, 2006 we executed an unsecured Promissory Note with Rocky
Fischer in the amount of $50,000 with a maturity date of November 11, 2006 and
with simple interest of 24% per annum.**
On August 15, 2006 we entered into an Extension of Real Estate Lien
Note on a note in the amount of $200,000 originally entered into September 15,
2005 and first extended on March 15, 2006 by and between us and Mark Reis and
Rocky Fischer as his assign. Under the Extension, we agreed to immediately pay
$6,000 of the remaining $56,000 principal amount, $500 for legal fees, and
$1,120 for interest. The note was extended to a new maturity date of October 15,
2006.
On August 17, 2006 we executed a Promissory Note with Swan and Gardiner
in the amount of $60,000 with a maturity date of December 15, 2006, with simple
interest of 24% per annum, and secured by 4,611 trees from our Major Trees
Tucson Farm valued at $120,000.*
On September 15, 2006 we executed an unsecured Promissory Note with
Eric Engberg in the amount of $80,000 with a maturity date of January 15, 2007
and with simple interest of 24% per annum.**
On October 6, 2006 we executed an unsecured Promissory Note with Eason
Horticultural Resources, Inc. in the amount of $86,713.04 with a maturity date
of October 25, 2008 and with interest of 12% per annum. Under the Note we agreed
to pay $4,081.88 per month for 24 months beginning October 25, 2006.
17
On October 13, 2006 we executed an unsecured Promissory Note with
Philip Oleson in the amount of $30,000 with a maturity date of December 13, 2006
and with simple interest of 24% per annum.**
On October 27, 2006 we executed an unsecured Promissory Note with Mike
Tempest in the amount of $50,000 with a maturity date of February 1, 2007 and
with simple interest of 24% per annum plus an origination fee of $2,000. Under
the Note, we agree to pay on February 1, 2007 a total of $50,000 plus $5,000. We
also agree to a %5,000 penalty for each month the Note is not paid after March
1, 2007.**
On October 31, 2006 we executed an unsecured Promissory Note with BWI
Companies, Inc. in the amount of $185,814.93 with a maturity date of September
30, 2007 and interest of 9% per annum. Under the Note we agreed to pay $8,860.00
per month beginning October 31, 2006 through August 31, 2007 with the remainder
of the unpaid principal and any accrued and unpaid interest due September 30,
2007.
---------------------------------------------
* Executed on Penge Corp's Form of Secured Promissory Notes attached hereto as
Exhibit 10.7
** Executed on Penge Corp's Form of Unsecured Promissory Note attached hereto as
Exhibit 10.8
18
ITEM 6. EXHIBITS
See the Exhibit Index attached hereto following the signature page.
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
-------------------------------------
November 14, 2006 By: /s/ Kirk Fischer
--------------------------- -------------------------------------
Date Kirk Fischer, Chief Executive Officer
November 14, 2006 By: /s/ KC Holmes
--------------------------- -------------------------------------
Date KC Holmes, Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT INCORPORATED BY REFERENCE/ FILED HEREWITH
---------------- --------------------------------------------------- ------------------------------------------
10.1 Modification and Extension of Trust Deed Note Filed herewith
between Penge Corporation, Monitor Finance, L.C.,
and First Capital Funding, L.C. in the amount of
$284,291.07 dated July 1, 2006
10.2 Modification and Extension of Trust Deed Note Filed herewith
between Penge Corporation, Monitor Finance, L.C.,
and First Capital Funding, L.C. in the amount of
$375,278.99 dated July 1, 2006
10.3 Modification and Extension of Trust Deed Note Filed herewith
between Penge Corporation, Monitor Finance, L.C.,
and First Capital Funding, L.C. in the amount of
$101,147.82 dated July 1, 2006
10.4 Extension of Real Estate Lien Note between Penge Filed herewith
Corporation and Mark Reis and his assign Rocky
Fischer dated August 15, 2006
10.5 $86,713.04 Promissory Note between Penge Filed herewith
Corporation and Eason Horticultural Resources,
Inc. dated October 6, 2006
10.6 $185,814.93 Promissory Note between Penge Filed herewith
Corporation and BWI Companies, Inc.
10.7 Form of Secured Promissory Note Filed herewith
10.8 Form of Unsecured Promissory Note 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
-----------------------------------------
19