The following discussion should be read in conjunction with our Form 10-KSB and the audited consolidated financial statements and the related notes for the year ended September 30, 2007 and the factors that could affect our future financial condition and results of operations. Historical results may not be indicative of future performance.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" beginning on page 29 of this annual report.
Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
- 24 -
As used in this quarterly report, the terms "we", "us", "our" and "Panglobal" mean Panglobal Brands Inc. and our wholly owned subsidiary Mynk Corporation, unless otherwise indicated.
Overview
Corporate Overview and History
We were incorporated on March 2, 2005, under the laws of the State of Delaware, under the name “EZ English Online Inc.” Since incorporation we were engaged in the development of an online teacher training course to teach English as a second language. Our principal offices are located 2853 E. Pico Blvd. Los Angeles, CA 90023, and our telephone number is 323.266 -6500.
On July 3, 2006, our common stock was approved for quotation on the OTC Bulletin Board.
On February 2, 2007, we affected a forward stock split of our authorized and issued and outstanding shares on a six-for-one basis. The forward split resulted in the increase of our authorized capital from 100,000,000 shares of common stock with a par value of $0.0001 to 600,000,000 shares of common stock with a par value of $0.0001.
On February 2, 2007, we completed a merger with our wholly owned subsidiary Panglobal Brands Inc. As a result, we changed our name from EZ English Online Inc. to Panglobal Brands Inc. Our subsidiary was incorporated on January 22, 2007, specifically for the purpose of the merger. The six-for-one forward stock split, merger and name change became effective with NASDAQ’s OTC Bulletin Board on February 6, 2007 and our trading symbol was changed to “PNGB”.
On May 11, 2007, we acquired all of the issued and outstanding shares of Mynk Corporation. Mynk is now our wholly-owned, operating subsidiary. With the acquisition of Mynk, we changed our business focus to that of our newly acquired subsidiary and are now engaged in the business of the design, production and sale of clothing and accessories. We intend to acquire and create brands for the contemporary apparel market in the U.S. and international markets.
Our Current Business
Business Strategy
Our strategy is to build a series of apparel brands, consisting of mainly women’s apparel, and to build brand recognition by marketing our products to fashion conscious, affluent consumers who shop in high-end boutiques and department stores and who want to wear and be seen in the latest and most fashionable clothing and accessories. We plan to update our product offerings continually to be seen as a trend setter in fashionable clothing and accessories. We also are targeting the junior market and design, have manufactured and sell junior denim, t-shirts, dresses and other apparel. Lastly, based upon our branded products, we expect to be offered the opportunity to manufacture private label women’s apparel including dresses, skirts and knit and woven tops.
We operate all of our apparel businesses through our wholly-owned subsidiary, Mynk Corporation .
Our divisions are aggregated into four major consumer market product groupings. The major consumer divisions are as follows:
HAUTEUR MYNK-Hauteur Mynk is a trademarked brand name selling premium denim jeans, skirts, dresses and shorts. Most of the sales through December 31, 2007 have been sales of Mynk denim. Mynk is currently sold at Saks Fifth Avenue and approximately 100 premium boutiques throughout the U.S. Mynk products are manufactured in Los Angeles using Italian denim fabric. The product’s image is a low-rise, soft, sexy look perfect for evening wear and is available for both women and men. The retail price point ranges from $200-240 for denim bottoms. Competition is strong from larger companies including Seven, True Religion, Paige Denim, Citizens for Humanity, Rock and Republic, etc.
NELA-Nela designs, merchandises and sells women's better dresses using Italian prints and related fabrics. The dresses are manufactured under contract in Asia and a royalty fee will be paid to the Italian fabric manufacturer.
- 25 -
There have been no sales of Nela dresses to date. We intend to commence shipments in February 2008. We intend to sell Nela designs through high-end department stores and boutiques catering to a contemporary woman 30+ years old. Retail prices points will range from $280-400 and competition includes well-known designers such as Diane von Furstenburg, Marc by Marc Jacobs, Rozae Nichols, Milly, Tibi, etc.
TEA AND HONEY-Tea and Honey designs, merchandises and sells women’s mid-priced contemporary dresses. Tea and Honey is a more casual look for women ages 22-35 with a vintage feel easily convertible for wear by the working woman by day and for evening wear, as well. Tea and Honey products are expected to commence sales after May 2008 and will be manufactured in Asia. Prospective retail customers include Federated department store chains. Competition includes Velvet, Ella Moss and A Common Thread.
SOSIK-Sosik designs, merchandises and sells junior t-shirts, dresses, skirts and knit and woven tops and other apparel and is manufactured in Asia. Junior apparel includes clothing for girls ages 14-22 as well as products for children ages 6-14. Sales of Sosik, including products that will be sold under private labels for junior products commenced in October, 2007 and shipments commenced in January 2008. We anticipate that greater than 50% of our revenue for our fiscal year ending September 30, 2008 will be from Sosik and junior products. Customers include Charlotte Russe, Forever 21, Wet Seal, Guess, Ross and Limited Too.
PRIVATE LABEL- Lastly, based upon our branded products, we expect to be offered the opportunity by major department stores to design, merchandise and manufacture private label women’s apparel including dresses, skirts and knit and woven tops. There have been no sales of private label products to date; however, our backlog for shipments beginning January, 2008 includes customers such as Sears Holdings and Victoria’s Secret.
We anticipate no significant change in our products lines or new apparel industry divisions. In all of our divisions, we purchase finished goods from numerous contract manufacturers and to a lesser extent raw materials directly from numerous textile mills and yarn producers and converters. We have not experienced difficulty in obtaining finished goods or raw materials essential to our business in any of our apparel business divisions.
We plan to manufacture our products to order and not carry inventory with the exception of Hauteur Mynk denim products to meet the delivery requirements of our customers. Denim jeans tend to be sold in small quantities to boutiques with replenishment of the same styles and washes occurring on a continuing basis.
We plan on outsourcing our warehousing and shipping functions to a third party warehousing company designed to ship apparel products for multiple companies.
We maintain a company website at www.panglobalbrand.com where examples of our products can be seen.
Consulting Agreement for Sosik Division
On August 20, 2007 we signed a consulting agreement with Lolly Factory, Inc. and its sole shareholder through December 31, 2010 to provide sales and merchandising consulting services for the Sosik and Juniors apparel divisions. Consulting fees totalling $452,125 are payable between September 2007 and June 2008. For the three months ended December 31, 2007 $180,850 in consulting fees were paid. In addition, the consultant shall earn 3.5% commission on Sosik and Junior divisions net sales. The consultant also earns 100,000 of our common shares payable each month from September, 2007 to June, 2008, up to an aggregate of 1,000,000 common shares which shares are deemed to be earned and vested each month. The Company recorded an expense to operations in the amount of $272,000 for shares earned for the three months ended December 31, 2007.
The consultant and the Company. have established sales targets totaling $30 million for calendar year 2008, $45 million for calendar year 2009 and $60 million for calendar year 2010. The consultant could earn up to 1,500,000 common shares of Panglobal Brands Inc. according to the following schedule:
| (i) |
500,000 shares upon meeting the sales target for calendar year 2008; |
| (ii) |
500,000 shares upon meeting the sales target for calendar year 2009; and, |
| (iii) |
500,000 shares upon meeting the sales target for calendar year 2010. |
- 26 -
Manufacturing
We outsource all of our manufacturing to third parties on an order-by-order basis. These contract manufacturers are found in Asia and the United States and they will manufacture our garments on an order-by-order basis. We believe that we will be able to meet our production needs in this way. Although the various fabrics that we intend to use in the manufacture of our products will be of the high quality, they are available from many suppliers in the United States and abroad.
Employees
As of January, 2008, we have 51 full-time employees: two (2) are executive, nine (9) are design staff, fifteen(15) are production staff, seventeen (17) are sewing staff, four (4) are sales staff and four (4) are accounting/administration staff. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.
Financial Condition, Liquidity and Capital Resources
At December 31, 2007, we had a working capital surplus of $1,536,435.
At December 31, 2007, our total assets were $2,823,586 of which $1,556,663 consisted of cash.
At September 30, 2007, our total liabilities were $800,217.
Assets
Our current assets totalled $2,336,652 and $330,131 at December 31, 2007 and 2006, respectively. Our current assests at September 30, 2007 were $1,735,977. Total assets were $2,823,586 and $330,131 at December 31, 2007 and 2006, respectively. Total assets at September 30, 2007 were $2,014,972.The increase in current assets is primarily due to the growth in factor receivable, inventory and the generation of cash. At December 31, 2007 our assets consisted primarily of inventory of $531,540, net accounts receivable totalling $31,168, due from factor of $150,113 and cash on hand of $1,556,663.
Liabilities and Working Capital
Our current liabilities totalled $800,217 and $731,617 at December 31, 2007 and 2006, respectively. Current liabilities at September 30, 2007 were $406,988. This resulted in working capital of $1,536,435 at December 31, 20007, a working capital deficit at December 31, 2006 and working capital of $1,328,989 at September 30, 2007.. We had no long term debt in either year.
Cash Requirements And Additional Funding
On February 27 and 28, 2007, we raised approximately $4,774,602 through the sale of our equity securities in private placement transactions. We have also earned revenues from the sale of our fall product line. With the money we raised through the private placements and the revenue we earned through the sale of our products, we were able to pay our operating expenses for approximately the next nine months. At that point, we anticipated requiring further corporate financing in the next twelve months to carry out our business plan.
On October 23, 2007, the Company closed a private placement of 2,871,759 units for gross proceeds of $2,153,819. Each unit was sold for $0.75 and consists of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase, if exercised, one additional common share of our company at a price of $1.00 per common share until October 23, 2008 and at $1.50 per common share if exercised during the period from October 24, 2008 until the warrants expire on October 23, 2009.
- 27 -
There are no assurances that we will earn the funds required for our continued operation. If we do not earn the required revenues, then we will have to seek another source of financing, likely through the sale of more shares of our common stock or borrowing money. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.
There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon a combination of our ability to obtain further long-term financing, the successful and sufficient market acceptance of any product offerings that we may introduce, the continuing successful development of our product offerings, and, finally, our ability to achieve a profitable level of operations. At this time, we have a backlog for shipments of our products beginning January 2008 and extending through June 2008. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments.
In management’s opinion, we need to achieve the following events or milestones in the next twelve month period in order for us to continue to develop our business:
| 1. |
We must continue to develop new retail store customers for each of our brands/divisions. New customers have been generated by sales calls, attendance at tradeshows and through our company-staffed and contract sales showrooms. | |
| 2. |
We must increase brand awareness for each of our brands/divisions to the retail trade by positive trade press and public relations in periodicals such as Women’s Wear Daily, Elle, Vogue, etc. We have engaged a public relations company to achieve our media goals. |
The Three Months Ended December 31, 2007 Compared to the Three Months Ended December 31, 2006
Revenue
Net sales for the three months ended December 31, 2007 totalled $120,633. Sales of Sosik/junior apparel totalled $60,900 and the remainder of the sales were Hauteur Mynk denim jeans. All of the sales during the three months ended December 31, 2006, , were sales of Hauteur Mynk denim jeans. Gross profit/(loss) was ($6,394) and $5,710 for the three months ended December 31, 2007 and 2006, respectively. Sales returns for the three months ended December 31, 2007 totalled $30,041 as the Company nears the end of the problem of denim jeans being returned due to earlier manufacturing problems causing a negative gross profit. At this time, we have a backlog of sales orders in excess $5.0 million for shipments beginning January 2008 through June 2008. Over 75% of these orders are for Sosik and junior apparel products including skirts and knit and woven tops. The balance is for Mynk jeans and Nela dresses. Our ability to generate any significant revenues will be determined during the coming fiscal year ending September 30, 2008. Our Sosik products are sold through in-house sales staff and sales showrooms in Los Angeles and New York. Our Mynk/Nela/Tea and Honey products are sold through in-house sales staff and a sales showroom in New York, and through contract outside sales showrooms in Los Angeles earning sales commissions of 10-12%.
Expenses
Our total expenses were $2,297,784 for the three months ended December 31, 2007. This included $400,000 in design and development expenses and $463,000 in production expenses, $404,000 in selling and shipping expenses, and $1,106,000 in general and administrative fees, of which $547,901 consisted on non-cash compensation expenses. Expenses for the three months ended December 31, 2006 were $217,750 relating mainly to the original start-up of Mynk Corporation and the development and sales of Hauteur Mynk jeans. For the there months ended December 31, 2007 design, development and production expenses totalled $862,860. During this period designers for all of product divisions developed winter and spring collections for shipping during early 2008 and salaries totalled $193,000. Purchases of sample fabric and trims totalled $132,000. This expense should reduce
- 28 -
in future periods. Production expenses consist of production staff salaries ($64,000), production patternmaking salaries ($130,000), sample sewers salaries ($147,000), fabric cutting ($37,000) and outside services ($19,000).
For the three months ended December 31, 2007 selling and shipping expense totalled $404,232 compared to $73,495 for the three months ended December 31, 2006. Travel and trade show expenses totalled $63,000, sales salaries totalled $91,000 and sales consulting expenses totalled $188,350. On August 20, 2007 we signed a consulting agreement with Lolly Factory, Inc. and its principal, Mark Cywinski through December 31, 2010 to provide sales and merchandising consulting services for the Sosik and juniors apparel division. Included in sales consulting expenses for the three months ending December 31, 2007 was $180,850 paid to Lollly Factory, Inc. Selling expenses for the three months ended December 31, 2006 consisted of commissions ($23,000), public relations and advertising ($16,000), and travel ($33,000).
Our general and administrative expenses consist of accounting, information technology, website development, marketing and promotion, travel, meals and entertainment, rent, insurances, office maintenance, communication expenses (cellular, internet, fax, telephone), office supplies, and courier and postage costs.
For the three months ended December 31, 2007 general and administrative expenses (excluding non-cash compensation costs of $547,901) totalled $468,000. Key components included salaries for executive, accounting and customer service totalling $130,000, payroll taxes ($61,000), professional fees ($41,000), postage and delivery ($39,000) , insurance ($65,000) and rent ($21,000). Not included in general and administrative expenses is $14,467 in depreciation expense.
Off Balance-Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.
Inventory is valued at the lower of cost or market, cost being determined by the first-in, first-out method. We continually evaluate our inventories by assessing slow moving current product as well as prior seasons’ inventory. Market value of non-current inventory is estimated based on historical sales trends for this category of inventory of our company’s individual product lines, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory.
Revenue from product sales is recognized as title passes to the customer upon shipment. Sales returns, to date all from Mynk denim products have been significant and we have accrued $10,831 as of December 31, 2007for estimated sales returns and other allowances.
Adoption of New Accounting Policies
In December 2006, the FASB issued FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”), which addresses an issuer’s accounting for registration payment arrangements. EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB No. 5, “Accounting for Contingencies”. EITF 00-19-2 further clarifies that a financial instrument subject to a
- 29 -
registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of EITF 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of EITF 00-19-2, EITF 00-19-2 is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Early adoption of EITF 00-19-2 for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The Company adopted EITF 00-19-2 effective December 31, 2006.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The adoption of the provisions of FIN 48 did not have a material effect on the Company’s financial statements. As of June 30, 2007, no liability for unrecognized tax benefits was required to be recorded.
The Company currently files or has in the past filed income tax returns in Canada and the United States. The Company is subject to tax examinations by tax authorities for tax years ending in 2006 and subsequently.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2007, the Company has no accrued interest or penalties related to uncertain tax positions.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a formal framework for measuring fair value under generally accepted accounting principles. SFAS No. 157 defines and codifies the many definitions of fair value included among various other authoritative literature, clarifies and, in some instances, expands on the guidance for implementing fair value measurements, and increases the level of disclosure required for fair value measurements. Although SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for: SFAS No. 123R, share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently assessing the potential effect of SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. SFAS No. 159 also requires
- 30 -
companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157 and SFAS No. 107. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the company makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company is currently assessing the potential effect of SFAS No. 159 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141R improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAF No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. The two statements are effective for fiscal years beginning after December 15, 2008 and management is currently evaluating the impact that the adoption of these statements may have on the Company’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company's financial statements.
RISK FACTORS
Much of the information included in this annual report includes or is based upon estimates, projections or other “forward-looking statements”. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Such estimates, projections or other “forward-looking statements” involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward-looking statements”. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
Risks Related to our Business
Our continued operations depend on current fashion trends. If our products and designs are not considered fashionable or desirable by enough consumers, then our business could be adversely affected.
The acceptance by consumers of our products and design is important to our success and competitive position, and the inability to continue to develop and offer fashionable and desirable products to consumers could harm our business. We cannot be certain that our high-fashion clothing and accessories will be considered fashionable and desirable by enough consumers to make our operations profitable. There are no assurances that our future designs will be successful, and any unsuccessful designs could adversely affect our business. If we are unable to respond to changing consumer demands in a timely and appropriate manner, we may fail to establish or maintain
- 31 -
our brand name and brand image. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles that are no longer popular. Should trends veer away from our style of products and designs, our business could be adversely affected.
We may be unable to achieve or sustain growth or manage our future growth, which may have a material adverse effect on our future operating results.
We cannot provide any assurances that our business plan will be successful and that we will achieve profitable operations. Our future success will depend upon various factors, including the strength of our brand image, the market success of our current and future products, competitive conditions and our ability to manage increased revenues, if any, or implement our growth strategy. In addition, we anticipate significantly expanding our infrastructure and adding personnel in connection with our anticipated growth, which we expect will cause our selling, general and administrative expenses to increase in absolute dollars and which may cause our selling, general and administrative expenses to increase as a percentage of revenue. Because these expenses are generally fixed, particularly in the short-term, operating results may be adversely impacted if we do not achieve our anticipated growth.
Future growth may place a significant strain on our management and operations. If we experience growth in our operations, our operational, administrative, financial and legal procedures and controls may need to be expanded. As a result, we may need to train and manage an increasing number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If we are unable to anticipate or manage our growth effectively, our operating results could be adversely affected.
We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our business could be harmed.
We face intense competition in the apparel industry from other, more established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the apparel industry, compete more effectively on the basis of price and production and to develop new products in less time. In addition, new companies may enter the markets in which we compete, further increasing competition in the apparel industry.
We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of our common stock.
Our business could suffer if our manufacturers do not meet our demand or delivery schedules.
Although we design and market our products, we outsource manufacturing to third party manufacturers. Outsourcing the manufacturing component of our business is common in the apparel industry and we compete with other companies for the production capacity of our manufacturers. Because we are a small enterprise and many of the companies with which we compete have greater financial and other resources than we have, they may have an advantage in the competition for production capacity. There is no assurance that the manufacturing capacity we require will be available to us, or that if available it will be available on terms that are acceptable to us. If we cannot produce a sufficient quantity of our products to meet demand or delivery schedules, our customers might reduce demand, reduce the purchase price they are willing to pay for our products or replace our product with the product of a competitor, any of which could have a material adverse effect on our financial condition and operations.
Government regulation and supervision could restrict our business.
- 32 -
Any negative changes to international trade agreements and regulations such as the North American Free Trade Agreement or any agreements affecting international trade such as those made by the World Trade Organization which result in a rise in trade quotas, duties, taxes and similar impositions or which has the result of limiting the countries from whom we can purchase our fabric or other component materials, or limiting the countries where we might market and sell our products, could have an adverse effect on our business.
Increases in the price of raw materials or their reduced availability could increase our cost of sales and decrease our profitability.
The principal fabrics used in our business are cotton, synthetics, wools and blends. The prices we pay for these fabrics are dependent on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate significantly, depending on a variety of factors, including crop yields, weather, supply conditions, government regulation, economic climate and other unpredictable factors. Any raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.
If we are unable to enforce our intellectual property rights or otherwise protect our intellectual property, then our business would likely suffer.
Our success depends to a significant degree upon our ability to protect and preserve any intellectual property we develop or acquire, including copyrights, trademarks, patents, service marks, trade dress, trade secrets and similar intellectual property. We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights. However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we may develop, causing us to lose sales or otherwise harm our business. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse affect on our business. If any of these risks arise, our business would likely suffer.
Risks Related to Our Company
We lack an operating history and have losses which we expect to continue into the future. Our auditor has stated that we have incurred a loss from operations and negative cash flows from operations that raise substantial doubt about our ability to continue as a going concern. There is no assurance our future operations will result in profitable revenues. If we cannot generate sufficient revenues to operate profitably, we may suspend or cease operations.
Our inception date is February 3, 2006. We have a very short operating history upon which an evaluation of our future success or failure can be made. Our net loss since inception (February 3, 2006) was $7,044,442 as of December 31, 2007. In its audit report dated January 14, 2008, our auditor stated that we have incurred a loss from operations and negative cash flows from operations that raise substantial doubt about our ability to continue as a going concern.
Based upon current plans, we expect to incur operating losses in future periods because we will continue to incur expenses. We cannot guarantee that we will be successful in becoming profitable in the future. Failure to become profitable would cause us to go out of business.
- 33 -
Our management may be able to control substantially all matters requiring a vote of our stockholders and their interests may differ from the interests of our other stockholders and cause investors to lose some or all potential benefit from their investment.
As of December 31, 2007, our directors and officers as a group beneficially owned approximately 21% of our outstanding common stock. Therefore, our directors and officers may be able to control matters requiring approval by our stockholders. Matters that require the approval of our stockholders include the election of directors and the approval of mergers or other business combination transactions. Our directors and officers also have control over our management and affairs. As a result of such control, certain transactions are effectively not possible without the approval of our directors and officers, including, proxy contests, tender offers, open market purchase programs or other transactions that could give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our common stock. If the interests of our directors and officers conflict with those of our investors, investors could lose some or all of the potential benefit of their investment.
Risks Related to Our Securities
Our stock price is highly volatile and stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
The trading price of our common stock has fluctuated significantly since our incorporation (March 2, 2005), and is likely to remain volatile in the future. The trading price of our common stock could be subject to wide fluctuations in response to many events or factors, including the following:
-
quarterly variations in our operating results;
-
changes in financial estimates by securities analysts;
-
changes in market valuations or financial results of apparel companies;
-
announcements by us or our competitors of new products, or significant acquisitions, strategic partnerships or joint ventures;
-
any deviation from projected growth rates in revenues;
-
any loss of a major customer or a major customer order;
-
additions or departures of key management or design personnel;
-
any deviations in our net revenue or in losses from levels expected by securities analysts;
-
activities of short sellers and risk arbitrageurs; and,
-
future sales of our common stock.
The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies' securities and that have often been unrelated to the operating performance of these companies. Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
The U.S. Securities and Exchange Commission imposes additional sales practice requirements on brokers who deal in our shares which are penny stocks, some brokers may be unwilling to trade them. This means that you may have difficulty reselling your shares and this may cause the price of the shares to decline.
- 34 -
Our shares are classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 and the Rules which impose additional sales practice requirements on brokers/dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, the broker/dealer must make a special suitability determination and receive from you a written agreement prior to making a sale for you. Because of the imposition of the foregoing additional sales practices, it is possible that brokers will not want to make a market in our shares. This could prevent you from reselling your shares and may cause the price of the shares to decline.
We do not intend to pay dividends and there will be less ways in which you can make a gain on any investment in our company.
We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future. To the extent that we require additional funding currently not provided for in our financing plan, our funding sources may likely prohibit the payment of a dividend. Because we do not intend to declare dividends, any gain on an investment in our company will need to come through appreciation of the stock’s price.
Item 3. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by the quarterly report, being December 31, 2007, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. This evaluation was carried out by our company’s principal executive officer and our company’s principal financial officer. Based upon that evaluation, our company’s principal executive officer and our company’s principal financial officer concluded that our company’s disclosure controls and procedures are not effective as at the end of the period covered by this report. Management arrived at this determination as a result of having identified a stock-based compensation accounting issue that caused it to restate the financial statements of Mynk Corporation for the three months ended December 31, 2006, the period from February 3, 2006 (Inception) to December 31, 2006, and the period from February 3, 2006 (Inception) to December 31, 2007. The Company is addressing this issue by reviewing and revising its internal accounting policies and procedures, expanding the resources allocated to its accounting department, and retaining qualified advisors to assist the company in addressing technical accounting issues.
There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief financial officer and our chief executive officer and our chief financial officer as appropriate, to allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Other than as described below, we know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period of settlement. We do not believe the potential outcome from these legal proceedings will significantly impact our financial position, operations or cash flows. Elk Brands Manufacturing Company, Inc. is suing Mynk Corporation. for an alleged payment owing of approximately $70,800. We believe that this claim is
- 35 -
unfounded and we intend to fight it through all reasonable legal means. We believe that we will not be held liable for or be required to pay the amount claimed by Elk Brands. The claim was filed in the circuit court for Davidson County, Tennessee at Nashville on February 16, 2007. On October 19, 2007, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles by Unger Fabrik, LLC, a Delaware limited liability company, against our company, Mark Cywinski, Craig Soller and Stephen M. Soller, our chief executive officer and a director and our company. The complaint made several allegations, including breach of contract, unfair competition and unfair business practices. The plaintiff was seeking monetary damages, punitive damages, injunctions, restitution, attorney fees, pre and post judgment interest and any further relief that the Court deems just and proper. A settlement agreement and mutual release was signed on February 7, 2008 wherein Unger will file a request for dismissal of Panglobal Brands Inc., Stephen Soller and Mark Cywinski.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 23, 2007, the Company closed a private placement of 2,871,759 units for gross proceeds of $2,153,819. Each unit was sold for $0.75 and consists of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase, if exercised, one additional common share of our company at a price of $1.00 per common share until October 23, 2008 and at $1.50 per common share if exercised during the period from October 24, 2008 until the warrants expire on October 23, 2009.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
- 36 -
Item 6. Exhibits.
| Exhibit | |
| Number | Description |
| Exhibits required by Item 601 of Regulation S-B |
| Exhibit | Description |
| Number | |
| (3) | Articles of Incorporation and Bylaws |
| 3.1 | Articles of Incorporation of Panglobal Brands Inc. (formerly EZ English Online) (incorporated by reference as Exhibit Number 3.1 of our Form SB-2 filed January 3, 2006). |
|
|
|
| 3.2 | Bylaws of Panglobal Brands Inc. (formerly EZ English Online) (incorporated by reference as Exhibit Number 3.2 of our Form SB-2 filed January 3, 2006). |
|
|
|
| 3.3 | Articles of Incorporation of Mynk Corporation (incorporated by reference as Exhibit Number 3.1 of our Form SB- 2 filed February 3, 2006). |
|
|
|
| 3.4 | Bylaws of Mynk Corporation. (incorporated by reference as Exhibit Number 3.2 of our Form SB-2 filed February 3, 2006). |
|
|
|
| 3.5 | Certificate of Amendment (incorporated by reference from our Current Report on Form 8-K filed on February 6, 2007). |
|
|
|
| 3.6 | Certificate of Ownership (incorporated by reference from our Current Report on Form 8-K filed on February 6, 2007). |
|
|
|
| (10) | Material Contracts |
|
|
|
| 10.1 | PayPal User Agreement (incorporated by reference as Exhibit Number 10.1 of our Form SB-2 filed February 3, 2006). |
|
|
|
| 10.2 | Affiliated Stock Purchase Agreement dated December 12, 2006 (incorporated by reference from our Current Report on Form 8-K filed on December 13, 2006). |
|
|
|
| 10.3 | Share Exchange Agreement between Panglobal Brands Inc. and Mynk Corporation, dated February 15, 2007 (incorporated by reference from our Current Report on Form 8- K filed on February 20, 2007). |
|
|
|
| 10.4 | Consulting Agreement between our company, Lolly Factory, LLC and Mark Cywinski dated September 16, 2007 (incorporated by reference as Exhibit Number 10.1 of our Form 8-K filed September 27, 2006). |
|
|
|
| 10.5 | Lease Agreement with RFS Investments LLC, dated January 11, 2007 (incorporated by reference from our Current Report on Form 8-K filed on February 20, 2007). |
|
|
|
| 10.6 | Lease Agreement with YMI Jeanswear |
|
|
|
| 10.7 | Lease Agreement with Jamison California Market Center, L.P. |
|
|
|
| 10.8 | Lease Agreement with Steven Goldstein |
|
|
|
| 10.9 | Lease Agreement with TR 39th St. Land Corp. |
|
|
|
| (31) | Section 302 Certifications |
|
|
|
| 31.1* | |
|
|
|
| 31.2* | |
|
|
|
| (32) | Section 906 Certifications |
|
|
|
| 32.1* | |
|
|
|
| 32.2* |
* filed herewith
- 37 -
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PANGLOBAL BRANDS
INC.
(Registrant)
By: /s/ STEPHEN SOLLER
Stephen Soller
Chief
Executive Officer
(Principal Executive Officer)
Date: February 18, 2008
By: /s/ CHARLES LESSER
Charles Lesser
Chief
Financial Officer
(Principal Accounting Officer and Principal Financial
Officer)
Date: February 18, 2008