- 3 -
| Item 5 Other Information | 37 |
| Item 6 Exhibits | 38 |
| SIGNATURES | 39 |
| - 4 - |
| PANGLOBAL BRANDS INC. |
| AND SUBSIDIARY |
| CONSOLIDATED BALANCE SHEETS |
| September | ||||||
| March 31, | 30, | |||||
| 2008 | 2007 | |||||
| (Unaudited) | ||||||
| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 6,582 | $ | 1,170,214 | ||
| Accounts receivable, net of allowance of $13,332 and $14,675 as of | 108443 | 29,975 | ||||
| March 31, 2008 and September 30, 2007, respectively | ||||||
| Due from factor, net | 1,324,759 | 175,084 | ||||
| Inventory | 669,444 | 309,700 | ||||
| Prepaid expenses and other current assets | 114,550 | 51,004 | ||||
| Total current assets | 2,223,778 | 1,735,977 | ||||
| Property and equipment , net | ||||||
| 466,120 | 210,930 | |||||
| Deposits | 134,520 | 68,065 | ||||
| Total assets | $ | 2,824,418 | $ | 2,014,972 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current liabilities: | ||||||
| Bank overdraft | $ | 179,172 | $ | --- | ||
| Accounts payable and accrued expenses | 1,579,427 | 396,988 | ||||
| Convertible note payable to related party | 500,000 | 10,000 | ||||
| Total current liabilities | 2,258,599 | 406,988 | ||||
| Commitments and contingencies | ||||||
| Stockholders’ equity : | ||||||
| Common stock, $0.0001 par value: | ||||||
| Authorized - 600,000,000 shares; issued and outstanding – 29,630,530 shares and | ||||||
| 26,731,771 shares at March 31, 2008 and September 30, 2007, respectively | ||||||
| 2,960 | 2,673 | |||||
| Additional paid-in capital | 9,604,750 | 6,363,418 | ||||
| Accumulated deficit | (9,041,891 | ) | (4,758,107 | ) | ||
| Total stockholders’ equity | 565,819 | 1,607,984 | ||||
| Total liabilities and stockholders’ equity | $ | 2,824,418 | $ | 2,014,972 |
See accompanying notes to consolidated financial statements.
| - 5 - |
| PANGLOBAL BRANDS INC. |
| AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
| Three Months Ended | Six Months Ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||
| (Restated) | (Restated) | |||||||||||
| Net sales | $ | 2,962,919 | $ | (136,833 | ) | $ | 3,083,552 | $ | 180,623 | |||
| Cost of sales | 2,261,341 | 104,432 | 2,388,368 | 416,178 | ||||||||
| Gross profit (loss) | 701,578 | (241,265 | ) | 695,184 | (235,555 | ) | ||||||
| Costs and expenses: | ||||||||||||
| Design and development | 932,527 | 77,271 | 1,795,387 | 77,271 | ||||||||
| Selling and shipping | 500,247 | 163,925 | 904,479 | 237,420 | ||||||||
| General and administrative, including | ||||||||||||
| $514,899 and $-0- of stock-based | ||||||||||||
| compensation for the three months | ||||||||||||
| ended March 31, 2008 and 2007, | ||||||||||||
| respectively; and $1,062,800 and $-0- | ||||||||||||
| for the six months ended March 31, 2008 | ||||||||||||
| and 2007, respectively | ||||||||||||
| 1,240,547 | 117,749 | 2,256,772 | 261,834 | |||||||||
| Depreciation and amortization | 21,357 | 808 | 35,824 | 978 | ||||||||
| Total costs and expenses | 2,694,678 | 359,753 | 4,992,462 | 577,503 | ||||||||
| (1,993,100 | ) | (601,018 | ) | (4,297,278 | ) | (813,058 | ) | |||||
| Interest income | 4,140 | 25 | 21,983 | 25 | ||||||||
| Interest (expense) | (8,489 | ) | ---- | (8,489 | ) | --- | ||||||
| Interest income/(expense), net | (4,349 | ) | 25 | 13,494 | 25 | |||||||
| Net loss | $ | (1,997,449 | ) | $ | (600,993 | ) | $ | (4,283,784 | ) | $ | (813,033 | ) |
| Net loss per common share - basic and | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.15 | ) | (0.06 | ) | |
| diluted | ||||||||||||
| Weighted average number of common | ||||||||||||
| shares | ||||||||||||
| outstanding - basic and diluted | 29,635,530 | 13,000,000 | 29,250,000 | 13,000,000 | ||||||||
See accompanying notes to consolidated financial statements.
| - 6 - |
| PANGLOBAL BRANDS INC. |
| AND SUBSIDIARY |
| CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY |
| Accumulated | Total | ||||||||||||||
| Additional | Deficit | Stockholders’ | |||||||||||||
| Common Stock | Paid-in | Equity | |||||||||||||
| Shares | Amount | Capital | (Deficiency) | ||||||||||||
| Balance, September 30, 2006 (restated) | 3,749,995 | 375 | 646,635 | (833,236 | ) | (186,226 | ) | ||||||||
| Shares issued to acquiree in connection | 11,396,550 | 1,140 | (68,991 | ) | — | (67,851 | ) | ||||||||
| with reverse merger transaction | |||||||||||||||
| Shares issued to related parties for debt | |||||||||||||||
| in connection with reverse merger | |||||||||||||||
| transaction | 975,000 | 97 | 389,903 | — | 390,000 | ||||||||||
| Shares issued in private placement, net | |||||||||||||||
| of offering costs of $21,900 | 10,610,22 | 1,061 | 4,751,641 | — | 4,752,702 | ||||||||||
| 6 | |||||||||||||||
| Stock-based compensation | — | — | 644,230 | — | 644,230 | ||||||||||
| Net loss for the year ended September 30, | |||||||||||||||
| 2007 | — | — | — | (3,924,871 | ) | (3,924,871 | ) | ||||||||
| Balance September 30, 2007 | 26,731,771 | 2,673 | 6,363,418 | (4,758,107 | ) | 1,607,984 | |||||||||
| Shares issued in private placement | 2,871,759 | 287 | 2,153,532 | 2,153,819 | |||||||||||
| — | — | — | |||||||||||||
| Shares to be issued as loan fees | 25,000 | 25,000 | |||||||||||||
| Stock-based compensation | — | — | 1,062,800 | — | 1,062,800 | ||||||||||
| Net loss for the six months ended March | (4,283,784 | ) | |||||||||||||
| 31, 2008 | (4,283,784 | )) | |||||||||||||
| Balance, March 31, 2008 | 29,603,530 | 2,960 | 9,604,750 | (9,041,891 | ) | 565,819 | |||||||||
See accompanying notes to consolidated financial statements.
| - 7 - |
| PANGLOBAL BRANDS INC. |
| AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| Six | Six | |||||
| Months | Months | |||||
| Ended | Ended | |||||
| March 31, | March 31, | |||||
| 2008 | 2007 | |||||
| Cash flows from operating activities | ||||||
| Net loss | $ | (4,283,784 | ) | (813,033 | ) | |
| Adjustments to reconcile net loss to net | ||||||
| cash used in operating activities: | ||||||
| Depreciation and amortization | 35,824 | 978 | ||||
| Provision for bad debts | (1343 | ) | ||||
| Provision for returns | 63,566 | |||||
| Stock-based compensation | 1,062,800 | --- | ||||
| Stock issued as loan fees | 25,000 | --- | ||||
| Loss on abandoned leasehold improvements | 4,243 | |||||
| Changes in operating assets and liabilities: | ||||||
| (Increase) decrease in - | ||||||
| Accounts receivable | (77,125 | ) | --- | |||
| Due from factor | (1,086,109 | ) | (8,346 | ) | ||
| Inventories | (359,744 | ) | (358.177 | ) | ||
| Prepaid expenses and other current assets | (63,546 | ) | (7,472 | ) | ||
| Deposits | (66,455 | ) | (5,400 | ) | ||
| Increase (decrease) in - | ||||||
| Accounts payable and accrued expenses | 1,182,439 | 187,082 | ||||
| Net cash used in operating activities | (3,691,366 | ) | (1,004,368 | ) | ||
| Cash flows from investing activities | ||||||
| Purchase of office equipment | (295,257 | ) | (76,178 | ) | ||
| Net cash used in investing activities | (295,257 | ) | (76,178 | ) | ||
| Cash flows from financing activities | ||||||
| Increase in bank overdraft | 179,172 | --- | ||||
| Gross proceeds from private placements | 2,153,819 | --- | ||||
| Advances from related parties | ---- | 850,000 | ||||
| Proceeds from related party note | 500,000 | 190,000 | ||||
| Repayment of related party loans | (10,000 | ) | (100,000 | ) | ||
| Net cash provided by financing activities | 2,822,991 | 940,000 | ||||
| Net increase/(decrease) in cash | (1,163,632 | ) | (140,546 | ) | ||
| Cash and cash equivalents at beginning of period | 1,170,214 | 150,922 | ||||
| Cash and cash equivalents at end of period | $ | 6,582 | 10,376 |
(continued)
| - 8 - |
| PANGLOBAL BRANDS INC. |
| AND SUBSIDIARY |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued) |
| Six | Six | |||||
| Months | Months | |||||
| Ended | Ended | |||||
| March 31, | March 31, | |||||
| 2008 | 2007 | |||||
| Supplemental disclosures of non-cash investing and | ||||||
| financing activities: | ||||||
| Liabilities assumed in connection with reverse merger | $ | ---- | ----- | |||
| Common stock issued in payment of debt | $ | ----- | ----- | |||
| Supplemental disclosures of cash flow information: | ||||||
| Cash paid for - | ||||||
| Interest | $ | 8,489 | --- | |||
| Income taxes | $ | --- | --- |
See accompanying notes to consolidated financial statements.
| - 9 - |
| PANGLOBAL BRANDS INC. AND SUBSIDIARY |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. Organization and Basis of Presentation
Organization and Nature of Operations
EZ English Online Corp, a Delaware corporation (“EZ English”), was incorporated in the State of Delaware on March 2, 2005. EZ English sold common stock pursuant to a registration statement on Form SB-2 declared effective by the Securities and Exchange Commission on February 28, 2006, and raised gross proceeds of approximately $85,000. Through September 30, 2006, EZ English was a development stage company offering a teacher training course to teach English as a second language over the Internet.
Beginning in December 2006, in conjunction with a new controlling shareholder acquiring approximately 79% of the issued and outstanding common shares, EZ English began a program to discontinue its existing business operations and prepare to enter the fashion industry. On February 2, 2007, in order to better reflect its future business operations and prepare for its acquisition of Mynk Corporation, a privately-held Nevada corporation (“Mynk”), EZ English completed a merger with its wholly-owned Delaware subsidiary, in order to effect a name change to Panglobal Brands Inc. (“Panglobal”), and effected a six-for-one forward split of its outstanding common stock. All common share amounts referred to herein are presented on a post-split basis. All options referred to herein were issued on a post-split basis.
Mynk was incorporated in Nevada on February 3, 2006 to engage in the business of design, manufacture and distribution of clothing and accessories throughout the United States and Canada.
Unless the context indicates otherwise, Panglobal and Mynk are hereinafter referred to as the “Company”.
The Company sells its products through a network of wholesale accounts. The Company was considered a “development stage company” as defined in Statement of Financial Accounting Standards No. 7, “Accounting and Reporting by Development Stage Enterprises” until December 31, 2007, as it had not yet commenced any material revenue-generating operations, did not have any material cash flows from operations, and was dependent on debt and equity funding to finance its operations. The Company recorded approximately $3.0 million in revenue in the three months ended March 31, 2008 and is still dependent on financing, but no longer considers itself a “development stage company”. The Company has elected September 30 as its fiscal year-end.
Basis of Presentation
On May 11, 2007, Mynk completed a transaction with Panglobal, whereby Mynk became a wholly-owned subsidiary of Panglobal (see Note 3). Panglobal was a development stage company and had terminated its prior operations by that date and was essentially a shell company seeking a new business opportunity. For financial reporting purposes, Mynk was considered the accounting acquirer in the merger and the merger was accounted for as a reverse merger. The determination to account for this transaction as a reverse merger was based on the fact that the shareholders and officers of Mynk acquired effective control of Panglobal at the conclusion of the transactions described herein, through control of the Board of Directors and ownership of approximately 43% of the issued and outstanding shares of common stock of Panglobal. Additional factors that Panglobal considered in arriving at this determination included that through a series of planned and interdependent transactions beginning in December 2006, as disclosed in Panglobal’s prior filings with the Securities and Exchange Commission, Panglobal and its controlling shareholder (who owned approximately 79% of the outstanding common shares in December 2006) terminated Panglobal’s prior business operations, changed its name, appointed new officers and directors, entered into a series of stock-based transactions funded by Panglobal’s controlling shareholder to facilitate the acquisition and operations of Mynk, and raised approximately $4,750,000 of equity capital from investors to fund the business operations of Mynk as a wholly-owned subsidiary of Panglobal.
- 10 -
The controlling shareholder of Panglobal returned 18,975,000 shares of common stock to the Company for cancellation immediately prior to the closing of the transaction on May 10, 2007. Of the 11,396,550 shares of common stock retained by the Panglobal shareholders on May 11, 2007 upon the closing of the transaction, 5,025,000 shares were owned by the controlling shareholder, resulting in the other public shareholders owning 6,371,550 shares. Of such 5,025,000 shares, 2,025,000 shares were subject to purchase and escrow agreements transferring such shares to new management at June 30, 2007, and of the remaining 3,000,000 shares, 2,500,000 were transferred to a consultant to the Company, Lolly Factory(see Note 8), and 250,000 transferred to the Chief Financial Officer(see Note 3).
Accordingly, the historical financial statements presented herein are those of Mynk and do not include the historical financial results of Panglobal, except for the period subsequent to May 11, 2007. The stockholders’ equity section of Panglobal has been retroactively restated for all periods presented to reflect the accounting effect of the reverse merger transaction. All costs associated with the reverse merger transaction were expensed as incurred.
Interim Financial Information
The interim consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments (including normal recurring adjustments), necessary to present fairly the financial position at March 31, 2008, the results of operations for the three and six months ended March 31, 2008 and 2007, and the cash flows for the six months ended March 31, 2008 and 2007.
Operating results for the three and six months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2008.
2. Business Operations and Summary of Significant Accounting Policies
Going Concern and Plan of Operations
The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Prior to December 31, 2007 the Company had been in the development stage. It has generated approximately $3.0 million in revenues from operations for the three months ended March 31, 2008, but is still dependent upon debt and equity financing which raises substantial doubt about its ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital, and ultimately achieve profitable operations. As of March 31, 2008, the Company had an accumulated deficit of $9,041,891; and had incurred a net loss of $4,283,784 and used net cash in operating activities of $3,691,366 for the six months ended March 31, 2008. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
At December 31, 2007, the Company had not yet commenced any material revenue-generating operations. Principal activity through December 31, 2007 related to the Company’s formation, capital raising efforts and initial product design and development activities. These activities generated $3.0 in revenue for the three months ended March 31, 2008 and the company has as order backlog of approximately $6.0 million in prospective sales. The Company has yet to generate any material cash flows from operations, and is essentially dependent on debt and equity funding from both related and unrelated parties to finance its operations.
Prior to February 28, 2007, the Company’s cash requirements were funded by advances from Mynk’s founders. On February 27, 2007, the Company completed an initial closing of its private placement (see Note 3), selling 9,426,894 shares of common stock at a price of $0.45 per share and receiving net proceeds of $4,220,203. On February 28, 2007, the Company completed a second closing of its private placement, selling 1,183,332 shares of common stock at a price of $0.45 per share and receiving net proceeds of $532,499.
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
- 11 -
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.
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of Panglobal and its wholly-owned subsidiary, Mynk. All intercompany balances and transactions have been eliminated in consolidation.
Inventories
Inventories are valued at the lower of cost or market, with cost being determined by the first-in, first-out method. The Company continually evaluates its inventories by assessing slow-moving product and records mark-downs as appropriate. At March 31, 2008, inventories consisted of finished goods, work-in-process and raw materials.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise to its wholesale accounts when products are shipped and the customer takes title and assumes the risk of loss, collection of the relevant receivable is reasonably assured, pervasive evidence of an arrangement exists, and the sales price is fixed or otherwise determinable. Sales allowances are recorded as a reduction to revenue. Management has evaluated the effects of estimating and accruing for sales returns in the current and prior periods and provides for an estimated allowance for returns based upon historical percentages.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At times, such cash and cash equivalents may exceed federally insured limits. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.
The Company will provide a valuation allowance for the full amount of the deferred tax asset since there is no assurance of future taxable income. Tax deductible losses can be carried forward for 20 years until utilized.
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. 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.
- 12 -
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of March 31, 2008, the Company has no accrued interest or penalties related to uncertain tax positions.
Stock-Based Compensation
Effective February 3, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123R requires that the Company measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards, with the cost to be recognized as compensation expense in the Company's financial statements over the period of benefit, which is generally the vesting period of the awards. Accordingly, the Company recognizes compensation cost for equity-based compensation for all new or modified grants issued after February 3, 2006 (Inception).
The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, and EITF 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees”, whereas the value of the stock compensation is based upon the measurem