As filed with the Securities and Exchange Commission on August 14, 2006
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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PENGE CORP
(Name of Small Business Issuer in its Charter)
DELAWARE 71-0895709
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1501 NORTH FAIRGROUNDS
MIDLAND, TEXAS 79705
(Address and zip code of principal executive offices)
(432) 683-8800
(Issuer's telephone number)
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SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
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PART I.
ITEM 101. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-SB contains statements that constitute forward-looking
statements. Such statements can be identified by the use of the forward-looking
words "anticipate," "estimate," "project," "likely," "believe," "intend" or
"expect" or similar words. When considering such forward-looking statements, you
should keep in mind the risk factors noted under the heading "Risk Factors" in
Item 2. "Management's Discussion and Analysis or Plan of Operation" and other
cautionary statements throughout this Form 10-SB. 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.
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,
descriptions of "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 farming
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
four acres in Midland, Texas for the site of our first retail nursery. We
completed a $950,000 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 over
$560,000 in retail business. We also did over $400,000 in business with our
existing Midland wholesale customers. As we go 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 at least $1 million more than we paid for
it. We plan to sell 3.5 acres of this property and develop the remaining 3.5
acres into a full service retail nursery in early 2007. We have not entered into
any agreements with respect to the sale of this site.
2
Going forward, our focus will be to create, and expand, a vertically
integrated wholesale and retail nursery business. We expect that 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.
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 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 of farming property and certain
related assets near Houston Texas on which we have established a wholesale
operation 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 flower 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
four acres in Midland, Texas for the site of our first retail nursery at a very
good price. We completed a $950,000 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 over $560,000 in retail business. We also did over $400,000 in
business with our existing Midland wholesale customers. As we go 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 at least $1 million more than we paid for
it. We plan to sell 3.5 acres of this property and develop the remaining 3.5
acres into a full service retail nursery in early 2007. We have not entered into
any agreements with respect to the sale of this site.
As the availability of capital and 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 over fifty nurseries to
compete in these markets.
4
PRINCIPAL PRODUCTS AND THEIR MARKETS
Our farms grow dozens of varieties of trees, shrubs, bedding plants,
and flowers native to the Southwest region. These are primarily desert nursery
products that thrive in the dry and arid regions common throughout the
southwestern United States and are those varieties most commonly sold by
nurseries and utilized by landscape companies in that area.
The market for landscape trees, shrubs, bedding plants and flowers is
large and very diverse. Due to the significant transportation and shipping costs
as well as varying local growing conditions and landscaping needs, the markets
for landscape trees and shrubs are very localized and highly specific to
particular geographic and climatological region with the majority of landscape
trees grown in particular areas also ultimately being sold and planted in the
same geographic area. Historically, our major customer groups include retail
nurseries, major retail outlets, and landscape companies located in New Mexico,
Nevada, Oklahoma, Arizona and Texas. We plan to continue to market our trees,
shrubs, bedding plants and flowers to those customers; however, as our retail
operations grow, we expect to divert an increasing percentage of those plants to
our retail stores.
ELDARICA PINE. The primary tree grown by our Major Trees Tucson Farm is
the Eldarica Pine, which accounted for approximately 44% of our sales in our
fiscal year ended June 30, 2005 ("Fiscal 2005") and 29% of our sales in the nine
months of our fiscal year ended of June 30, 2006. The Eldarica Pine is from the
Middle East and Russia and is a desert tree with growth of 1-6 feet a year
depending on climate, water, and fertilizer. The tree is highly disease
resistant and hardy in warm climates. The Eldarica Pine has been sold in the
United States for decades and is a proven commodity in both hardiness and
marketability to the Christmas, landscape, and nursery markets in the southern
United States and the region from Texas to California in particular.
On our Major Trees Tucson Farm, we compete in a very small niche of the
larger Christmas tree market-potted, living trees. In the American Southwest,
unlike many other regions of our country, it is warm enough in the winter that
consumers can buy living trees, rather than cut trees, keep them indoors during
the Christmas season, and then plant them out of doors later that season. Our
Eldarica Pine trees are well suited for sale as a potted, living tree in the
Southwest because they are robust enough to withstand Christmas-season abuse,
need little water and are able to withstand replanting in a warm, dry
environment. Of our trees sold to Home Depot and similar retailers, we believe
that many are sold and used as potted, living Christmas trees and then planted
as landscaping trees. We plan to continue to operate our Major Trees Tucson Farm
primarily as a wholesale business, continuing to market to Home Depot and other
retailers or landscape companies in the Arizona area, as well as providing
product to our retail centers.
OTHER PRODUCTS. In addition to the Eldarica Pine, we also grow hundreds
of other varieties of trees, shrubs, bedding plants, and flowers on our two
Texas farms, and we buy additional products from regional wholesale suppliers
for our retail stores. These products represented the other 56% of our sales in
Fiscal 2005 and 71% of our sales in nine months ended June 30, 2006. We carry a
full line of diverse products to service many of the needs of a southwest retail
nursery center.
We grow our trees and shrubs from seed to harvest in 1-gallon to
100-gallon plastic pots. The trees are sold at an average age of 3 years old,
with heights ranging from 3 feet to 18 feet, with the best selling trees being
6-7 feet tall. We grow bedding plants and flowers from seed and from starts and
sell most of the inventory out each year.
5
MARKETING AND DISTRIBUTION
In the past, our focus has been on operating as a wholesale tree and
shrub provider to retail nurseries and landscaping companies. We do not employ
full-time sales force, engage third-party distributors or advertise our
products. Our marketing efforts for our wholesale operation are informal,
primarily through direct in-person contacts to management personnel at retail
nurseries, and we ship directly to our customers. Although we hope to expand our
wholesale operation in the future, consistent with our focus on becoming a
vertically integrated nursery operation, we do not expect to spend a significant
amount of money or other resources on the marketing of our wholesale business or
the development of a sophisticated distribution channel in the near future.
Going forward, our focus will be to create and to expand an integrated
wholesale and retail nursery business.
In the spring of 2006, we ran a large marketing campaign in Midland,
Texas in connection with the opening of our first retail center. The ad campaign
lasted for 10 weeks at a cost of approximately $55,000. We ran ads in the
newspaper, on television, and on the radio. We placed thousands of small ads in
an attempt to quickly build a brand name in Midland, and to get across our core
message of "Better Plants, Better Prices." We wanted the public to quickly
understand that there is a new retail nursery in town that grows much of the
product, cuts out the middlemen, and offers very low prices. The campaign
succeeded in attracting thousands of shoppers in the first 10 weeks we were
open.
COMPETITION
Competition-Wholesale
---------------------
At the wholesale level, there are a large number of producers in any
area, and a grower must possess some form of sustainable competitive advantage
in order to be successful. This could take the form of geographic proximity to a
large number of retailers, cultivation of a unique species or variety of trees,
or access to affordable labor, natural resources or capital. The large number of
growers also results in highly competitive pricing and pressures on
profitability for people selling to the big box stores.
With respect to our Major Trees Tucson Farm, we believe that the size
of our Eldarica Pine operation, which is the largest in the Southwest, gives us
a competitive advantage with larger retailers because of our perceived ability
to meet their growing demand more easily than smaller growers. We also enjoy
close proximity to Arizona and Nevada markets that are experiencing rapid
population growth. We have not experienced a reduction in orders or significant
demands for price reduction from Home Depot and other cost sensitive retailers.
As a result, we believe that our prices (at least for our Eldarica Pine) are as
low as or lower than those of our competitors. With respect to other factors,
such as cost of production and access to labor, we do not have a significant
advantage or disadvantage overall, and may be perceived as having a competitive
advantage or disadvantage, depending upon which competitor we are being compared
with.
With respect to our wholesale operations in Texas, we believe that we
are reasonably competitive with respect to all key factors, but do not believe
that we have a significant advantage or disadvantage overall. We may be
perceived as having a competitive advantage or disadvantage, depending upon
which competitor we are being compared with. We plan on shrinking the size of
our wholesale business in Texas, and shipping most of the products to our retail
centers in the coming years.
6
Competition-Retail
------------------
In the retail nursery business, retailers compete primarily on the
basis of price, selection, quality and service. The retail nursery business is
presently dominated by big box retailers such as Home Depot, Lowe's and
Wal-Mart. Such 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%. The big box
stores also have moderate selection and quality and are generally perceived as
having substandard service in this industry. There are numerous small nurseries
in any retail market that, although unable to compete on price, generally offer
good service and quality and, in certain circumstances, superior selection or
access to many types of plants.
Our experience operating a retail store is limited with our first store
having opened in April 2006. We expect to be able to match the big box
retailers, and beat the small nurseries, with respect to price. We expect that
our selection, quality and service will be comparable to that of a small
nursery. Our two biggest competitors in Texas (other than the big box stores)
are Houston Garden Center, with 20 locations in Houston, and Calloways, with 23
locations in various Texas markets. Both of these competitors use the old model
and buy all of their products from wholesale growers.
We do not know of any vertically integrated retailer in Texas that uses
our business model. However, Moon Valley Nursery is a vertically integrated
business located in Phoenix and Las Vegas that competes in the large tree
segment of retail nurseries. We believe that they currently have 11 locations
with exceptional selection and pricing. They are currently aggressively
expanding in Phoenix and Las Vegas.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
During Fiscal 2005, sales to Home Depot accounted for 44% of our
revenues, and during nine months ended June 30, 2006, sales to Home Depot
accounted for 29% of our revenues. In the future, we expect our dependence upon
Home Depot to continue to decrease as our retail and other wholesale operations
expand.
OUR FARMING PROPERTIES
For information on our farming and retail properties, see Item 3
"Description of Properties."
INTELLECTUAL PROPERTY
We do not presently regard our intellectual property as critical to our
success. If we acquire any proprietary intellectual property rights that we
believe would benefit from patent, copyright, trademark or trade secret
protection, we intend to take appropriate steps in order to protect those
rights. This would likely include the filing of applications for appropriate
state and federal registrations of our intellectual property rights and
requiring any employees involved with the intellectual property to sign
confidentiality and invention agreements.
GOVERNMENT REGULATION
The nursery industry as a whole is not regulated by state, federal or
local governments. As a result, our expenses associated with compliance with
government regulations are minimal. Because of the proximity of our properties
to the Mexican border and our use of temporary laborers, we do experience some
administrative expense in connection with our compliance with immigration and
7
employment laws, including laws requiring that we verify the immigration status
of our employees, limiting our ability to employ legal and illegal aliens,
granting certain minimum wage and other rights to employees and facilitating the
organization of labor. If we were to fail to comply with any such laws or
regulations, we may incur significant expenses in connection with any government
investigation or litigation and could be forced to pay fines and/or take costly
measures to ensure compliance. At that point, costs associated with government
regulations could become material.
RESEARCH AND DEVELOPMENT
We have not incurred any research and development expenses in the past
and do not anticipate incurring any such expenses in the foreseeable future.
ENVIRONMENTAL REGULATION
We are not required to obtain any environmental permits and do not use
any hazardous materials in connection with the operation of our nursery
business. Accordingly, we have incurred no material expenses associated with
environmental compliance. We do, however, use fertilizers and pesticides that
may contain chemicals that have been, or may be, determined to be harmful to the
environment, which chemicals could enter the air, surface water or ground water
in and around our farms or affect animals and plants in the area. If that were
to occur or if it has occurred in the past, we may be subject to fines,
penalties and remediation obligations under the environmental laws; such
include, without limitation, the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act and the Comprehensive Environmental
Response, Compensation, and Liability Act. At such point, costs associated with
environmental compliance and remediation could become material.
EMPLOYEES
As of March 31, 2006, we had had a total of 45 employees, which
includes 7 executives/managers, and 38 general and administrative employees.
None of our employees is represented by a collective bargaining agreement, nor
have we experienced any work stoppage. We consider our relations with our
employees to be good.
SUBSIDIARIES
We run our operations through the following three subsidiaries: Major
Trees, Inc., an Arizona corporation, which runs our wholesale operations in and
around Tucson, Arizona and Houston, Texas; S&S Plant Farm, Inc., a Texas
corporation, which runs our wholesale operations in Midland, Texas; and Texas
Landscape Center, Inc., a Texas corporation, which runs our retail operations in
Midland, Texas.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This section may include projections and other forward-looking
statements regarding management's expectations regarding performance of the
Company. You should not place undue reliance on such projections and forward
looking statements, and, when considering such projections and forward-looking
statements, you should keep in mind the risk factors noted throughout this
Report. You should also keep in mind that all projections and 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. See the "Risk Factors" beginning on page 19.
8
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,
descriptions of "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
four acres in Midland, Texas for the site of our first retail nursery. We
completed a $950,000 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 over
$560,000 in retail business. We also did over $400,000 in business with our
existing Midland wholesale customers. As we go 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 in a sale 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 at least $1 million more than we
paid for it. We plan to sell 3.5 acres of this property and develop the
remaining 3.5 acres into a full service retail nursery in early 2007. We have
not entered into any agreements with respect to the sale of this site.
Going forward, our focus will be to create, and 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.
9
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.
Our Properties
--------------
OUR ARIZONA WHOLESALE OPERATIONS. In September 2002, we acquired
property in southern Arizona, 90 minutes southeast of Tucson and the related
wholesale tree business. We refer to this as our Major Trees Tucson Farm. This
operation is a 20-year-old tree and shrub farm on 272 acres that grows trees and
shrubs that are sold wholesale to retail outlets, such as Home Depot, and to
retail nurseries and landscape companies primarily in Arizona, New Mexico,
Texas, Oklahoma, and Nevada.
Our Major Trees Tucson Farm produces and sells a variety of trees and
shrubs and is the largest supplier of Eldarica Pine trees in the Southwest,
selling these pine trees as, among other things, living, potted Christmas trees.
As of March 31, 2006, we have an inventory of approximately over 150,000 trees
growing on our Major Trees Tucson Farm.
During the fiscal year ended June 30, 2005 ("Fiscal 2005") and
nine-months ended March 31, 2006 ("nine months ended June 30, 2006"), our Major
Trees Tucson Farm generated the following amount of revenue:
Fiscal Year Gross Revenue
----------- -------------
2005 $840,000
2006(9 months) $860,000
OUR TEXAS WHOLESALE OPERATIONS. In May 2004, we acquired a 17-acre
farming property near Houston, Texas and certain related farming assets. We
refer to this farm as our Major Trees Houston Farm. We grow a variety of
landscape trees and shrubs on our Major Trees Houston Farm, which we ship almost
exclusively to our retail nursery in Midland, Texas. We presently have an
inventory of over 100,000 trees, palms and shrubs on the Major Trees Houston
Farm, which we plan on harvesting and selling over the next 3-5 years.
In March 2005, we acquired a bedding plant and flower farm in Midland,
Texas, which we refer to as our S&S Plant Farm. We grow a variety of bedding
plants, flowers, shrubs and trees on the S&S Plant Farm. Wholesale sales from
the S&S Plant Farm occur primarily in spring and fall. In the future we plan on
having the S&S Plant Farm supply exclusively to our retail stores, but most of
the sales in the nine months ended June 30, 2006 were to other wholesale
customers.
RETAIL NURSERY LOCATION - MIDLAND, TEXAS. In October 2005, we purchased
a vacant 13,000 square foot building on four acres in Midland, Texas for the
site of our first retail nursery. We completed a $950,000 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 over $560,000 in retail business. We also did over
$400,000 in business with our existing Midland wholesale customers. As we go
forward, both the wholesale and retail business will be done at the retail
center.
PROPOSED RETAIL NURSERY LOCATION - SAN ANGELO, TEXAS. 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
10
sold for $13.66 and $12.30 per square foot. We believe that our property is
currently worth at least $1 million more than we paid for it. We plan to sell
3.5 acres of this property and develop the remaining 3.5 acres into a full
service retail nursery in early 2007. We have not entered into any agreements
with respect to the sale of this site.
SEASONALITY. Our underlying wholesale business is the production and
sale of trees, shrubs, bedding plants, and flowers to retailers and landscape
companies. As with other agricultural businesses, our business is seasonal in
nature with the majority of our revenues coming during the March-June and
September-December periods.
On our Major Trees Tucson Farm, we generally harvest trees in the fall
and generate over 80% of our revenues from that farm between October and
December. Revenues from our Major Trees Tucson Farm during other months of the
year are growing but are still small. Costs associated with the Major Trees
Tucson Farm also peak during approximately the same period as we harvest the
trees, transport them to market and conduct most of our planting activities.
On our S&S Plant Farm and the Major Trees Houston Farm, we generally
harvest trees, shrubs, bedding plants and flowers between March and June and
between September and December of each year. We generate substantially all of
our revenues from those farms directly, or indirectly through our retail
operations at the Texas Landscape Center, during thfrom Same period. We also
incur increased transportation, sales and planting expenses during that period.
The acquisition of the Texas-based farms and retain business has helped
balance the seasonality of our business to some extent. Even so, we will
continue to experience dramatic increases and decreases in revenue and expenses
throughout the year and, as a result, our quarterly or multi-quarterly results
will generally not be indicative of our annual results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management is basing this discussion and analysis of our financial
condition and results of operations on our consolidated financial statements.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our critical accounting policies and estimates,
including those related to agricultural productions, inventories, property and
equipment, acquisition costs and revenue recognition. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. These judgments and estimates affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting periods. Changes to these judgments and estimates could
adversely affect our future results of operations and cash flows.
o Agricultural Production - We account for agricultural activities in
accordance with Statement of Position 85-3, "Accounting by Agricultural
Producers and Agricultural Cooperatives". All direct and indirect costs of
growing crops are either accumulated as inventory or expensed as cost of goods
sold. Permanent land development costs are capitalized and not depreciated.
Limited-life land development costs and the development costs to bring long-life
and intermediate-life plants into production are capitalized and depreciated
using the straight-line method over the estimated useful lives of the assets.
11
o Inventories - Growing crops inventory is stated at the lower of cost
or market using the retail method as we have a large quantity of inventory items
that have similar costs and markups; we do not have any individually significant
items. Because our inventory has these characteristics, it is not beneficial to
track inventory costs to each individual unit of inventory. Under the retail
method, we count and extend our inventory at estimated sales prices, based upon
historical sales, which we then multiply by our cost ratio to determine
inventory at cost. Our cost ratio is determined by adding the total cost of the
beginning inventory and all direct and indirect costs of growing crops divided
by the total estimated sales price of ending inventory, based on historical
sales, plus sales revenues. Raw material inventory is stated at the lower of
market or cost using the first-in first-out (FIFO) method.
o Property And Equipment - Property and equipment are stated at cost or
carryover basis. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized upon being placed in
service. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we periodically review our property and equipment for
impairment.
o Acquisition Costs - Costs related to proposed acquisitions are
deferred and will be included in the acquisition price upon completion of the
related acquisition. In the event an acquisition is unsuccessful, the costs
related to the acquisition are written off to expense.
o Revenue Recognition - Our revenue comes primarily from the sale of
nursery products. We recognize revenue from the sale of nursery products when
rights and risk of ownership have passed to the customer, there is persuasive
evidence of a sales arrangement, product has been shipped or delivered to the
customer, the price and terms are finalized and collection of the resulting
receivable is reasonably assured.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2006 COMPARED WITH NINE MONTHS ENDED
MARCH 31, 2005
The following table reflects selected operational results for
nine-month periods ended March 31, 2006 and March 31, 2005, which represent the
nine months of Fiscal 2006 and Fiscal 2005:
PERIODS ENDED
MARCH 31,
---------
2006 2005
----------- -----------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 1,707,552 $ 991,906
COST OF GOODS SOLD 1,197,099 611,065
----------- -----------
GROSS PROFIT 510,453 380,841
OPERATING EXPENSES 729,004 999,168
----------- -----------
LOSS FROM OPERATIONS (218,551) (618,327)
INTEREST EXPENSE 638,968 222,693
----------- -----------
NET LOSS $ (857,519) $ (841,020)
----------- -----------
LOSS PER COMMON SHARE (.04) (.04)
----------- -----------
12
Our results of operations for the nine-months ended March 31, 2006
included the operations of our Major Trees Houston Farm, Major Trees Tucson Farm
and S&S Plant Farm. Results of operations for the nine-months ended March 31,
2006 do not include the Texas Landscape Center, which was opened in April 2006.
We expect to do approximately 1.3 million in sales in the quarter ending June
30, 2006.
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of trees and other nursery products. Revenues increased from $991,906
for the nine-months ended March 31, 2005 to $1,707,552 for the nine-months ended
March 31, 2006. Costs of Good Sold increased from $611,065 for the nine-months
ended March 31, 2005 to $1,197,099 the nine-months ended March 31, 2006. Our
revenue and certain of our expenses (particularly our cost of goods sold) are
seasonal, with a majority of our revenue and costs of good sold being recognized
between March and June and between October and December of each year. As a
result, revenues, and related costs of good sold, for the quarters ended March
31, 2005 and March 31, 2006 are not representative of revenues or costs of good
sold for the respective fiscal years. Such results primarily illustrate the
seasonality of our business.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and depreciation. Operating expenses
decreased from $999,168 for the nine-months ended March 31, 2005 to $729,004 for
the nine-months ended March 31, 2006. This decrease is attributable to decreased
personnel. We expect our operating expenses as a percentage of revenue to
continue to decrease.
OTHER EXPENSE. Other expense consists primarily of interest paid on
outstanding notes payable and amortization of deferred loan costs. It also
includes loss on disposal of fixed assets. Other expense increased from $222,693
for the nine-months ended March 31, 2005 to $638,968 for the nine-months ended
March 31, 2006. This increase is a result of an increase in indebtedness
primarily in order to fund our expansion of inventory and our expansion costs.
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.
NET LOSS. Our net loss increased from $841,020 for the nine-months
ended March 31, 2005 to $857,519 for the nine-months ended March 31, 2006. The
increase in net loss is the result of the increased other expense described
above. We expect our net loss to decrease in the next year as a result of higher
sales, increased gross margins, and lower operating expenses as a percentage of
sales.
YEAR ENDED JUNE 30, 2005
The following table reflects selected operational results for Fiscal
2005:
YEAR ENDED
JUNE 30,
2005
-----------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 1,919,770
COST OF GOODS SOLD 1,424,309
-----------
GROSS PROFIT (LOSS) 495,461
TOTAL OPERATING EXPENSES 1,449,127
-----------
LOSS FROM OPERATIONS (953,666)
OTHER EXPENSE: 416,808
-----------
NET LOSS (1,370,474)
-----------
NET LOSS PER COMMON SHARE (.09)
-----------
13
Our results of operations for Fiscal 2005 reflect results from the
Major Trees Tucson Farm and the Major Trees Houston Farm. In March 2005, we
acquired the S&S Plant Farm. Our results of operations for Fiscal 2005 reflect 4
months of revenue and expense from the S&S Plan Farm. Our results of operations
for Fiscal 2005 do not include any sales from our Texas Landscape Center, which
commenced operations in April 2006.
REVENUE. Our revenues are derived primarily from the sale of trees and
other nursery products. Most of the trees we grow can be sold within three years
of being planted. Our revenue for Fiscal 2005 was $1,919,770. During Fiscal 2005
and prior years, we have significantly increased our tree inventory by planting
or acquiring additional trees. In addition, we acquired the S&S Farm 8 months
into Fiscal 2005. We expect annual revenue growth to accelerate in Fiscal 2006
and the fiscal year ending June 30, 2007 ("Fiscal 2007"), primarily as a result
of revenue associated with the S&S Plant Farm and the new Texas Landscape Center
in addition to sales from inventory planted at the Major Trees Houston Farm and
the Major Tree Tucson Farm.
COST OF GOODS SOLD. Cost of goods sold includes all operational
expenses associated with the operation of our three farms, including all
farm-related salaries, planting, maintenance and harvesting costs, equipment and
any depreciation related to the foregoing. During Fiscal 2005, our cost of goods
sold was $1,424,309. We primarily sold acquired inventory, for which we
generally record a higher expense in cost of goods sold than we do with respect
to inventory we have produced. In the future, we expect to decrease the
percentage of acquired inventory we sell and, as a result, expect our cost of
goods sold to decrease as a percentage of revenue.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and depreciation. Our operating expenses for
Fiscal 2005 were $1,449,127, consisting primarily of salaries and other G&A. In
light of expenses preparatory to, and associated with, this Form 10-SB and
anticipated ongoing compliance expenses, as well as projected expenses
associated with our existing retail store and a planned retail store, we expect
other general and administrative expenses to increase in Fiscal 2006 and Fiscal
2007.
INTEREST EXPENSE. Interest expense consists primarily of interest paid
on outstanding notes payable and amortization of deferred loan costs. Interest
expense was $372,792 for Fiscal 2005. We expect interest expense to increase in
the short-term as we expand our growing operations and add retail nurseries.
NET LOSS. Our net loss was $1,370,474 for Fiscal 2005. Our net loss
increased over prior periods because of higher interest expense, expenses
associated with stocks and options, lower gross margins, and higher salaries,
consulting, and other G&A. We expect our net loss to decrease in the next year
as a result of higher sales, increased gross margins, and lower operating
expenses as a percentage of sales.
14
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments and Expenditures. The following table discloses
aggregate information about our contractual obligations including long-term
debt, operating and capital lease payments, office lease payments, contractual
service agreements and the periods in which payments are due as of March 31,
2006.
LESS THAN
1 YEAR 2-3 YEARS 4-5 YEARS AFTER
(4/1/06 TO (4/1/07 TO (4/1/09 TO 5 YEARS
CONTRACTUAL OBLIGATIONS TOTAL 3/31/07) 3/31/09) 3/31/11) (AFTER 4/1/11)
---------------------------------- ---------- ---------- ---------- ---------- ----------
Operating leases -- -- -- -- --
Capital leases 427,720 97,629 195,258 134,833 --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 6,381,282 1,622,263 3,072,292 1,394,580 292,147
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations 6,809,002 1,719,892 3,267,550 1,529,413 292,147
---------- ---------- ---------- ---------- ----------
The following table summarizes the material terms of our convertible
and non-convertible notes (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:
CONVERSION
PRINCIPAL BALANCE AS OF MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 31, 2006 ORIGINATION DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------ --------------- ---------------- ----------------- ---------- ------------- -------------------
$20,000 $21,200 4/17/06 8/15/06; prorated 6% N/A Unsecured
annual interest
plus principal
due on maturity
$200,000 $56,000 9/15/05 8/15/06; $1,120 24% N/A Second lien on S&S
monthly Plant Farm
$200,000 $147,500 6/15/06 12/15/06; monthly 24% N/A Second lien on S&S
interest Plant Farm
$600,000 $201,080 9/27/2002 3/1/2007; 7% N/A First lien on all
$150,000 annually assets acquired
on March 1 from M7 Farms
$200,000 $77,149 9/27/2002 3/1/2007; $50,000 7% N/A First lien on
annually on March outstanding shares
1 of Major Trees, Inc.
$400,000 $273,202 5/26/2004 5/1/2009; $2,500 (1) N/A First lien on all
monthly assets acquired
from Major Trees
Houston Farm LLC
$25,000 $25,000 9/28/05 9/28/07; 12% (2) Lien on 3,845 trees
quarterly on the Major Trees
interest payments Tucson Farm
15
CONVERSION
PRINCIPAL BALANCE AS OF MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 31, 2006 ORIGINATION DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------ --------------- ---------------- ----------------- ---------- ------------- -------------------
$30,000 $30,000 9/13/05 10/1/07; 12% (2) Lien on 4,611 trees
quarterly on the Major Trees
interest payments Tucson Farm
$60,000 $60,000 11/03/05 11/1/07; 12% (2) Lien on 9,221 trees
quarterly on the Major Trees
interest payments Tucson Farm
$25,000 $25,000 11/14/05 12/1/07; 12% (2) Lien on 3,845 trees
quarterly on the Major Trees
interest payments Tucson Farm
$12,500 $12,500 11/16/05 12/1/07; 12% (2) Lien on 1,923 trees
quarterly on the Major Trees
interest payments Tucson Farm
$50,000 $50,000 1/26/06 1/1/08; quarterly 12% (3) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 1/26/06 1/1/08; quarterly 12% (3) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 1/31/06 1/1/08; quarterly 12% (3) Lien on 14,850
interest payments trees on the Major
Trees Tucson Farm
$150,000 $129,550 12/31/05 2/12/08; $1,370 7.25% N/A Trust deed on S&S
monthly Plant Farm
$80,000 $80,000 3/8/06 3/1/08; quarterly 12% (2) Lien on 12,308
interest payments trees on the Major
Trees Tucson Farm
$50,000 $50,000 4/12/06 3/1/08; quarterly 12% (2) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$242,000 $225,656 12/21/05 3/31/08; $2,016 18% (3) Trust deed on 119
monthly in Feb, acres of real
Mar, and April property located in
2006; $11,167 Midland County,
monthly beginning Texas
May 2006 until
maturity date
$70,000 $70,000 3/24/06 4/1/08; quarterly 12% (2) Lien on 10,770
interest payments trees on the Major
Trees Tucson Farm
16
CONVERSION
PRINCIPAL BALANCE AS OF MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 31, 2006 ORIGINATION DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------ --------------- ---------------- ----------------- ---------- ------------- -------------------
$50,000 $50,000 4/12/06 5/1/08; quarterly 12% (3) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 1/10/06 1/30/08; 12% (3) Lien on 14,850
quarterly trees on the Major
interest payments Trees Tucson Farm
(1) Accruing interest at 7% until May 2005, at 8% from May 2005 until May
2007 and at 9% from May 2007 until May 2009.
(2) Convertible with accrued interest into common stock at $0.95 per share
during the first twelve months and at $1.05 per share for the second
twelve months; we have agreed to register the shares of common stock
received upon conversion upon registration of any of our shares of
common stock.
(3) Convertible with accrued interest into common stock at $0.95 per share
during the first twelve months and at $1.10 per share for the second
twelve months; we have agreed to register the shares of common stock
received upon conversion upon registration of any of our shares of
common stock.
As of March 31, 2006, we had $284,792 in cash and cash equivalents.
This represents a decrease of $182,651 compared to June 30, 2005. Cash used
during the nine months ended March 31, 2006 includes approximately $712,889 used
in operations as well as $1,719,610 used in investing activities. Sources of
cash during the nine months ended March 31, 2006 included a net amount of
$2,310,176 from financing activities. Of the $2,310,176 of net cash provided by
financing activities, $1,504,500 represents net cash received less payments made
on convertible promissory notes issued to multiple parties from July 2005 -
March 2006, $360,823 represents net cash received less payments made on
non-convertible notes, $350,477 represents the proceeds from issuance of common
stock less offering costs. The $94,376 difference between the $2,310,176 of net
cash provided by financing activities and the $2,215,800 of cash itemized above
represents advances from related parties, payments on related party advances and
loan costs and payments on capital lease obligations.
As of June 30, 2005, we had $467,443 in cash and cash equivalents. Cash
used during the year ended June 30, 2005 includes approximately $926,296 used in
operations as well as $953,119 used in investing activities. Sources of cash
during the year ended June 30, 2005 included a net amount of $2,215,469 from
financing activities. Of the $2,215,469 of net cash provided by financing
activities, $1,777,656 represents net cash received less payments made on
convertible promissory notes issued to multiple parties from July 2004 - June
2005, $132,240 represents net cash received less payments made on
non-convertible notes, $352,723 represents the proceeds from issuance of common
stock less offering costs. The $47,819 difference between the $2,215,469 of net
cash provided by financing activities and the $2,263,619 of cash itemized above
represents related party advances, payments on related party advances and loan
costs and payments on capital lease obligations.
Our material capital expenditures for Fiscal 2005 included direct costs
of approximately $600,081to plant tree, shrub, and flower inventory, $514,119 to
purchase property and equipment and $300,000 to pay the cash portion of the
purchase price of S&S Plant Farm and $150,000 to pay the cash portion used to
merge with Profile Diagnostic Sciences, Inc.
Our material capital expenditures for the nine-months ended March 31,
2006 included direct costs of approximately $914,956 to plant tree, shrub, and
flower inventory, $1,771,917 to purchase property and equipment, and $950,000 to
build out our Texas Landscape Center.
17
We anticipate making capital expenditures during the fourth quarter of
Fiscal 2006 and Fiscal 2007. Specifically, resources permitting, we plan to
spend at least $1,500,000 to open a second reatail nursery and to replace
inventory sold during Fiscal 2006.
Liquidity. The following table reflects selected balance sheet data as
of June 30, 2005 and March 31, 2006.
MARCH 31, 2006 JUNE 30, 2005
-------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents............................ 215,968 338,291
Working capital (deficit)............................ (626,893) 1,037,064
Total assets......................................... 8,976,035 6,396,808
Retained deficit..................................... (3,048,593) (2,191,074)
Stockholders' equity................................. 440,192 498,145
As of March 31, 2006, we had $215,968 in cash and cash equivalents,
total current assets of $2,884,835 and currently liabilities of $3,511,728,
representing a current working capital deficit of $(626,893). Our current
liabilities as of March 31, 2006 include a $703,125 balance on a secured
convertible note due with one year, and a $754,351 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 8% per annum. Management may demand payment on 30 days written
notice.
Other than the informal and nonbinding commitments from management, we
do not have any specific commitments from third parties to provide financing
needed to cover any capital shortfalls with respect to our operations, planned
capital expenditures or near-term debt obligations. We caution that,
particularly in light of the early stage of our business, such financing may not
be available on favorable terms, or at all. We may be compelled to divert
substantial portions of our existing cash and future cash flow to the repayment
of debt, which would limit our ability to replace or expand inventory and
acquire additional farms. This would have an adverse affect on revenues in the
coming years. Certain 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.
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 October 29, 2005
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.
18
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.
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 3 1/2 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
o 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.
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 March 31, 2006, we had $215,968 in cash and cash equivalents and
a current account deficit of ($626,893). 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:
19
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.
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 Walmart, 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.
20
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 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 our
operations having a principal amount of $3,217,625 as of March 31, 2006. Of
these notes, $2,247,171.96 of which are secured by our farming and commercial
properties and $2,241,077.00 of which is secured by trees contained in our
inventory. As of March 31, 2006, our monthly interest payment with respect to
such notes was approximately $60,242 per month, and we are required to begin
paying down principal on these notes in 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 leverage, 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. 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 2007, 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 2007 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:
21
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 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 $3,048,593 as of March 31,
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 October 29, 2005
that includes an explanatory paragraph stating that recurring losses raise
substantial doubt about our ability to continue as a going concern. Our product
22
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.
WE MAY BE UNABLE TO MANAGE SIGNIFICANT GROWTH.
To successfully implement our business strategy, we must establish and
achieve substantial growth in our customer base through expansion of production
and sales from existing properties, through business acquisitions, and through
expansion into the retail nursery business. If achieved, significant growth
would place significant demands on our management and systems of financial and
internal controls, particularly because of the number of places of businesses
from which we operate or expect to operate. Moreover, significant growth would
require an increase in the number of our personnel, particularly within sales,
accounting and management. The market for such personnel remains highly
competitive, and we may not be able to attract and retain the qualified
personnel required by our business strategy. If successful in expanding our
business, we may outgrow our present management capacity, placing additional
strains on our human resources in trying to locate, manage and staff multiple
locations. If we are unable to adequately manage our projected growth, our
operations and financial condition may fail to improve, or even deteriorate.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS HAVE EFFECTIVE
CONTROL OF PENGE.
Our directors, officers, and 5% shareholders and their affiliates
control approximately 60% of our outstanding shares of common stock. These
directors, officers and affiliates effectively control all matters requiring
approval by the shareholders, including any determination with respect to the
acquisition or disposition of assets, future issuances of securities,
declarations of dividends and the election of directors. This concentration of
ownership may also delay, defer or prevent a change in control and otherwise
prevent shareholders other than our affiliates from influencing our direction
and future.
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.
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
23
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 44% of our revenue in Fiscal
2005.
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 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 limited 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.
24
OBTAINING ADDITIONAL CAPITAL THROUGH THE FUTURE SALE OF COMMON STOCK AND
DERIVATIVE SECURITIES WILL RESULT IN DILUTION OF SHAREHOLDER INTERESTS.
We plan to raise additional funds in the future by issuing additional
shares of common stock, or securities such as convertible notes, options,
warrants or preferred stock that are convertible into common stock. Any such
sale of common stock or other derivative securities will lead to further
dilution of the equity ownership of existing holders of our common stock.
OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS
OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK.
Shares of our common stock may be deemed to be "low-priced" or "penny
stock," resulting in increased risks to our investors and certain requirements
being imposed on some brokers who execute transactions in our common stock. In
general, a low-priced stock is an equity security that:
o Is priced under five dollars;
o Is not traded on a national stock exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market;
o 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;
25
o monthly accounts statements; and
o a written statement of the customer's financial
situation and investment goals.
ITEM 3. DESCRIPTION OF PROPERTY
We own a 272-acre tree and shrub farm located at 14660 South Highway
191 in Elfrida, Arizona, which is an approximately 90 minute drive from Tucson,
Arizona. (This farm is referred to as the Major Trees Tucson Farm.) The farm is
flat, desert landscape and is surrounded by other agricultural land. Water for
the farm is drawn from deep wells. This farm secures a $600,000 note maturing in
February 2010. The note accrues interest at 7% and had an outstanding balance of
$206,268.03 as of March 31, 2006. Principal payments of $75,000 are due on
annually on the note. We are permitted to prepay the note without penalty at any
time. In addition, the Major Trees Tucson Farm also secures a note for $370,125,
a $50,000 note, and a $280,646 note. Although we plan on increasing the amount
of inventory planted on this Major Trees Tucson Farm, we do not otherwise
anticipate renovating, improving, or developing this property. In the opinion of
our management, the Major Trees Tucson Farm is adequately covered by insurance.
We also own a 17-acre tree and shrub farm called the Major Trees
Houston Farm that is located at 19461 Mt. Pleasant Road in Montgomery, Texas,
which is an approximately 30 minute drive from Houston, Texas. The farm is
sloped and is surrounded by rolling hills. The farm is surrounded by national
forest, other agricultural land and residential development. It is very wet and
watered by both rainwater and wells. This farm secures a $400,000 note payable
maturing in May 2009. The note accrues interest at the rate of 7% during the
first year of the note (until May 2005), 8% during the second and third years of
the note (May 2005-May 2007) and 9% during the fourth and fifth years of the
note (May 2007-May 2009). This note had an outstanding balance of $272,202 at
March 31, 2006. The note requires monthly payments of $2,500; in addition, a
balloon payment of $250,000 is required in May of 2009. In addition, this farm
also secures a $370,125 note and a $400,000 note. Although we plan on increasing
the amount of inventory planted on this farm, we do not otherwise anticipate
renovating, improving, or developing this property. In the opinion of our
management, this farm is adequately covered by insurance.
We own the S&S Plant farm located at 4011 Todd Road in Midland, Texas,
which is primarily a plant and flower growing operation. The farm is situated on
50 acres, of which 8 acres are under greenhouse and shadehouse. We currently
have between 15-25 employees based on seasonality. We sell products to wholesale
customers in a 250 mile radius, and we provide products to our new retail center
in Midland. S&S is wholly owned by Penge Corp. This farm secures a $150,000 note
payable maturing in February 2008. The note accrues at the rate of 7.25% during
the term of the note. This note had an outstanding balance of $129,550 as of
March 31, 2006. The note requires monthly payments of $1,370. We are permitted
to prepay the note without penalty at any time and a final payment of $118,786
will be due on the note upon maturity in February 2008, assuming we do not make
any prepayments and make all other payments due under the note in a timely
manner. In addition, the S&S Plant Farm also secures a $200,000 note payable due
August 2006 and another $200,000 note payable due December 2006. Although we
plan on increasing the amount of inventory planted on this Major Trees Tucson
Farm, we do not otherwise anticipate renovating, improving, or developing this
property. In the opinion of our management, this farm is adequately covered by
insurance.
26
We own a retail location in Midland, Texas consisting of 4 acres of
real estate and a 13,000 square foot building. We recently completed a
conversion of the property into a retail store including a complete remodel of
the building and the addition of 32,000 square feet of greenhouse and 40,000
square feet of tree display area. This property secures a $379,083 first
mortgage maturing in March 2026. The note accrues interest at the rate of 6.75%
per annum, and we are required to make monthly payments of $3,316.25. This
property also secures a second mortgage of $450,000 maturing in January, 2008.
The note accrues interest at 12% per annum, and we are required to make
quarterly payments of $13,500. The property is adequately covered by insurance.
We own 7 acres of commercial property in San Angelo, Texas sharing an
intersection with Wal-Mart, Lowe's, and Sam's Club. This property secures a
first mortgage for approximately $1.1 million dollars maturing June 30, 2025.
The note accrues interest at 6% per annum, and we are required to make quarterly
payments of $18,241. This property secures a second mortgage of approximately
$200,000 maturing in January, 2007. The note accrues interest at 24% per annum,
and all amounts are payable in a single lump sum on the maturity date.
We maintain our corporate records at the Texas Landscape Center located
at 1501 North Fairgrounds, Midland, Texas 79707.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information with respect to the beneficial
ownership of our Common Stock, as of August 1, 2006, as to each person who
beneficially owns of record more than 5% of our outstanding Common Stock, as to
the Chief Executive Officer and each other executive officer whose compensation
from the Company for the fiscal year ended June 30, 2005 ("Fiscal 2005")
exceeded $100,000 (the "named executive officers"), each director and by all of
our directors and executive officers as a group. Except as otherwise indicated
in the footnotes to this table, all shares are owned directly, and the persons
named in the table have sole voting and investment power with respect to shares
shown as beneficially being owned by them.
BENEFICIAL OWNERSHIP OF COMMON STOCK
------------------------------------- -----------------------------------------------------
OWNERSHIP AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP(1) PERCENTAGE OWNERSHIP(2)
------------------------------------- ----------------------- --------------------------
EXECUTIVE OFFICERS AND DIRECTORS(3)
Kirk Fischer (4)
CEO and Chairman and Lori Fischer
Controller 4,100,000(4) 16.75%
KC Holmes (5)
President, CFO and Director 1,748,727(5) 7.15%
Jim Fischer(6)
Vice President of Operations
(Arizona) and Director 1,205,000(6) 4.93%
All Executive Officers and Directors
as a Group (5 Persons) 8,770,394 28.83%
27
BENEFICIAL OWNERSHIP OF COMMON STOCK
------------------------------------- -----------------------------------------------------
OWNERSHIP AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP(1) PERCENTAGE OWNERSHIP(2)
------------------------------------- ----------------------- --------------------------
5% SHAREHOLDERS
(WHO ARE NOT NAMED EXECUTIVE OFFICERS
OR DIRECTORS)
Curtis Schmid(7)
President of S&S Plant Farm 1,716,667 7.01%
(1) Ownership numbers include shares of our common stock subject to options
and warrants that are exercisable within 60 days of August 1, 2006.
(2) The percentages set forth above have been computed assuming the number
of shares of common stock outstanding equals the sum of (a) 24,472,942,
which is the number of shares of common stock actually outstanding on
August 1, 2006, and (b) shares of common stock subject to options,
convertible notes and similar securities exercisable to purchase common
stock within 60 days of such date by the selling shareholder with
respect to which such percentage is calculated.
(3) Business address is 1501 North Fairgrounds, Midland, Texas 79705.
(4) Includes 1,250,000 shares held of record by Lori L. Fischer, our
Controller and wife of Kirk Fischer, 250,000 shares held of record by
Quinn J. Fischer, 250,000 shares held of record by London C. Fischer
and 250,000 shares held of record by Britton K. Fischer, each a
dependent son of Kirk and Lori Fischer.
(5) Includes 148,727 shares held of record by 5th Genki LLC, an entity over
which Michelle Holmes, wife of K.C. Holmes, exercises voting and
investment control, 400,000 shares held of record by Alecia Monet
Holmes, a dependent daughter of KC and Michelle Holmes, 400,000 shares
held of record by Chance Jaxon Holmes, a dependent son of KC and
Michelle Holmes, 400,000 shares held of record by Brooklyn Elaine
Holmes, a dependent daughter of KC and Michelle Holmes and 400,000
shares held of record by Rian Michelle Holmes, a dependent daughter of
KC and Michelle Holmes.
(6) Includes 115,000 shares held of record by Ellen Fischer, Jim Fischer's
wife.
(7) Includes 25,000 shares held by Karlee Schmid, and 25,000 shares held by
Austin Schmid, both dependents of Curtis Schmid.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Certain information regarding our executive officers and directors is
set forth below. Our executive officers are appointed by, and continue to serve
at the will of, our board of directors. Our directors are elected or appointed
for terms that continue, absent resignation, death or removal by our
stockholders, until the later of the next annual meeting of stockholders or
until a replacement is duly appointed or elected and qualified.
NAME AGE POSITION
---- --- --------
Kirk Fischer 39 Chief Executive Officer and Chairman of the Board
KC Holmes 39 President, Chief Financial Officer, and Director
Jim Fischer 60 Vice President of Operations for Arizona Tree Farm
Operations and Director
Curtis Schmid 38 President of S&S Plant Farm
28
KIRK FISCHER, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD. Mr.
Fischer has served as Chief Executive Officer and Chairman of the Board of the
Company since it was founded in August 2002 and as Chief Financial Officer since
September 2004. Mr. Fischer's background covers a variety of different
businesses, serving primarily in senior management positions. Between 1999 and
2002, Mr. Fischer started, and served as chairman and chief executive officer
of, Microcap Financial Services, a company specializing in investor relations,
corporate strategy and consulting services for newer public companies, and
Microcap Financial Group, a finance and investment company. Mr. Fischer earned a
bachelor's degree in accounting from Brigham Young University. Mr. Fischer is
the husband of Lori Fischer, our Controller, and the son of Jim Fischer, our
Vice President of Operations and a director.
JIM FISCHER, VICE PRESIDENT OF OPERATIONS FOR ARIZONA TREE FARM
OPERATIONS AND DIRECTOR. Mr. Fischer has served as Vice President of Operations
and a director of the Company since it was founded in August 2002. Mr. Fischer
has over 30 years' experience working with Cenex-affiliated farm cooperatives
and businesses. Starting as general manager of the Wendell Grange Supply
operation in 1978, Mr. Fischer grew the business from one location to five
locations and over 100 employees. Mr. Fischer is the father of Kirk Fischer, our
Chief Executive Officer and Chairman of the Board, and father-in-law of Lori
Fischer, our Controller.
KC HOLMES, PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr. Holmes
has served as President and Chief Financial Officer of the Company since March,
2005 and, prior to that, from August 2002 until September 1, 2004. He also
served as Manager of Mergers & Acquisitions of Penge from late 2004 to early
2005. From 1996 to 2002, Mr. Holmes served in various capacities with The
Murdock Group as an executive and board member and with Q Comm International
(QMM) as a board member and consultant. He also served as an executive of NEBO
Products, an import/export wholesale business selling hardware and sporting
goods, from 1996 to 1999. Mr. Holmes graduated from Brigham Young University
with a degree in Psychology. Mr. Holmes is the cousin of Kirk Fischer, our Chief
Executive Officer, and Chairman of the Board, and the nephew of Jim Fischer, our
Vice President of Operations and a director.
CURTIS SCHMID, PRESIDENT S&S PLANT FARM. Mr. Schmid has served as
President and manager of S&S Plant Farm since March 1, 2005. Prior to that
Curtis was the longtime owner and manager of S&S Plant Farm. Curtis started S&S
from scratch in 1990 and built it into multi million dollar business over 15
years.
KEY EMPLOYEE
Certain information regarding a key employee is set forth below.
LORI FISCHER, CONTROLLER. Ms. Fischer has served as Controller of Penge
since it was founded in August 2002. Between 1999 and 2002, Ms. Fischer served
as controller of Microcap Financial Services, a company specializing in investor
relations, corporate strategy and consulting services for newer public
companies, and Microcap Financial Group, a finance and investment company. Ms.
Fischer earned a bachelor's degree in accounting from Brigham Young University.
Ms. Fischer is the wife of Kirk Fischer, our Chief Executive Officer and
Chairman of the Board, and the daughter-in-law of Jim Fischer, our director and
Vice President of Operations.
BOARD COMMITTEES
Our entire Board of Directors presently serves as our audit committee.
None of the members of the audit committee satisfy the independence requirements
applicable to audit committees of listed companies. In addition, the Board of
Directors has determined that the audit committee does not have a member
qualifying as an audit committee financial expert, as defined in Item 401(e) of
29
Regulation S-B. To save limited capital over the last several years, we have
chosen not to expand the size of our Board of Directors or offer cash
compensation to our directors. The absence of cash compensation makes recruiting
persons who are not otherwise interested in our company more difficult. For
these reasons, we do not have on our Board of Directors a person who would
qualify as an audit committee financial expert.
We do not presently have a standing nominating committee or
compensation committee, and we do not have a nominating committee charter or a
compensation committee charter.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
aggregate compensation earned during each of the fiscal years ended June 30,
2005, June 30, 2004 and June 30, 2003 from the Company by the named executive
officers.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ---------------------------- ------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
------------------------------ ----------- ----------- ---------- ----------- ------------- -------------- ------------ ------------
Kirk Fischer, 6/30/05 132,000 250,000
Chief Executive Officer 6/30/04 60,000 - - - - - -
6/30/03 5,500 - - - 1,000,000 - -
KC Holmes, 6/30/05 132,000 10,000 250,000
President, CFO 6/30/04 112,250 10,000 - - - - -
6/30/03 28,850 - - - 1,000,000 - -
OPTION/SAR GRANTS IN LAST FISCAL YEAR. The Company did not grant any
options to purchase common stock or stock appreciation rights to any named
executive officer during Fiscal 2005.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES. The following table sets forth the information concerning the
options to purchase capital stock of the named executive officers exercised
during Fiscal 2005 and the value of unexercised options held by the named
executive officers as of June 30, 2005.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED JUNE 30, 2005 JUNE 30, 2005
ON EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) ($)(1) UNEXERCISABLE UNEXERCISABLE (1)
----------------------------- ---------------- -------------------- --------------------------- --------------------------
Kirk Fischer
CEO and Chairman 1,000,000 190,000 (1) 0 0
KC Holmes
President, CFO and Director 1,000,000 190,000(1) 0 0
30
(1) Calculated as the difference between the exercise price of the option
($0.11) and the market price of a share of common stock on the date of exercise
of the option. The market price of the common stock on that date was assumed to
be $.30, the price nearest to that date at which shares of common stock were
sold in a private placement.
LONG-TERM INCENTIVE PLAN. We have not granted any LTIP awards to any
executive officer during the last fiscal year. We have never granted any LTIP
awards.
COMPENSATION OF DIRECTORS. Directors are reimbursed for the expenses
they actually incur in attending board meetings. Directors are not paid a fee
for their service or attendance at board meetings. During Fiscal 2005, we
granted no options to directors. Directors, whether or not employees, are
permitted to participate in our stock incentive plan.
EXECUTIVE EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE
OF CONTROL ARRANGEMENTS.
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 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 $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% incrase 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 Tuscon 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.
31
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discusses certain transactions that have occurred since
July 1, 2003, between us and our officers, directors, beneficial holders of 5%
or more of our common stock and certain others that may be deemed to be
affiliates.
In September 2003, we granted options to purchase 100,000 shares of our
common stock to Rocky Fischer, the brother of Kirk Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board, for consulting
services.
During Fiscal 2004, we paid Rocky Fischer, the brother of Kirk Fischer,
our Chief Executive Officer and Chairman of the Board $25,875 for consulting
services.
During Fiscal 2004 and Fiscal 2005, we provided the compensation
described in the section entitled "Executive Compensation" to the named
executive officers. We also compensated Lori Fischer, the Controller and wife of
Kirk Fischer, $106.075 in Fiscal 2004 and $38,000 in Fiscal 2005.
The table below summarizes advances made to us by management and other
related parties during Fiscal 2004 and Fiscal 2005 and the balance owed by Penge
to such individuals as of March 31, 2006:
BALANCE 2004 2004 BALANCE 2005 2005 BALANCE 2006 2006 3/31/06
INDIVIDUAL 6/30/03 ADVANCES PAYMENTS 6/30/04 ADVANCES PAYMENTS 6/30/05 ADVANCES PAYMENTS BALANCE
------------------ --------- ---------- --------- --------- ---------- ----------- --------- ----------- ---------- ----------
Jim Fischer -- 25,411 (25,411) -- -- -- --
KC Holmes 12,209 51,300 (63,509) -- 25,000 (19,519) 5,481 25,000 0 25,000
Kirk Fischer 511 36,700 (37,211) -- 125,000 (53,358) 71,642
Lori Fischer 3,524 127,388 (120,678) 10,234 2,898 (10,234) 2,898 95,500 63,500 32,000
---------- --------- --------- --------- ---------- ----------- --------- ----------- ---------- ----------
Total 16,244 240,799 (246,809) 10,234 152,898 (83,111) 80,021 120,500 63,500 57,000
In March of 2005, we paid Curtis Schmid $1,500,000 for the S&S Plant
Farm. He received $300,000 cash, $200,000 on an 11 month note, $500,000 on a 5
year note, 1,666,667 shares of common stock and $10,000 in additional inventory
buyout money.
During Fiscal 2004 and Fiscal 2005, respectively, we paid Rocky
Fischer, the brother of Kirk Fischer, our Chief Executive Officer, Chief
Financial Officer and Chairman of the Board, $24,020 and $25,875 for consulting
services.
In February 2005, we paid accrued stock bonuses of 50,000 shares to Jim
Fischer, 500,000 shares to Kirk Fischer and 500,000 shares to KC Holmes.
In February 2005, Rocky Fischer, Kirk Fischer, Jim Fischer, and KC
Holmes each paid cash and signed a promissory note to exercise 1,000,000 options
each to purchase Penge common stock.
In Fiscal 2005, Lori Fischer put her house up as collateral and
cosigned on a promissory note on behalf of Penge Corp in the amount of $172,020.
In Fiscal 2006, Lori Fischer loaned the company $95,500 and was paid
back $63,500.
In Fiscal 2006, KC Holmes loaned the company $25,000 and was paid back
$0.
32
ITEM 8. DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, $.001 par value, and 5,000,000 shares of preferred stock, $.001 par
value.
COMMON STOCK
As of March 31, 2006, there were 24,272,942 shares of our common stock
issued and outstanding. There were approximately 340 shareholders of record.
The holders of common stock are entitled to one vote per share on each
matter submitted to a vote of stockholders. In the event of liquidation, holders
of common stock are entitled to share ratably in the distribution of assets
remaining after payment of liabilities, if any. Holders of common stock have no
cumulative voting rights and the holders of a majority of the outstanding shares
have the ability to elect all of the directors. Holders of common stock have no
preemptive or other rights to subscribe for shares. Holders of common stock are
entitled to such dividends as may be declared by the board of directors out of
funds legally available for dividends. The rights, preferences and privileges of
holders of our common stock are subject to any series of preferred stock that we
may issue in the future, as described below.
PREFERRED STOCK
As of March 31, 2006, there were no shares of our preferred stock
issued or outstanding. Our board of directors has the authority to issue
preferred stock in one or more series and to fix the number, designation, power,
preferences and relative, participating, optional and other rights, and the
qualifications, limitations and restrictions thereof, if any, of any series of
preferred stock, including, without limitation, the following, without any
further vote or action by our shareholders:
o the distinctive designation of, and the number of shares of preferred
stock which shall constitute the series, which number may be increased
(except as otherwise fixed by the board of directors) or decreased (but
not below the number of shares thereof then outstanding) from time to
time by action of the board of directors;
o the dividend rate of such series, the conditions and times upon which
such dividends shall be payable, the relation which such dividends
shall bear to the dividends and/or other payments payable on or with
respect to any other class or classes of stock or series thereof, or on
the other series of the preferred stock, and whether dividends shall be
cumulative or noncumulative;
o the conditions upon which the shares of such series shall be subject to
redemption by the Company and the times, prices and other terms and
provisions upon which the shares of such series may be redeemed;
o whether or not the shares of such series shall be subject to the
operation of retirement or sinking fund provisions to be applied to the
purchase or redemption of such shares and, if such retirement or
sinking fund be established, the annual amount thereof and the terms
and provisions relative to the operation thereof and the relation
payments on such retirement or sinking fund shall bear to any payments
and/or distributions on or with respect to each other class or classes
of stock or series thereof, or on or with respect to the other series
of the preferred stock;
33
o whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes, with or without
par value, or of any other series of the preferred stock and, if
provision is made for conversion or exchange, the times, prices, rates,
adjustments and other terms and conditions of such conversion or
exchange;
o whether or not the shares of the series shall have voting rights, in
addition to the voting rights provided by law, as such voting rights
granted by law may be modified or limited in the provisions designating
such series, and, if so, subject to the limitations hereinafter set
forth, the terms of such additional voting rights; and
o the rights of the shares of such series in the event of voluntary or
involuntary liquidation, dissolution or upon distribution of assets of
the Company.
The issuance of preferred stock by our Board of Directors could adversely affect
the rights of holders of our common stock. The potential issuance of preferred
stock may
o have the effect of delaying or preventing a change in control
of the Company;
o discourage bids for the common stock at a premium over the
market price of the common stock; and
o adversely affect the market price of, and the voting and other
rights of the holders of, our common stock.
34
PART II.
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Shares of common stock are quoted on the OTC Pink Sheets under the
symbol "PNGC." Trading in our common stock is sporadic. We do not have access to
daily bid price information for our common stock; however, according to the OTC
Pink Sheets, the high and low sale prices for our common stock subsequent to the
closing of the merger on June 30, 2005 have been $2.00 per share and $0.05 per
share, respectively. As of close of business on July 31, 2006, the reported bid
price for our common stock was $0.20 and the ask price for our common stock was
$1.45.
COMMON STOCK OUTSTANDING AND AVAILABLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public
market or the prospect of such sales could adversely affect market prices for
our common stock (to the extent that any such market develops).
As of July 31, 2006, there were 24,272,942 shares of our common stock
outstanding held by approximately 340 holders of record. In addition, there were
845,000 shares of common stock authorized for issuance upon the exercise of
outstanding options and warrants granted pursuant to our stock option plan,
2,655,000 shares of common stock reserved for the future grant of stock options
under that plan, 6,100,450 shares of common stock issuable upon the conversion
of convertible notes payable.
Of our outstanding shares of common stock, approximately 93% are
"restricted securities," as defined in Rule 144 promulgated under the Securities
Act, and may be sold in the public market only if registered under the
Securities Act or if they qualify for an exemption from registration, including
an exemption under Rule 144. The holding period for substantially all such
restricted shares began to run on June 30, 2005.
In general under Rule 144, a person, including an "affiliate" of the
Company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of one percent of the then outstanding shares of common stock
(approximately 244,729 shares of common stock as of the date hereof) or the
average weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are subject to manner-of-sale
restrictions, notice requirements and the availability of current public
information about us. Rule 144(k) provides that a person who is not an
"affiliate" of the issuer at any time during the three months preceding a sale
and who has beneficially owned shares for at least two years is entitled to sell
those shares at any time without compliance with the public information, volume
limitation, manner of sale and notice provisions of Rule 144.
DIVIDENDS
We have never declared or paid cash dividends on our shares of common
stock. We currently intend to retain future earnings for use in our business
and, therefore, do not anticipate paying any dividends on our shares of common
stock in the foreseeable future.
35
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth below is certain information about the number of shares of
our common stock subject to options, warrants and other rights granted, or that
may be granted, under our equity compensation plans as of June 30, 2005. The
equity compensation plan that has been approved by security holders is the 2002
Stock Incentive Plan. We have no equity compensation plans that have not been
approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
future issuance under
Number of securities to equity compensation
be issued upon exercise Weighted-average exercise plans (excluding
of outstanding options, price of oustanding securities reflected
Plan category warrants and rights warrants and rights in column (a))
----------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 845,000 2,655,000
----------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders None None None
----------------------------------------------------------------------------------------------------------
Total 845,000 None 2,655,000
----------------------------------------------------------------------------------------------------------
ITEM 2. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings that,
singly or in the aggregate, would reasonably be expected to have a material
adverse effect on our business, financial condition or results of operations.
ITEM 3. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
On December 31, 2004 we terminated our engagement of Pritchett, Siler &
Hardy, P.C. ("Pritchett Siler") as our independent registered public accounting
firm. The decision to terminate Pritchett Siler was approved by our Board of
Directors, which functions as our audit committee. No report of Pritchett Siler
on our financial statements for the fiscal years ended June 30, 2003 or June 30,
2004 contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope, or accounting principals.
During the fiscal years ended June 30, 2003 and June 30, 2004, and
during the interim period between July 1, 2004 and the date of the this Report,
there were no disagreements with Pritchett Siler on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which disagreement, if not resolved to the satisfaction of Pritchett
Siler, would have caused it to make reference to the subject matter of the
disagreements in its reports. There were no "reportable events," as described in
Item 304(a)(1)(v) of Regulation S-K, during the fiscal years ended December 31,
2003 and December 31, 2004, and from July 1, 2004 to the date of this Report.
36
On April 8, 2005 with the approval of our Board of Directors, we
engaged Gregory & Eldredge, LLC (now Gregory & Associates, LLC) as our
independent public accountants. No consultations occurred between the Company
and Gregory & Associates, LLC during the two prior fiscal years, or in any
interim period preceding the appointment of Gregory & Associates, LLC, regarding
the application of accounting principles, the type of audit opinion that might
be rendered or any other accounting, auditing or financial reporting issue.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding all securities sold during the
period from July 1, 2003 through June 30, 2005 by Penge Nevada and sold by Penge
Delaware subsequent to, and in connection with, the June 30, 2005 merger by
which it acquired by business of Penge Nevada.
SHARES OF COMMON STOCK
Between July 2003 and September 2003, we offered and sold 680,000
shares of our common stock at $0.25 per share to seven investors. Of those
680,000 shares, 260,000 shares were sold for cash totaling $65,000 and 420,000
shares were sold for a subscription receivable of $105,000, which was
subsequently paid in full. 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.
Between August 2003 and September 2004, we offered and sold 717,332
shares of our common stock at $0.30 per share to 13 investors. Of these shares,
450,664 were sold for cash of $135,199, 166,667 shares were sold for a
subscription receivable of $50,000, and 100,001 shares were sold for a
subscription receivable of $30,000. 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.
37
In May 2004, we issued 400,000 shares of our common stock valued at
$120,000, or $0.30 per share, together with other consideration to H. Preston
and Shirley Franks in connection with our acquisition of certain assets of
Sampres Tree Farms, L.L.C. 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 Rule 506 promulgated under the
Securities Act and in Section 4(2) of the Securities Act, 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.
In February 2005, we issued 70,375 shares of our common stock valued at
$21,112, or $0.30 per share for consulting services rendered. The offer and sale
of such shares of our common stock were effected in reliance upon the exemption
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
In March 2005, we issued 1,150,000 shares of our common stock valued at
$345,000, or $0.30 per share to Kirk Fischer, and KC Holmes, and Jim Fischer
(officers of the company) as bonuses. 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.
38
In March 2005, we issued 1,166,667 shares of our common stock valued at
$500,000, or $0.30 per share, together with other consideration to Curtis and
Tiffany Schmid in connection with our acquisition of the capital stock of S&S
Plants Farm, Inc. 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 Rule 506 promulgated under the Securities Act
and 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
In June 2005, we issued 50,000 shares of our common stock valued at
$15,000, or $0.30 per share for consulting services. 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
Between April 2005 and June 2005, we offered and sold 922,000 shares of
our common stock at $0.50 per share. Of these shares, 872,000 were sold for cash
totaling $242,500 and subscriptions receivable of $193,500, and 50,000 shares
were issued for consulting services. 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.
39
As of June 30, 2005, Penge Nevada merged with a subsidiary of Profile
Diagnostic Sciences, Inc., a Delaware corporation with no current operations,
and all outstanding shares of common stock were exchange on a 1:1 ratio for
shares of common stock of Profile Diagnostic Sciences, Inc. 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" The offer and sale of such shares of common stock of Profile
Diagnostics Sciences, Inc. to stockholders of Penge Nevada was effected in
reliance upon the exemptions for sales of securities not involving a public
offering, as set forth in Rule 506 promulgated under the Securities Act and in
Section 4(2) of the Securities Act and rules promulgated thereunder, based upon
the following: (a) there were no more than 35 shareholders that were not
"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 the transaction; (c) the shareholders were provided
with disclosure materials complying with Rule 502(b) and all other information
requested in connection with their voting decision; (d) the shareholders
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; (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; and (f) a
Form D was filed with the SEC with respect to the transaction.
Between October 2005 and March 2006, we offered and sold 193,574 shares
of our common stock at $0.70 per share to a total of 7 investors. Of these
shares, all were sold for cash totaling $135,500. 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.
Between October 2005 and March 2006, Richard Wenger converted 5,000
shares of common stock at $0.30 per share that was held as options for cash
totaling $1,500. 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"
40
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.
In January 2006, we issued 50,000 shares of our common stock for
employee compensation to the family of Curtis Schmid, our President of S&S Plant
Farm. 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.
CONVERTIBLE NOTES PAYABLE
In March 2004, we issued a convertible note payable secured by both of
our farms totaling $300,000 to two investors. This note bears interest at 10%
per annum with unpaid principal and accrued interest convertible into shares of
our common stock at $0.30 per share. The offer and sale of such convertible note
payable 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.
Between March and June 2004, we issued unsecured convertible notes
payable totaling $55,000 to four investors. These notes bear interest at 10% per
annum, mature between September and December 2006 and are convertible into
shares of our common stock at $0.25 per share during the first six months, at
$0.35 per share during the second six months and at $0.50 per share thereafter.
The offer and sale of such convertible notes payable 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
41
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.
In July 2004, we issued a convertible note payable for $200,000 to two
investors, secured by 50,000 trees from our inventory, bearing interest at 10%
per annum and maturing in January 2007. The unpaid principal and interest on the
note is convertible into shares of our common stock at $0.24 per share during
the first year, at $0.30 per share during the second year and at $0.35 per share
thereafter. The offer and sale of such note 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 the 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.
In August 2004, we issued a convertible note payable for $50,000 to one
investor, secured by 7,693 trees from our inventory, bearing interest at 12% per
annum and maturing in August 2006. The unpaid principal and interest on the note
is convertible into shares of our common stock at $0.24 per share during the
first year, at $0.30 per share during the second year and at $0.35 per share
thereafter. The loan also included the issue of 50,000 warrants to buy stock at
$0.30 per share for 10 years. The offer and sale of such note 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 the 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.
Between February 2005 and March 2005, we issued convertible notes
payable totaling $630,000 to nine investors and were secured by 96,923 inventory
trees. These notes bear interest at 12% per annum, mature between February and
March, 2007 and are convertible into shares of our common stock at $0.30 per
share during the two year period. The offer and sale of such note 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
42
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to the 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.
In March 2005, we issued a convertible notes payable for $370,125.26 to
nine investors, secured by 56,942 inventory trees, bearing interest at 12% per
annum and maturing in March 2007. The notes are convertible into shares of our
common stock at $0.30 per share during the two year period. The offer and sale
of such notes 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 the
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.
Between April 2005 and June 2005, we issued convertible notes payable
totaling $848,000 to sixteen investors. These notes bear interest at 10%-15% per
annum, mature between April 2007 and June 2007 and are convertible into shares
of our common stock at $0.65 to $0.75 per share. The offer and sale of such
notes 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 the 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.
Between August 2005 and March 2006, we issued convertible notes payable
totaling $730,000 and were secured by 112,307 inventory trees. These notes bear
interest at 12% per annum, mature between August 2007 and March 2008 and are
convertible into shares of our common stock at $0.95 per share during the first
12 months, at $01.10 per share during the second 12 months. The offer and sale
of such notes 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
43
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 the
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.
OPTIONS TO PURCHASE SHARES OF COMMON STOCK
In September 2003, we granted Rocky Fischer 100,000 options to purchase
shares of our common stock at an exercise price of $0.30 per share during a term
of 10 years under our 2002 Stock Incentive Plan. In September 2004, we granted
Doug Bean 200,000 options to purchase shares of our common stock at an exercise
price of $0.30 per share during a term of 10 years under our 2002 Stock
Incentive Plan.
In February 2005, we granted consultants and employees 300,000 options
to purchase shares of our common stock at an exercise price of $0.30 per share
during a term of 2 years under our 2002 Stock Incentive Plan. The two
consultants assisted us with business planning and consulting, and the employee
was a longtime employee and mother of Curtis Schmid.
The offers and issuances of the options to purchase shares of our
common stock described in the preceding paragraph were effected in reliance upon
the exemption for offers and sales pursuant to certain compensatory benefit
plans as set forth in Rule 701 promulgated under the Securities Act, based upon
the following: (a) the offers and issuances were made pursuant to a written
compensatory benefit plan established by us for the compensation of our
officers, employees, directors, consultants and other permitted persons; (b) the
recipients of such options were officers, employees, directors, consultants or
other permitted persons at the time of the issuance of the options (and any
recipients that were consultants provided bona fide services unrelated to a
capital-raising transaction or the promotion of a market for our stock in
exchange for such options); (c) we were not subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, at the time of issuance of the options; (d) the aggregate sale price,
calculated in accordance with Rule 701, of the options issued in reliance on
Rule 701 during any 12-month period did not exceed $1 million; (e) all
recipients were provided with certain disclosure materials and all other
information requested with respect to our company, including a copy of the
governing compensatory benefit document; (f) the option recipients 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 (g) the governing option agreement requires that, unless
otherwise permitted by law, a legend be 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.
In August 2004, we offered and sold options to purchase 50,000 shares
of our common stock to a single investor in connection with a $50,000 secured
note payable. The offer and sale of such options to purchase 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 Rule 506 promulgated
under the Securities Act and in Section 4(2) of the Securities Act, 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
44
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 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation, as amended and restated (our
"Certificate") and bylaws provide that, except to the extent prohibited by the
Delaware General Corporate Law (the "DGCL"), as amended, our directors shall not
be personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as directors of the Company.
Our Certificate and bylaws provide that the Company shall indemnify, to
the extent permitted by law, any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative) by reason
of the fact that such person is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
or to be paid in settlement reasonably incurred by such person in connection
with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. We are not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, we have been informed
that in the opinion of the SEC such indemnification is contrary to public policy
as expressed in the Securities Act and is, therefore, unenforceable.
45
PART F/S
Attached hereto beginning on Page F-1 following the signature pages are the
following audited financial statements of Penge Corp and its consolidated
subsidiaries.
BEGINNING ON
1. PENGE CORP AND SUBSIDIARIES PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheet as of June 30, 2005 F-2
Consolidated Statements of Operations for the year ended June 30, 2005 F-4
Consolidated Statements of Shareholders' Equity for the year ended June 30, 2005 F-5
Consolidated Statements of Cash Flows for the year ended June 30, 2005 F-8
Notes to Consolidated Financial Statements F-12
2. PENGE CORP AND SUBSIDIARIES* PAGE
----
Balance Sheet as of March 31, 2006 (Unaudited) F-37
Statements of Operations for the nine-month periods ended March 31, 2006 and 2005
(Unaudited) F-39
Statements of Cash Flows for the nine-month periods ended March 31, 2006 and 2005
(Unaudited) F-40
Notes to Financial Statements F-43
3. S&S FARMS INC. PAGE
----
Balance Sheet as of March __, 2005 (Unaudited) **
Statements of Operations for the eight-month period ended February 28, 2005 (Unaudited) **
Statements of Cash Flows for the eight-month period ended February 28, 2005 (Unaudited) **
Notes to Financial Statements **
4. PRO FORMA FINANCIAL STATEMENTS (PENGE CORP AND S&S FARMS, INC.)* PAGE
----
Background Information Regarding Pro Forma Financial Statements* **
Pro Forma Combined Balance Sheet as of February 28, 2005* **
Pro Forma Combined Statement of Operations for the eight months ended February 28, 2005* **
* Audited annual financial statements to be filed by amendment.
** Confirming need to file. To be filed by amendment.
46
PART III
ITEMS 1 & 2. INDEX AND DESCRIPTION TO EXHIBITS
INCORPORATED BY REFERENCE/
EXHIBIT NO. EXHIBIT FILED HEREWITH
-------------- --------------------------------------------------------- ---------------------------------
Incorporated by reference to the
2.1 Asset Purchase Agreement by and Among Penge Corp, Kirk Company's Registration Statement
Fischer and H. Preston and Shirley M. Franks along with on Form SB-2, File Number
Major Trees Houston Farm L.L.C. dated as of May 20, 333-119947, filed with the
2004 and exhibits Commission on October 25, 2004.
2.3 Asset Purchase Agreement by and Among Penge Corp, Kirk [to be filed by amendment]
Fischer and Curtis Schmid along with S&S Tree Farm
dated as of March 2005 and exhibits
2.4 Agreement and Plan of Merger by and among Penge Corp., Filed herewith
Penge Acquisition Corp., and Profile Diagnostics
Sciences, Inc. dated June 30, 2005
4.1 Certificate of Incorporation, as amended to date Filed herewith
4.2 Bylaws, as amended to date Filed herewith
4.3 Form of Common Stock Certificate [to be filed by amendment]
10.1 2002 Stock Incentive Plan Incorporated by reference to the
Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.2 Form of Incentive Stock Option Agreement Incorporated by reference to the
Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.3 Form of Non Statutory Option Agreement Incorporated by reference to the
Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
47
10.4 Form of Convertible Note Purchase Agreement Incorporated by reference to the
Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.5 Form of Convertible Promissory Note Incorporated by reference to the
Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.6 $400,000 Real Estate Lien Note and Deed of Trust Incorporated by reference to the
between Penge Corp, Kirk Fischer and Major Trees Company's Registration Statement
Houston Farm, L.L.C. and H. Preston Franks and Shirley on Form SB-2, File Number
M. Franks dated May 26, 2004 333-119947, filed with the
Commission on October 25, 2004.
10.7 $200,000 Promissory Note between Penge Corporation and Incorporated by reference to the
Steven Sutherland dated September 27, 2002 Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.8 $600,000 Promissory Note between Penge Corporation and Incorporated by reference to the
Roger Major and Barbara Major dated September 27, 2002 Company's Registration Statement
on Form SB-2, File Number
333-119947, filed with the
Commission on October 25, 2004.
10.9 $100,000 Promissory Note between Penge Corporation and Filed herewith
Curtis & Tiffany Schmid
10.10 $200,000 Real Estate Lien Note between Penge [to be filed by amendment]
Corporation and Mark Reis
10.11 $20,000 Promissory Note between Penge Corporation and Filed herewith
Stefan Weiss
10.12 $200,000 Promissory Note between Penge Corporation and Filed herewith
Philip Oleson
10.13 $500,000 Note Payable between Penge Corporation and [to be filed by amendment]
Curtis Schmid
48
10.14 $172,000 Note Payable between Penge Corporation and [to be filed by amendment]
Monitor Finance/First Capital
10.15 $280,646 Note Payable between Penge Corporation and [to be filed by amendment]
Monitor Finance/First Capital
10.16 $85,577 Note Payable between Penge Corporation and [to be filed by amendment]
Monitor Finance/First Capital
10.17 $150,000 Promissory Note between [S&S Farms] and [to be filed by amendment]
American State Bank
10.18 Form of Convertible Note Payable bearing 12% interest Filed herewith
and convertible at $0.65 per share during the first
year and $0.75 per share during the second year
10.19 Form of Convertible Note Payable bearing 12% interest Filed herewith
and convertible at $0.95 per share during the first
year and $1.05 per share during the second year
10.20 Form of Convertible Note Payable bearing 12% interest Filed herewith
and convertible at $0.95 per share during the first
year and $1.10 per share during the second year
10.21 Form of Secured Note Payable Filed herewith
10.22 Employment Agreement with Kirk Fischer Filed herewith
10.23 Employment Agreement with KC Holmes Filed herewith
10.24 Employment Agreement with Jim Fischer Filed herewith
10.25 Employment Agreement with Curtis Schmid Filed herewith
21.1 Subsidiary List Filed herewith
23.1 Consent of Independent Registered Public Accounting Filed herewith
Firm
49
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PENGE CORP
Date: August 14, 2006 By: /s/ Kirk Fischer
-------------------------------------
Kirk Fischer, Chief Executive Officer
50
PENGE CORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
PENGE CORP. AND SUBSIDIARIES
CONTENTS
PAGE
----
-- Report of Independent Registered Public Accounting Firm F-1
-- Consolidated Balance Sheets, June 30, 2005 F-2
-- Consolidated Statements of Operations,
for the year ended June 30, 2005 F-4
-- Statement of Stockholders Equity for the year
ended June 30, 2005 F-5
-- Consolidated Statements of Cash Flows, for the year
ended June 30, 2005 F-8
-- Notes to Consolidated Financial Statements F-12
GREGORY & ASSOCIATES, LLC
CERTIFIED PUBLIC ACCOUNTANTS
4631 SO. SYCAMORE DR. o SALT LAKE CITY, UTAH 84117
(801) 277-2763 PHONE o (801) 277-6509 FAX
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PENGE CORP. AND SUBSIDIARIES
Midland, TX 79708
We have audited the accompanying consolidated balance sheet of Penge Corp., and
subsidiaries as of June 30, 2005, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended June 30,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal controls over financial reporting. Our audit included consideration of
internal controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal controls
over financial reporting. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements audited by us present fairly, in all material
respects, the financial position of Penge Corp., and subsidiaries as of June 30,
2005, and the results of its consolidated operations and its consolidated cash
flows for the year ended June 30, 2005, in conformity with generally accepted
accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has not yet established profitable operations
and has incurred significant losses since its inception. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 13.
The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Salt Lake City, Utah
October 29, 2005 except for
Note 18 at to which the Date is July 31, 2006
F-1
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2006
----------
CURRENT ASSETS:
Cash $ 338,291
Accounts receivable, net 129,152
Inventories, net 1,681,832
Prepaid assets 4,098
----------
Total Current Assets 2,153,373
PROPERTY, PLANT AND EQUIPMENT, net 2,624,858
LAND HELD FOR SALE 1,394,481
OTHER ASSETS:
Deferred loan costa 68,483
Deposits 560
Goodwill 150,000
Definite-life intangible assets, net 25,053
----------
Total Other Assets 244,096
----------
$6,396,808
==========
[Continued]
The accompanying notes are an integral part of this
consolidated financial statement
F-2
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES & SHAREHOLDERS' EQUITY
June 30,
2006
------------
CURRENT LIABILITIES:
Current portion of convertible notes payable $ --
Current portion of notes payable 46,400
Current portion of related party notes payable 273,198
Accounts payable 601,104
Related party accounts payable 45,478
Customer deposits 3,271
Contingent derivative liabilities 56,217
Other accrued liabilities 90,641
-----------
Total Current Liabilities 1,116,309
LONG-TERM DEBT:
Convertible notes payable, less current portion 4,332,354
Notes payable, less current portion 1,735,312
Related party notes payable, less current portion 1,038,417
Related party convertible notes payable 450,000
-----------
Total Long-term Debt 7,556,083
-----------
8,672,392
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, 23,132,373 shares issued and outstanding 23,132
Addtional paid-in capital 3,249,364
Accumulated (deficit) (2,191,074)
-----------
1,081,422
Less stock subscriptions receivable - related party (583,277)
-----------
498,145
-----------
$ 9,170,537
===========
The accompanying notes are an integral part of this
consolidated financial statement
F-3
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
June 30,
2005
-----------
NET REVENUES:
Farm Crop Sales $ 1,919,770
Total Net Revenues 1,919,770
COST OF GOODS SOLD 1,424,309
-----------
GROSS PROFIT 495,461
OPERATING EXPENSES:
Salaries, Wages and Related Expenses 808,521
Consulting 148,800
Travel 72,440
Other General and Administrative 419,366
-----------
Total Operating Expenses 1,449,127
LOSS FROM OPERATIONS (953,666)
OTHER INCOME (EXPENSE):
Interest income 128
Interest expense (372,792)
Loss on disposal of fixed assets (44,144)
-----------
Total Other (Expense) (416,808)
-----------
LOSS BEFORE INCOME TAXES (1,370,474)
CURRENT TAX EXPENSE --
CURRENT TAX (BENEFIT) --
-----------
NET LOSS $(1,370,474)
===========
BASIC AND DILUTED LOSS
PER COMMON SHARES $ (0.09)
-----------
The accompanying notes are an integral part of this
consolidated financial statement
F-4
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
Preferred Stock Common Stock Additional
------------------------ ------------------------- Paid-in Accumulated Subacriptions
Shares Amount Shares Amount Capital Deficit Receivable
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 2004 -- $ -- 12,852,331 12,852 1,110,488 (820,600) (50,000)
Issuance of shares for cash at
$.30 per share, July through
August 2004 -- -- 100,001 100 29,900 -- --
Fair value of warrants issued
in connection with notes
payable, September 2004 -- -- -- -- 15,000 -- --
Convertible note payable proceeds
allocated to beneficial
conversion feature,
September 2004 -- -- -- -- 50,000 -- --
Compensation for options granted
to purchase 200,000 shares of
common stock for consulting
services rendered, September 2004 -- -- -- -- 60,000 -- --
Issuance of shares in payment of
consulting services rendered at
$.30 per share, February 2005 -- -- 70,375 70 21,043 -- --
Compensation for options granted
to purchase 300,000 shares of
common stock for consulting
services rendered February 2005 -- -- -- -- 43,755 -- --
[Continued]
The accompanying notes are an integral part of this consolidated financial statement
F-5
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
(CONTINUED)
Preferred Stock Common Stock Additional
------------------------ ------------------------- Paid-in Accumulated Subacriptions
Shares Amount Shares Amount Capital Deficit Receivable
---------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of shares for employee
services rendered, February
through March 2005 -- -- 1,150,000 1,150 343,850 -- --
Exercised options to purchase
shares at $.10 per share and
at $.11 per share for
subscriptions receivable,
February 2005 -- -- 4,000,000 4,000 416,000 -- (420,000)
Issuance of shares to acquire S&S
Plant Farms, Inc. at $.30 per
share, March 2005 -- -- 1,666,667 1,667 498,333 -- --
Issuance of shares for cash and
subscriptions receivable at
$.50 per share, April through
June 2005 -- -- 872,000 872 435,128 -- (193,500)
Issuance of shares upon conversion
of note payable and accrued
interest, at $.24 per share,
June 2005 -- -- 847,032 847 202,441 -- --
Issuance of shares in payment of
consulting services rendered at
$.50 per share, June 2005 -- -- 50,000 50 24,950 -- --\
[Continued]
The accompanying notes are an integral part of this consolidated financial statement
F-6
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
(CONTINUED)
Preferred Stock Common Stock Additional
------------------------ ------------------------- Paid-in Accumulated Subacriptions
Shares Amount Shares Amount Capital Deficit Receivable
---------- ----------- ----------- ----------- ----------- ----------- -----------
Payments received on stock
subscription receivables -- -- -- -- -- -- 80,223
Effect of recapitalization of
subsidiary, June 2005 -- -- 1,523,967 1,524 (1,524) -- --
Net loss for the year
ended June 30, 2005 -- -- -- -- -- (1,370,474) --
---------- ----------- ----------- ----------- ----------- ----------- -----------
-- $ -- 23,132,373 $ 23,132 $ 3,249,364 $(2,191,074) $ (583,277)
========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this consolidated financial statement
F-7
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
June 30,
2006
-----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,370,474)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of deferred loan costs 57,749
Amortization of discounts on notes payable 62,096
Bad debt expense 5,334
Impairment of inventory (100,000)
Depreciation and amortization 143,803
Contingent derivative liabilities 12,229
Loss on sale of equipment 44,144
Non-cash expense related to shares and options issued 494,868
Changes in assets and liabilities:
Accounts receivable (119,693)
Inventories (600,081)
Prepaid expenses (1,776)
Refundable deposits (40)
Accounts payable 422,132
Accrued liabilities 20,142
Customer deposits 3,271
-----------
Net Cash Used by Operating Activities (926,296)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to purchase property and equipment (514,119)
Proceeds from sale of property and equipment 11,000
Cash paid for business acquisitions (450,000)
-----------
Net Cash Used by Investing Activitie (953,119)
-----------
[Continued]
The accompanying notes are an integral part of this
consolidated financial statement
F-8
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Year Ended
June 30,
2006
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party advances 281,735
Payments on related party advances (286,825)
Payment of loan costs (108,060)
Proceeds from convertible notes payable 1,387,656
Payments on convertible notes payable (10,000)
Proceeds from related party convertible notes payable 450,000
Proceeds from notes payable 302,666
Payments on notes payable (40,750)
Proceeds from related party notes payable 85,000
Payments on related party notes payable (198,676)
Proceeds from issuance of common stock 352,723
-----------
Net Cash Provided by Financing Activities 2,215,469
-----------
INCREASE IN CASH AND EQUIVALENTS 336,054
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD (8,763)
-----------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 327,291
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 192,747
Income Taxes $ --
[Continued]
The accompanying notes are an integral part of this
consolidated financial statement
F-9
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended June 30, 2005
In July 2004, the Company issued a $200,000 convertible note payable and
recorded a discount of $50,000 for the beneficial conversion feature of the
note.
In August 2004, the Company issued a $50,000 note payable and recorded a
discount of $15,000 for warrants to purchase 50,000 shares of common stock
issued in connection with the note payable.
In September 2004, the Company granted options to purchase 200,000 shares
of common stock for consulting services rendered valued at $60,000.
In February 2005, the Company granted options to purchase 300,000 shares of
common stock for consulting services rendered valued at $90,000.
In February through March 2005, the Company issued 1,150,000 shares of
common stock for employee services rendered valued at $345,000.
In February 2005, officers of the Company exercised options to purchase
2,000,000 shares of common stock at $.10 and 2,000,000 shares of common stock at
$.11 per share for subscriptions receivable of $420,000.
In March 2005, the Company issued 1,166,667 shares of common stock valued
at $500,000, issued a $200,000 note payable, issued a $500,000 note payable, and
paid $300,000 cash to acquire 100% of S&S Plant Farm, Inc.'s capital stock.
Through the acquisition, the Company acquired inventory of $219,949, property
and equipment of $1,321,918, and assumed accounts payable of $41,866.
In June 2005, the Company issued 412,000 shares of common stock for
subscriptions receivable of $193,500 and cash of $12,500.
In June 2005, the Company issued 847,032 shares of common stock upon the
conversion of a $200,000 note payable with accrued interest of $3,288.
In June 2005, the Company issued 50,000 shares of common stock in payment
of consulting services rendered valued at $25,000.
In June 2005, the Company sold property to an employee with a net book
value of $50,371 for $10,000 cash and a receivable of $1,000.
[Continued]
The accompanying notes are an integral part of this
consolidated financial statement
F-10
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(CONTINUED):
In June 2005, the Company issued 1,523,967 shares of common stock and paid
$150,000 in the merger with Profile Diagnostic Sciences, Inc. And recorded
$150,000 of goodwill.
In June 2005, the Company purchase land by issuing a $1,166,319 note
payable and paying cash of $208,162
The accompanying notes are an integral part of this
consolidated financial statement
F-11
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Penge Corp., ("Parent") formerly Profile Diagnostic
Sciences, Inc., was organized under the laws of the State of Nevada and was
reincorporated in Delaware by a Merger on May 17, 1987.
Penge Acquisition Corp., a wholly-owned subsidiary of the Parent and
incorporated in Nevada.
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. On September 27, 2002, Penge
acquired MT Subsidiary and certain assets of M7 Farms pursuant to a
Purchase Agreement signed August 14, 2002. Pursuant to the agreement, Penge
acquired certain assets from M7 Farms and all of its common stock wherein
MT Subsidiary became a wholly-owned subsidiary of Penge.
S&S Plant Farms, Inc. ("S&S Subsidiary") was organized under the laws of
the State of Texas on February 23, 1995. On March 1, 2005, Penge acquired
S&S Subsidiary pursuant to a Stock Purchase Agreement effective March 1,
2005. Pursuant to the agreement, Penge acquired all of S&S Subsidiary's
common stock wherein S&S Subsidiary became a wholly-owned subsidiary of
Penge. The financial statements include operations of S&S Plant Farms, Inc.
from March 1, 2005 through June 30, 2005.
On June 30, 2005, the Parent completed a plan of reorganization and stock
exchange agreement with Penge Corp. wherein the Parent issued common shares
to acquire all the issued and outstanding shares of Penge Corp (a reverse
acquisition). The reorganization further merged Penge Acquisition Corp,
with and into Penge, wherein Penge became a wholly-owned subsidiary of the
Parent. In connection with the reorganization Profile Diagnostics Sciences,
Inc. name was changed to Penge Corp., the officers and directors of Penge
became the officers and directors of Parent and Penge paid $150,000 to
Tyrant LLC an entity owned by shareholders of the Parent.
Parent, Penge, MT Subsidiary, and S&S Subsidiary, ("the Company") grow
landscaping and garden plants, flowers, shrubs, trees and other
agricultural products for sale to retail nurseries and landscape
professionals 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.
F-12
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATION -The financial statements presented reflect the accounts of
Parent, Penge, MT Subsidiary, and S&S 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 $148,085 in excess of federally
insured limits at June 30, 2005.
ACCOUNTS RECEIVABLE - The Company records accounts receivable at the lower
of cost or fair value. The Company recognizes interest income on an account
receivable based on the stated interest rate for past-due accounts over the
period that the account is past due. At June 30, 2005, the Company has an
allowance for doubtful accounts of $5,503, 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 - Growing crops 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; they do not have any
individually significant items. Because of 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 cost or market using the first-in
first-out (FIFO) method.
F-13
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
estimated net realizable value.
INTANGIBLE ASSETS - The Company accounts for their intangible assets in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 establishes three
classifications for intangible assets including definite-life intangible
assets, indefinite-life intangible 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.
STOCK OFFERING COSTS - Costs related to proposed stock offerings are
deferred and offset against the proceeds of the offering. In the event a
stock offering is unsuccessful, the costs related to the offering are
written off to expense.
PRODUCT WARRANTY - The Company warrants their agricultural products against
damage that may occur prior to delivery to the customer. At June 30, 2005,
the Company has established a reserve for future warranty expense of $0.
REVENUE RECOGNITION - The Company's revenue comes primarily from the sale
of agricultural products. The Company recognizes revenue from the sale of
agricultural products when rights and risk of ownership have passed to the
customer, there is persuasive evidence of a sales arrangement, product has
been shipped or delivered to the customer, the price and terms are
finalized and collection of the resulting receivable is reasonably assured.
The Company has historically generated revenue from business consulting
services.
F-14
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION - The Company has one stock-based employee
compensation plan [SEE NOTE 10]. The Company accounts for their plan under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. The following table illustrates the effect on net income
and loss per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
the Company's stock-based employee compensation.
June 30, 2005
-------------
Net loss, as reported $ (1,270,474)
Add: Stock-based employee
compensation expense included in
reported net loss -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method -
-------------
Pro forma net loss (1,270,474)
-------------
Loss per common share, as reported $ (0.08)
Loss per common share, pro forma $ (0.08)
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes" [SEE NOTE 11].
LOSS PER SHARE - The Company calculates loss per share in accordance with
the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Share." Basic earnings per common share (EPS) are based on the weighted
average number of common shares outstanding during each period. Diluted
earnings per common share are based on shares outstanding (computed as
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 note payable. [SEE NOTE 12].
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.
F-15
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ENACTED ACCOUNTING STANDARDS - The Emerging Issues Task Force has
issued EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." This Issue addresses the meaning of
other-than-temporary impairment and its application to debt and equity
securities. The Company does not expect this statement to have a material
impact on its financial position, results of operations or liquidity.
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 153, "Exchanges of Nonmonetary Assets an amendment to APB Opinion
No. 29." This statement requires exchanges of similar productive assets to
now be accounted for at fair value, the basic principle for nonmonetary
transactions, unless the exchange lacks commercial substance. The Company
does not expect the adoption of SFAS No. 153 to have a material impact on
its financial position, results of operations or liquidity.
In December 2004, the FASB issued two Staff Positions that provide
accounting guidance for the effects of the American Jobs Creation Act of
that was signed into law on October 22, . SFAS 109-1, "Application of FASB
Statement No. 109, `Accounting for Income Taxes,' to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act
of " states the manufacturers' deduction provided for under this
legislation should be accounted for as a special deduction instead of a tax
rate change. SFAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004", allows additional time to evaluate the effects of the
legislation for repatriation of foreign earnings. The Company does not
expect these statements to have a material impact on its financial
position, results of operations or liquidity.
In December, the FASB issued SFAS No. 123R, "Share-Based Payments". SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation", and supersedes APB 25. Among other items, SFAS No. 123R
eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments, based on the grant date fair
value of those awards, in the financial statements. The effective date of
SFAS No. 123R is the first reporting period beginning after December 31,
2005. The Company has not yet determined the model it will use to measure
the fair value of awards of equity instruments to employees upon the
adoption of SFAS No. 123R. The impact of SFAS No. 123R on the Company's
results of operations cannot be predicted at this time because it will
depend on the number of equity awards granted in the future, as well as the
model and assumptions used to value the awards.
F-16
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS
PROFILE DIAGNOSTIC SCIENCES, INC. - On June 30, 2005, Profile Diagnostic
Sciences, Inc., Parent, completed a plan of reorganization and stock
exchange agreement with Penge Corp. wherein the Parent issued common shares
to acquire all the issued and outstanding shares of Penge Corp (a reverse
acquisition). The reorganization further merged Penge Acquisition Corp,
with and into Penge, wherein Penge became a wholly-owned subsidiary of the
Parent. In connection with the reorganization Profile Diagmostics Scienses,
Inc. name was changed to Penge Corp., the officers and directors of Penge
became the officers and directors of Parent and Penge paid $150,000 to
Tyrant LLC, an entity controlled by sharesholders of the Parent.
S&S PLANT FARMS, INC. - On March 1, 2005, Parent acquired S&S Plant Farms,
Inc. pursuant to the Stock Purchase Agreement effective March 1, 2005.
Penge issued 1,667,000 shares of common stock valued at $500,000, issued a
$200,000 note payable, issued a $500,000 note payable, and paid $300,000 in
cash to acquire 100% of S&S Plant Farms, Inc.'s capital stock. The
financial statements include operations of S&S Plant Farms, Inc. from March
1, 2005 through June 30, 2005.
The following shows how the purchase price was allocated to the assets
acquired from S&S Plant Farms, Inc. at March 1, 2005:
March 1, 2005
---------------
Inventory $ 219,949
Property, plant and equipment 1,321,917
Accounts payable (41,866)
---------------
$ 1,500,000
---------------
SAMPRES TREE FARMS, L.L.C. - On May 26, 2004, Parent acquired certain
assets of Sampres Tree Farms L.L.C. pursuant to an Asset Purchase
Agreement. Parent issued 400,000 shares of common stock valued at $120,000,
issued a $400,000 note payable and paid $150,151 in cash to acquire the
assets. The Company has accounted for the acquisition as an asset purchase.
The purchase price was allocated to the assets acquired as follows:
May 26, 2004
---------------
Inventory $ 133,051
Property, plant and equipment 537,100
---------------
$ 670,151
---------------
F-17
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consist of the following at:
June 30, 2005
---------------
Raw materials $ 255,701
Growing crops 1,476,131
Allowance for obsolete / slow
moving inventory (50,000)
---------------
$ 1,681,832
---------------
All of the Company's inventories are collateral for certain notes payable
[See Notes 6, 7, 8, and 9].
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following at:
Estimated
Useful Lives of June 30,
Assets (Years) 2005
--------------- ------------
Office furniture and equipment 1 - 10 $ 36,126
Farm equipment 2 - 15 1,468,073
Buildings 20 - 30 715,110
Land not applicable 492,753
Construction in progress not applicable 131,329
------------
Total 2,843,391
Less accumulated depreciation (218,533)
------------
Property, Plant and Equipment, net $ 2,624,858
------------
Depreciation expense for the year ended June 30, 2005 was $132,240. All of
the Company's property and equipment are collateral for certain notes
payable [See Notes 6, 7, 8 and 9].
F-18
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 2005, the Company had $82,136 and in property
and equipment that had a lease liability payable by shareholders of the
Company.
NOTE 5 - GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS
The following is a summary of goodwill and definite-life intangible assets:
June 30, 2005
-------------
GOODWILL
Goodwill $ 150,000
-------------
DEFINITE-LIFE INTANGIBLES
5-year non-compete contract with
shareholder 28,907
5-year non-compete contract with
shareholders 28,907
Less accumulated amortization (32,761)
-------------
Net Definite-Life Intangible Assets $ 25,053
-------------
The Company estimates that its amortization expense will be approximately
as follows for the twelve month periods ended:
Amortization
June 30, Expense
------------- ------------
2006 11,563
2007 11,563
2008 1,927
Thereafter -
------------
25,053
The Company is amortizing their definite-life intangible assets on a
straight-line basis over five years. Amortization expense of $11,563 was
recorded for the year ended June 30, 2005, 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.
F-19
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable summarized in
groups with similar attributes at:
June 30, 2005
-------------
10% Note payable, maturing in 2007,convertible at $.25 per share
on or before six-month anniversary, $.35 per share six months
to one year, and $.50 per share after one year, no collateral,
net discount for beneficial conversion of $4,500 $ 40,500
12% Note payable, maturing in 2007, convertible at $.65 per share
for the first twelve months and $.75 per share for the second
twelve months, secured by UCC-1lien against inventory 270,000
12% Note payable, maturing in 2007, convertible at $.30 per share
through February 2007, secured by UCC-1 lien against inventory 378,000
12% Note 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 500,000
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 converted at $.345
per share, secured by a lien using a Trust Deed and Trust Deed
Note, against Major Trees and against Major Trees, TX, and a
term life insurance policy on two officers of the Company 370,125
-------------
Total 1,558,625
Less Current Portion --
-------------
$ 1,558,625
-------------
F-20
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The convertible notes payable mature as follows for the twelve-month
periods ended:
June 30, Amount
----------- ------------
2006 $ -
2007 1,058,625
2008 500,000
Thereafter -
------------
$ 1,558,625
------------
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the years ended
June 30, 2005, the Company amortized $55,533, the discounts on notes
payable as interest expense.
At June 30, 2005, the Company had a total of $29,081 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 years ended June 30, 2005, the Company amortized $22,679, of the
deferred loan costs as interest expense.
For the years ended June 30, 2005, interest expense on the convertible
notes payable amounted to $91,691.
F-21
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 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:
June 30, 2005
-------------
12% Note payable, maturing in 2007, convertible at $.30 per share
through February 2007, secured by UCC-1 lien against inventory,
greenhouses, and equipment $ 200,000
12% Note payable, maturing 2007, convertible at $.30 per share
through February 2007, secured by UCC-1 lien against inventory 100,000
12% Note 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
12% Note payable, maturing in 2007, convertible at $.30 per share
through February 2007, secured by inventory 100,000
-------------
Total 450,000
Less Current Portion -
-------------
$ 450,000
-------------
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
June 30, Amount
----------- ------------
2006 $ -
2007 400,000
2008 50,000
Thereafter -
------------
$ 450,000
------------
For the years ended June 30, 2005, interest expense on the related party
convertible notes payable amounted to $19,792.
F-22
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE
The Company had the following notes payable summarized in groups with
similar attributes at:
June 30, 2005
-------------
7% Note payable, yearly payments of $50,000, maturing 2007,
secured by Major Tree's outstanding shares of capital stock,
financial books and records, equipment, and furniture $ 77,150
14% Note payable, maturing 2007, secured by MT Subsidiary's
land in Cocise County, AZ 280,646
14% Note payable, maturing 2007, secured by the property of an
officer in Clark County, Nevada 172,020
12% Note payable, maturing in 2007, secured by inventory 85,577
Interest rate will be 6% until July 1, 2006. Beginning July 1,
2006, interest will accrue at the rate per year that will be
the lessor of .5% in excess of the Prime Interest Rate as
published by the Wall Street Journal; or the maximum
nonusirious rate of interest permitted by applicable law.
Beginning August 2006, 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. 1,166,319
-------------
Total 1,781,712
Less Current Portion (46,400)
-------------
$ 1,735,312
-------------
F-23
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE (CONTINUED)
The notes payable mature as follows for the twelve-month periods ended:
Principle
June 30, Due
----------- ------------
2006 $ 46,400
2007 659,737
2008 101,579
2009 108,567
2010 115,838
Thereafter 749,591
------------
$ 1,781,712
------------
At June 30, 2005, the Company had a total of $36,422 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 years
ended June 30, 2005, the Company amortized $32,549, of the deferred loan
costs as interest expense.
For the years ended June 30, 2005, interest expense on the notes payable
amounted to $57,440.
NOTE 9 - RELATED PARTY NOTES PAYABLE
The related party notes payable mature as follows for the twelve-month
periods ended:
June 30, Amount
----------- ------------
2006 $ 273,198
2007 176,480
2008 94,255
2009 329,712
2010 437,970
Thereafter -
------------
$ 1,311,615
------------
F-24
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY NOTES PAYABLE (CONTINUED)
The Company had the following related party notes payable summarized in
groups with similar attributes due to shareholders of the Company at:
June 30, 2005
-------------
7% Note payable, yearly payments of $75,000,
mature in 2009, secured by Major Tree's
farmland, inventory, buildings, and equipment $ 240,901
8% Note payable, monthly payments of $2,500, mature in 2009,
secured by land and inventory 279,151
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 500,000
10% Note payable, maturing in 2007, secured by
UCC-1 lien against inventory, net discount for
options issued of $8,438 41,563
12% Note payable, maturing in 2007, secured
by inventory 50,000
7% Unsecured Note payable, maturing in 2006 200,000
-------------
Total 1,311,615
Less Current Portion (273,198)
-------------
$ 1,038,417
-------------
The discounts due to the options issued with the notes are being amortized
over the term of the respective notes. For the years ended June 30, 2005,
the Company amortized $6,563, of the discounts on notes payable as interest
expense.
At June 30, 2005, the Company had a total of $2,979 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 years
ended June 30, 2005, the Company amortized $2,521 of the deferred loan
costs as interest expense. For the years ended June 30, 2005, interest
expense on the related party notes payable amounted to $65,476.
F-25
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS
PREFERRED STOCK - The Company has authorized 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
June 30, 2005, no preferred shares were issued and outstanding.
COMMON STOCK - The Company is authorized 50,000,000 shares of common stock
with $.001 par value.
In June 2005, the Company issued 1,523,967 shares of their previously
authorized but unissued common stock as part of a merger [SEE NOTE 2].
In June 2005, the Company issued 50,000 shares of their previously
authorized but unissued common stock for consulting services rendered
valued at $25,000.
In June 2005, the Company issued 847,032 shares of their previously
authorized but unissued common stock upon conversion of $200,000 note
payable and $3,288 accrued interest.
In April through June 2005, the Company issued 872,000 shares of their
previously authorized but unissued common stock for cash of $242,500 and
subscriptions receivable of $193,500.
In March 2005, the Company issued 1,666,667 shares of their previously
authorized but unissued common stock as part of a stock purchase agreement
[SEE NOTE 2].
In February 2005, the Company issued 2,000,000 shares of their previously
authorized but unissued common stock for subscriptions receivable of
$220,000. As of June 30, 2005, the Company had received $20,223 of the
subscriptions receivable.
In February 2005, the Company issued 2,000,000 shares of their previously
authorized but unissued common stock for subscriptions receivable of
$200,000. As of June 30, 2005, the Company had received $10,000 of the
subscriptions receivable.
In February through March 2005, the Company issued 1,150,000 shares of
their previously authorized but unissued common stock for employee services
rendered valued at $345,000.
F-26
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS (CONTINUED)
In February 2005, the Company issued 70,375 shares of their previously
authorized but unissued common stock for consulting services rendered
valued at $21,113.
In June 2004, the Company issued 166,667 shares of their previously
authorized but unissued common stock for a subscription receivable of
$50,000, or $.30 per share. As of June 30, 2005, the Company had received
$50,000 of the subscriptions receivable.
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with a
maximum of 8,000,000 shares of common stock reserved for issuance under the
Plan. The Plan provides for both the direct award of shares and for the
grant of options to purchase shares to employees, officers, directors,
agents, consultants, advisors and independent contractors. Awards under the
Plan will be granted as determined by the Board of Directors and the Board
of Directors shall determine which eligible persons are to receive
Incentive Stock Options, Non-Statutory Stock Options or stock issuances.
The Board of Directors also sets the number of shares, the exercise price
and the exercise terms for grants. Options granted to non-exempt employees
are required to have an exercise price of at least 85% of the fair market
value of the common stock at the time of grant. Incentive Stock Options
must be granted with an exercise price of at least 100% (110% for
shareholders who own at least 10% of the Company's outstanding stock) of
the fair market value of the common stock at the time of grant. Incentive
Stock Options are required to expire within 10 years. At June 30, 2005,
total awards available to be granted from the plan amounted to 3,150,000.
In February 2005, the Company's Board of Directors granted options to
purchase 300,000 shares of common stock from the 2002 Stock Incentive Plan
to consultants for services rendered valued at $90,000. The options vested
immediately and are exercisable at $.30 per share for 2 years. At June 30,
2005, none of these options had been exercised, forfeited, or cancelled.
In August 2004, the Company's Board of Directors granted options to
purchase 200,000 shares of common stock from the 2002 Stock Incentive Plan
to a consultant for services rendered valued at $60,000. The options vested
immediately and are exercisable at $.30 per share for 10 years. At June 30,
2005, none of these options had been exercised, forfeited, or cancelled.
In August 2004, the Company's Board of Directors issued options to purchase
50,000 shares of common stock from the 2002 Stock Incentive Plan to a
creditor. The options were valued at $15,000. The options vested
immediately and are exercisable at $.30 per share for 10 years. At June 30,
2005, none of these options had been exercised, forfeited, or cancelled.
F-27
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS (CONTINUED)
In September 2003, the Company's Board of Directors granted options to
purchase 100,000 shares of common stock from the 2002 Stock Incentive Plan
to a consultant for services rendered valued at $30,000. The options vested
immediately and are exercisable at $.30 per share for 10 years. At June 30,
2005 and 2004, 5,000 and 0, respectively, of these options had been
exercised and none had been forfeited or cancelled.
A summary of the status of options granted at June 30, 2005, and changes
during the periods then ended are as follows:
June 30, 2005
--------------------------
Weighted
Average
Exercise
Shares Price
---------- ----------
Outstanding at beginning of period 4,300,000 $ 0.11
Granted 550,000 0.30
Exercised (4,000,000) 0.11
Forfeited -- --
Expired -- --
---------- ----------
Outstanding at end of period 850,000 0.25
---------- ----------
Exercisable at end of period 850,000 0.25
---------- ----------
Weighted average fair value of
options granted 550,000 0.30
---------- ----------
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 year ended June 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%.
F-28
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS (CONTINUED)
A summary of the status of stock options outstanding at June 30, 2005 is
presented below:
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ----------------- ------------------- ------------------ ----------------- ------------------
$ 0.10 200,000 7.4 years $ 0.10 200,000 $ 0.10
0.30 650,000 5.5 years 0.30 650,000 0.30
----------------- ----------------- ------------------- ------------------ ----------------- ------------------
$0.10-0.30 850,000 5.9 years $ 0.25 850,000 $ 0.25
----------------- ----------------- ------------------- ------------------ ----------------- ------------------
NOTE 11 - INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 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 June 30, 2005, the total of all deferred tax assets is approximately
$592,000 the total of all deferred tax liabilities is $61,000. 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 $531,000 at June 30, 2005. The change in the valuation
allowance for the year ended June 30, 2005 was approximately $463,000.
The temporary differences, tax credits and carryforwards gave rise to the
following estimated deferred tax asset at:
June 30, 2005
-------------
Net operating loss carryover $ 579,000
Capital loss carryover 3,000
Excess of book over tax basis of fixed
And intangible Assets (61,000)
Inventory reserve 10,000
Valuation allowance (531,000)
-------------
Total deferred tax asset $ -
-------------
F-29
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED)
At June 30, 2005, the Company has available unused net operating loss
carryforwards of approximately $2,946,000, which may be applied against
future taxable income and expire in various years through 2025. Also, the
Company has unused capital loss carryovers at June 30, 2005 of
approximately $23,000, respectively, which expire in various years through
2009.
The estimated components of income tax expense (benefit) from continuing
operations for the years ended June 30, 2005 consist of the following:
2005
-------------
Current income tax expense (benefit):
Federal $ -
State -
-------------
Current tax expense -
-------------
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ 13,000
Capital loss carryover 1,000
Inventory reserve (10,000)
Accrued compensation 6,000
Net operating loss carryover (473,000)
Valuation allowance 463,000
-------------
Net deferred tax (benefit) $ -
-------------
Deferred income tax expense/(benefit) results primarily from the reversal
of temporary timing differences between tax and financial statement income.
A reconciliation of income tax expense at the federal statutory rate to
income tax expense at the company's effective rate is as follows:
June 30, 2005
-------------
Computed tax at the expected statutory rate (15.00)%
State and local income taxes, net of federal benefit (4.67)
Compensation due to options (11.00)
Valuation allowance 34.67
-------------
Effective income tax rates 0.00%
-------------
F-30
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
June 30, 2005
-------------
Loss from operations available to
common shareholders (numerator) $ (1,370,474)
-------------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 15,304,956
-------------
At June 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 13 - 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 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 14 - RELATED PARTY TRANSACTIONS
RELATED PARTY ADVANCES - During the year ended June 30, 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 year ended June 30, 2005, officers/shareholders of
the Company and their relatives made advances totaling $281,735 and the
company repaid advances totaling $286,825. Since the Company owed $10,234
from prior-year advances, the remaining balance owed to the
officers/shareholders of the Company and their relatives at June 30, 2005
is $5,144.
CONSULTING SERVICES - During the years ended June 30, 2005, the Company
paid a relative of an officer/shareholder $10,250 for consulting services.
F-31
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RELATED PARTY TRANSACTIONS (CONTINUED)
MANAGEMENT COMPENSATION - For the years ended June 30, 2005, the Company
expensed $309,732 as salary to the Company's Chief Executive Officer. At
June 30, 2005 , respectively, the Company owed $5,667 to the Chief
Executive Officer for accrued salary.
For the years ended June 30, 2005, the Company expensed $274,609 as salary
to the Company's former Chief Financial Officer. At June 30, 2005,
respectively, the Company owed $5,667 to the former Chief Financial Officer
for accrued salary.
EMPLOYEES - For the years ended June 30, 2005, the Company expensed $59,236
as salary to an employee of the Company who is the spouse of an
officer/shareholder of the Company. At June 30, 2005, the Company owed
$1,847 to this employee for accrued salary.
For the years ended June 30, 2005, the Company expensed $62,437 as salary
to an employee of the Company who is a relative of an officer/shareholder.
At June 30, 2005, the Company owed $2,800 to this employee for accrued
salary.
For the years ended June 30, 2005, the Company expensed $15,162 as salary
to employees of the Company who are former owners of S&S Subsidiary and
shareholders of the Company. At June 30, 2005, respectively, the Company
owed $1,478 to theses employees for accrued salary.
NOTE 15 - CONCENTRATIONS
ACCOUNTS RECEIVABLE - At June 30, 2005, 17% of the Company's accounts
receivable was owed by one customer.
REVENUES - During the years ended June 30, 2005, the Company had a
significant customer which accounted for 35% of the Company's total sales.
The loss of this significant customer could adversely affect the Company's
business and financial condition.
NOTE 16 - 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 June 30, 2005, the Company owed $370,125 in principal and $4,655
in accrued interest on the note. If the note had been converted into stock
on June 30, 2005, then the Company would have issued 1,249,268 shares of
common stock which would have been redeemable at the creditor's option for
$430,997. The Company has recorded a contingent derivative liability of
$56,217 associated with the option.
F-32
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SUBSEQUENT EVENTS
During December 2005, the Company accepted 408,296 common shares of the
Company in payment of $359,300 in subscription receivable.
In April 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.
In June 2006, the Company issued 356,083 shares of their previously
authorized but unissued common stock for the conversion of $105,000 note
payable and $1,825 interest.
In July 2006, the Company issued 31,429 shares of their previously
authorized but unissued common stock for cash of $22,000.
In April 2006, the Company issued 35,715 shares of their previously
authorized but unissued common stock for cash of $25,000.
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.
In February and March 2006, the Company issued 142,860 shares of their
previously authorized but unissued common stock for cash of $100,000.
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.
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.
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.
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.
In November 2005, the Company issued 35,714 shares of their previously
authorized but unissued common stock for cash of $25,000.
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.
F-33
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SUBSEQUENT EVENTS
During December 2005, the Company acquired 117 acre of land in Midland,
Texas for $242,000.
From July 2005 through July 2006 the Company borrowed an additional
$367,500 under various notes and convertible payable with interest rates
ranging from 12 to 24%, maturing on various dates through March 2021.
During September 2005, the Company organized Texas Landscape Center, Inc.
(TLC) as a wholly owned subsidiary of the Parent to own and operated a
retail nursery located in Midland, Texas. TLC purchased a 4 acre retail
location and opened the Texas Landscape Center opened April 15, 2006.
F-34
PENGE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2006
F-35
PENGE CORP. AND SUBSIDIARIES
CONTENTS
PAGE
----
-- Unaudited Condensed Consolidated Balance Sheets, F-37
March 31, 2006
-- Unaudited Condensed Consolidated Statements of F-39
Operations, for the three and nine months ended
March 31, 2006 and 2005
-- Unaudited Condensed Consolidated Statements of Cash F-40
Flows, for the nine months ended March 31, 2006
and 2005
-- Notes to Unaudited Condensed Consolidated Financial F-43
Statements
F-36
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2006
----------
CURRENT ASSETS:
Cash $ 215,968
Accounts receivable, net 68,824
Inventories, net 2,596,766
Prepaid assets 3,255
----------
Total Current Assets 2,884,835
PROPERTY, PLANT AND EQUIPMENT, net 4,509,834
LAND HELD FOR SALE 1,394,675
OTHER ASSETS:
Deferred loan costa 15,310
Deposits 5,000
Goodwill 150,000
Definite-life intangible assets, net 16,381
----------
Total Other Assets 186,691
----------
$8,976,035
==========
[Continued]
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-37
PENGE CORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONT.)
LIABILITIES AND SHAREHOLDERS EQUITY
March 31,
2006
------------
CURRENT LIABILITIES:
Current portion of convertible notes payable $ 703,125
Current portion of related party convertible notes payable 200,000
Current portion of notes payable 754,351
Current portion of related party notes payable 264,787
Current portion of capital lease obligations 97,629
Accounts payable 1,128,942
Related party payable 120,328
Customer deposits 3,271
Contingent derivative liabilities 56,240
Other accrued liabilities 173,285
Deferred revenue 9,770
-----------
Total Current Liabilities 3,511,728
LONG-TERM DEBT:
Convertible notes payable, less current portion 1,814,500
Related party convertible notes payable,
less current portion 500,000
Notes payable, less current portion 1,665,567
Related party notes payable, less current portion 778,952
Capital lease obligations, less current portion 239,857
Deferred revenue long term 25,239
-----------
Total Long-term Debt 5,024,115
-----------
8,535,843
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, 24,064,643 shares issued
and outstanding excluding 408,299 shares
held in treasury stock 24,473
Addtional paid-in capital 3,823,612
Treasury stock, at cost (408,299 shares, respectively) (359,300)
Accumulated (deficit) (3,048,593)
-----------
440,192
-----------
$ 8,976,035
===========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-38
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
NET REVENUE:
Farm crop sales $ 274,815 $ 197,033 $ 1,707,552 $ 991,906
COST OF GOODS SOLD 129,020 156,380 1,197,099 611,065
----------- ----------- ----------- -----------
GROSS PROFIT 145,795 40,653 510,453 380,841
OPERATING EXPENSES:
Salaries, wages and related expenses 195,886 403,931 461,708 587,526
Consulting 10,000 32,900 26,125 92,900
Travel 11,879 20,664 35,932 38,620
Other general and administrative 59,456 160,838 205,239 280,122
----------- ----------- ----------- -----------
Total Operating Expenses 277,221 618,333 729,004 999,168
LOSS FROM OPERATIONS (131,426) (577,680) (218,551) (618,327)
OTHER INCOME (EXPENSE):
Interest income 14 33 162 41
Interest expense (299,919) (90,090) (639,130) (217,961)
Loss on disposal of fixed assets -- -- -- (4,773)
----------- ----------- ----------- -----------
Total Other (Expense) (299,905) (90,057) (638,968) (222,693)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (431,331) (667,737) (857,519) (841,020)
CURRENT TAX EXPENSE -- -- -- --
CURRENT TAX (BENEFIT) -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (431,331) $ (667,737) $ (857,519) $ (841,020)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS
PER COMMON SHARES $ (0.02) $ (0.04) $ (0.04) $ (0.04)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-39
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
March 31,
---------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (857,519) $ (841,020)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of deferred loan costs 57,258 32,218
Amortization of discounts 9,924 22,655
Bad debt expense 2,177 3,637
Depreciation and amortization 218,301 85,076
Contingent derivative liabilities 23 12,175
Deferred taxes -- --
Loss on sale of equipment -- 4,773
Non-cash expense 131,157 469,867
Changes in assets and liabilities:
Accounts receivable 58,152 (78,970)
Inventories (914,956) (715,741)
Prepaid expenses 843 (752)
Refundable deposits (4,440) (40)
Accounts payable 485,616 351,866
Accrued liabilities 100,575 12,002
Customer deposits 100,575 12,002
----------- -----------
Net Cash Used by Operating Activities (712,889) (638,981)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to purchase property and equipment (1,771,917) (87,796)
Proceeds from sale of property and equipment -- 1,000
Proceeds from sale-leaseback of equipment 72,500 --
Payments for land improvements (20,193) --
Cash paid for business acquired -- (300,000)
----------- -----------
Net Cash Used by Investing Activitie (1,719,610) (386,796)
----------- -----------
[Continued]
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-40
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Nine Months Ended
March 31,
---------------------------
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party advances 182,689 281,369
Payments on related party advances (65,618) (191,761)
Payment of loan costs -- (108,061)
Proceeds from convertible notes payable 1,054,500 584,656
Payments on convertible notes payable -- (10,000)
Proceeds from related party convertible notes payable 450,000 400,000
Proceeds from notes payable 775,000 202,089
Payments on notes payable (273,595) --
Proceeds from related party notes payable 100,000 85,000
Payments on related party notes payable (240,852) (163,150)
Payments on capital lease obligations (22,695) --
Proceeds from issuance of common stock 350,477 95,000
----------- -----------
Net Cash Provided by Financing Activities 2,310,176 1,175,142
----------- -----------
INCREASE IN CASH AND EQUIVALENTS (122,323) 149,365
CASH AND EQUIVALENTS AT THE BEGINNING OF THE PERIOD 338,291 2,237
----------- -----------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 215,968 $ 151,602
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 342,860 $ 109,051
Income Taxes $ -- $ --
[Continued]
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-41
PENGE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the nine months ended March 31, 2006
In November 2005, the Company purchased fixed assets under capital lease
with a value of $360,181.
In December 2005 the Company reduced the conversion price on certain
convertible notes payable and recorded interest expense of $85,657.
In December 2005, the Company issued 1,091,995 shares of common stock upon
the conversion of a $100,000 note payable and a $200,000 related party note
payable and accrued interest of $17,931.
In December 2005, the Company assumed $132,718 in notes payable from a
shareholder of the Company as payment of $132,718 on a related party note
payable.
In January 2006 the Company issued 50,000 shares of common stock for
employee services rendered valued at $35,000.
In March 2006, the Company issued 15,000 shares of common stock for in
payment of services rendered valued at $10,500.
For the nine months ended March 31, 2005
In July 2004, the Company issued a $200,000 convertible note payable and
recorded a discount of $50,000 for the beneficial conversion feature of the
note.
In August 2004, the Company issued a $50,000 note payable and recorded a
discount of$ 15,000 for warrants to purchase 50,000 shares of common stock
issued in connection with the note payable.
In September 2004, the Company granted options to purchase 200,000 shares
of common stock for consulting services rendered valued at $60,000.
In February 2005, the Company granted options to purchase 300,000 shares of
common stock for consulting services rendered valued at $90,000.
In February through March 2005, the Company issued 1,150,000 shares of
common stock for employee services rendered valued at $345,000.
In February 2005, officers of the Company exercised options to purchase
2,000,000 shares of common stock at $.10 and 2,000,000 shares of common
stock at $.11 per share for subscriptions receivable of $420,000.
In March 2005, the Company issued 1,166,667 shares of common stock valued
at $500,000, issued a $200,000 note payable, issued a $500,000 note
payable, and paid $300,000 cash to acquire 100% of S&S Plant Farm, Inc.'s
capital stock. Through the acquisition, the Company acquired inventory of
$219,949, property and equipment of $1,321,918, and assumed accounts
payable of $41,866.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-42
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
of the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles of the United States
of America for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. It is suggested that
these condensed consolidated financial statements be read in conjunction
with the June 30, 2005 audited consolidated financial statements and notes
thereto for Penge Corp. The results of operations for the periods ended
March 31, 2006 and 2005 are not necessarily indicative of the operating
results for the year ending June 30, 2006.
ORGANIZATION - Penge Corp., ("Parent") formerly Profile Diagnostic
Sciences, Inc., was organized under the laws of the State of Nevada and was
reincorporated in Delaware by a Merger on May 17, 1987.
Penge Acquisition Corp., a wholly-owned subsidiary of the Parent and
incorporated in Nevada.
Penge Corp. ("Penge") was organized under the laws of the State of Nevada
on August 6, 2002.
Major Trees, Inc. ("MT Subsidiary") was organized under the laws of the
State of Arizona on December 29, 1993.
S&S Plant Farms, Inc. ("S&S Subsidiary") was organized under the laws of
the State of Texas on February 23, 1995.
Texas Landscape Center, Inc. ("TLC Subsidiary") was organized under the
laws of the State of Texas on September 1, 2005. The subsidiary was
organized by the Parent and as such, became a wholly owned subsidiary of
the Parent. The financial statements include operations of Texas Landscape
Center, Inc from September 1, 2005 through March 31, 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. Also,
the Company has occasionally provided business consulting services. 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.
F-43
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $48,750 and $148,085 in excess of
federally insured limits at March 31, 2006 and June 30, 2005, respectively.
ACCOUNTS RECEIVABLE - The Company records accounts receivable at the lower
of cost or fair value. The Company recognizes interest income on an account
receivable based on the stated interest rate for past-due accounts over the
period that the account is past due. The Company accumulates and defers
fees and costs associated with establishing a receivable to be amortized
over the estimated life of the related receivable. At March 31, 2006 and
June 30, 2005, the Company has an allowance for doubtful accounts of $7,007
and $5,503, respectively, which reflects the Company's best estimate of
probable losses inherent in the accounts receivable balance.
REVENUE RECOGNITION - The Company's revenue comes primarily from the sale
of agricultural products. The Company recognizes revenue from the sale of
agricultural products when rights and risk of ownership have passed to the
customer, there is persuasive evidence of a sales arrangement, product has
been shipped or delivered to the customer, the price and terms are
finalized and collection of the resulting receivable is reasonably assured.
The Company has historically generated revenue from business consulting
services. The Company recognizes revenue from business consulting services
over the term of the underlying consulting agreement.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States 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.
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. The plans are more fully described in
Note 12. Prior to January 1, 2006, 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.
F-44
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 nine months ended March 31, 2006 included:
(a) compensation expense for all share-based awards granted prior to, but
not yet vested as of January 1, 2006, and (b) compensation expense for all
share-based awards granted on or after January 1, 2006. Accordingly, no
compensation cost has been recognized for grants of options to employees
and directors in the accompanying statements of operations with a
associated recognized tax benefit of $0 of which $0 was capitalized as an
asset for the period ended March 31, 2006. 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:
Three Months Nine Months
Ended March 31, Ended March 31,
2005 2005
--------------- ---------------
Net loss, as reported $ (667,737) $ (841,020)
Add: Stock-based employee
compensation expense included in
reported net loss -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method -- --
--------------- ---------------
Pro forma net loss (667,737) (841,020)
--------------- ---------------
Loss per common share, as reported $ (0.04) $ (0.04)
Loss per common share, pro forma $ (0.04) $ (0.04)
RECLASSIFICATION - The financial statements for the period ended prior to
March 31, 2006 have been reclassified to conform to the headings and
classifications used in the March 31, 2006 financial statements.
F-45
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ENACTED ACCOUNTING STANDARDS - The Emerging Issues Task Force has
issued EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." This Issue addresses the meaning of
other-than-temporary impairment and its application to debt and equity
securities. The Company does not expect this statement to have a material
impact on its financial position, results of operations or liquidity.
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 153, "Exchanges of Non-monetary Assets an amendment to APB Opinion
No. 29." This statement requires exchanges of similar productive assets to
now be accounted for at fair value, the basic principle for non-monetary
transactions, unless the exchange lacks commercial substance. The Company
does not expect the adoption of SFAS No. 153 to have a material impact on
its financial position, results of operations or liquidity.
In December 2004, the FASB issued two Staff Positions that provide
accounting guidance for the effects of the American Jobs Creation Act of
2004 that was signed into law on October 22, 2004. SFAS 109-1, "Application
of FASB Statement No. 109, `Accounting for Income Taxes,' to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" states the manufacturers' deduction provided for
under this legislation should be accounted for as a special deduction
instead of a tax rate change. SFAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004", allows additional time to evaluate the
effects of the legislation for repatriation of foreign earnings. The
Company does not expect these statements to have a material impact on its
financial position, results of operations or liquidity.
NOTE 2 - INVENTORIES
Inventories consist of the following at:
March 31, 2006
--------------
Raw materials $ -
Growing crops 2,721,788
(25,000)
--------------
$ 2,696,788
--------------
The Company has estimated a $25,000 allowance for slow moving or obsolete
inventory was necessary at March 31, 2006. All of the Company's inventories
are collateral for certain notes payable [See Notes 6, 7, 8, and 9].
F-46
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - CAPITAL LEASES
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:
March 31, 2006
--------------
Farm equipment $ 330,595
Less accumulated depreciation (29,501)
--------------
Leased equipment, net $ 301,094
--------------
The Company amortizes its lease obligations over the term of each lease.
Amortization expense was $29,501 and $0 for the nine month periods ended
March 31, 2006 and 2006, respectively.
The future minimum lease payments are as follows for the twelve-month
periods ended:
March 31, Amount
------------ -------------
2007 $ 97,629
2008 97,629
2009 97,629
2010 88,109
2011 46,724
Thereafter -
-------------
Total minimum obligations 427,720
Executory costs and interest (90,234)
-------------
PV of minimum obligations 337,486
Current portion (97,629)
-------------
Long-term obligations $ 239,857
-------------
F-47
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at:
Estimated
Useful Lives of March 31,
Assets (Years) 2006
----------------- -------------
Office furniture and equipment 1 - 10 $ 44,259
Farm equipment 2 - 15 1,791,874
Buildings 20 - 30 1,083,144
Land not applicable 834,753
Construction in Progress not applicable 854,513
-------------
Total 4,608,542
Less accumulated depreciation (399,802)
-------------
Property, Plant and Equipment, net $ 4,208,740
-------------
Depreciation expense for the nine month periods ended March 31, 2006 and
2005 was $180,128 and $76,404, respectively. All of the Company's property
and equipment are collateral for certain notes payable [See Notes 6, 7, 8,
and 9].
For the nine month period ended March 31, 2006 the Company had $0 and
$82,136, respectively, in property and equipment that had a lease
obligation payable by shareholders of the Company.
NOTE 5 - GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS
The following is a summary of goodwill and definite-life intangible assets:
March 31, 2006
--------------
GOODWILL $ 150,000
--------------
DEFINITE-LIFE INTANGIBLES
5-year non-compete contract with
shareholder 28,907
5-year non-compete contract with
shareholders 28,907
Less accumulated amortization (41,433)
--------------
Net Definite-Life Intangible Assets $ 16,381
--------------
F-48
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS (CONTINUED)
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.
The Company is amortizing their definite-life intangible assets on a
straight-line basis over five years. Amortization expense of $8,672 was
recorded for the nine month periods ended March 31, 2006 and 2005 and has
been included in general and administrative expense.
The Company estimates that its amortization expense will be approximately
as follows for the twelve month periods ended:
Amortization
March 31, Expense
------------- -------------
2007 $ 11,563
2008 4,818
Thereafter -
-------------
$ 16,381
-------------
NOTE 6 - CONVERTIBLE NOTES PAYABLE
The Company verbally agreed with three of it note holders to adjust the
conversion features of their notes payable. Two of the notes payable had
original conversion features of $.25 on or before the six month
anniversary, $.35 per share six months to one year, and $.50 per share
after one year. These terms were adjusted to $.25 per share for the
remaining term of the loan, and the loans were converted into common stock
in December 2005. Two more of the notes payable had original conversion
features of $.30 per share through February 2007. These terms were adjusted
to $.25 per share for the remaining term of the loan, and the loans were
converted into common stock in December 2005. One other notes payable had
an original conversion feature of $.25 on or before the six month
anniversary, $.35 per share six months to one year, and $.50 per share
after one year. These terms were adjusted to $.22 per share for the
remaining term of the loan, and the loans were converted into common stock
in December 2005.
F-49
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The Company had the following convertible notes payable summarized in
groups with similar attributes at:
March 31, 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
12% Notes payable, maturing in February 2007, convertible at $.30 per
share through February 2007, secured by UCC-1 lien against inventory 333,000
12% Notes 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
15% Notes 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
and against Major Trees, TX, and a term life insurance policy on two
officers of the Company 370,125
12% Note payable, maturing in October 2007 to April 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 352,500
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 inventory 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 242,000
--------------
Total 2,517,625
Less Current Portion (703,125)
--------------
$ 1,814,500
--------------
F-50
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
The convertible notes payable mature as follows for the twelve-month
periods ended:
March 31, Amount
------------- -------------
2007 $ 703,125
2008 1,744,500
2009 70,000
Thereafter -
-------------
$ 2,517,625
-------------
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the nine month
periods ended March 31, 2006 and 2005, the Company amortized $4,500 and
$17,967, respectively, of the discounts on notes payable as interest
expense.
At March 31, 2006, the Company had a total of $5,288 in unamortized loan
fees and costs from establishing these convertible notes payable. These
costs have been deferred and are being amortized over the term of the
respective notes. For the nine month periods ended March 31, 2006 and 2005,
the Company amortized $23,794 and $6,941, respectively, of the deferred
loan costs as interest expense.
For the nine month periods ended March 31, 2006 and 2005, interest expense
on the convertible notes payable amounted to $186,908 and $57,336,
respectively.
NOTE 7 - RELATED PARTY CONVERTIBLE NOTES PAYABLE
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
March 31, Amount
------------- -------------
2007 $ 200,000
2008 500,000
Thereafter -
-------------
$ 700,000
-------------
F-51
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY CONVERTIBLE NOTES PAYABLE (CONTINUED)
For the nine month periods ended March 31, 2006 and 2005, interest expense
on the related party convertible notes payable amounted to $44,384 and
$7,825, respectively.
In December 2005, the Company reduced the conversion price on certain
convertible notes payable and recorded interest expense of $85,657
The Company had the following related party convertible notes payable
summarized in groups with similar attributes due to shareholders of the
Company at:
March 31, 2006
--------------
12% Note payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
UCC-1lien against inventory $ 100,000
12% Note 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
12% Note payable, maturing in 2007, convertible at $.30 per
share through February 2007, secured by inventory 100,000
12% Note 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
--------------
Total 700,000
Less Current Portion (200,000)
--------------
$ 500,000
--------------
F-52
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE
The Company had the following notes payable summarized in groups with
similar attributes at:
March 31, 2006
--------------
7% Note payable, yearly payments of $50,000, maturing in 2007, secured
by Major Tree's outstanding shares of capital stock, financial
books and records, equipment, and furniture $ 77,150
14% Note payable, maturing in 2007, secured by MT Subsidiary's land
in Cocise County, AZ 280,646
24% Note payable, maturing in August 15, 2006 secured by land
in San Angelo, TX 200,000
14% Note payable, maturing in 2007, secured by the property of an
officer in Clark County, Nevada. In September 2005 an officer of the
Company $72,169 in behalf of the Company and the lien on the
property was released by the holder of the note 99,850
12% Note payable, maturing in 2007, secured by inventory 85,577
6% Note payable until July 1, 2006. Beginning July 1, 2006, interest
will accrue at the rate per year that will be the lessor of .5% in
excess of the Prime Interest Rate as published by the Wall Street
Journal; or the maximum nonusirious rate of interest permitted by
applicable law. Beginning August 2006, 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. 1,166,319
6.75% Note payable, monthly payments of $3,355, maturing in 2021,
secured by TLC's building and land 379,084
7% Note payable, monthly payments of $1,370, Maturing in 2008,
secured by S&S' land and office building 131,292
--------------
Total 2,419,918
Less Current Portion (754,351)
--------------
$ 1,665,567
--------------
F-53
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE (CONTINUED)
The notes payable mature as follows for the twelve-month periods ended:
March 31, Amount
------------- -------------
2007 $ 754,351
2008 373,865
2009 166,034
2010 167,985
2011 665,536
Thereafter 292,147
-------------
$ 2,419,918
-------------
At March 31, 2006, the Company had a total of $9,106 in unamortized loan
fees and costs from establishing these notes payable. These costs have been
deferred and are being amortized over the term of the respective notes. For
the nine month periods ended March 31, 2006 and 2005, the Company amortized
$27,317 and $23,444, respectively, of the deferred loan costs as interest
expense.
For the nine month periods ended March 31, 2006 and 2005, interest expense
on the notes payable amounted to $116,459 and $37,094, respectively.
NOTE 9 - RELATED PARTY NOTES PAYABLE
The notes payable mature as follows for the twelve-month periods ended:
March 31, Amount
------------- -------------
2007 $ 264,787
2008 97,591
2009 120,302
2010 561,059
Thereafter -
-------------
$ 1,043,739
-------------
F-54
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY NOTES PAYABLE (CONTINUED)
The Company had the following related party notes payable summarized in
groups with similar attributes due to shareholders of the Company at:
March 31, 2006
--------------
7% Note payable, yearly payments of $75,000, maturing in 2009,
secured by Major Tree's farmland, inventory, buildings,
and equipment $ 206,268
8% Note payable, monthly payments of $2,500, mature in 2009,
secured by land and inventory 273,202
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 367,282
10% Note payable, balloon payment due upon maturity, maturing in
2007, secured by UCC-1 lien against inventory, net discount for
options issued of $3,013 46,987
12% Note payable, balloon payment due upon maturity, maturing in
2007, secured by inventory 50,000
12% Note payable, balloon payment due upon maturity,
maturing in 2007, not secured 100,000
--------------
Total 1,043,739
Less Current Portion (264,787)
--------------
$ 778,952
--------------
The discounts due to the options issued with the notes are being amortized
over the term of the respective notes. For the nine month periods ended
March 31, 2006 and 2005, the Company amortized $5,424 and $4,688,
respectively, of the discounts on notes payable as interest expense.
At March 31, 2006, the Company had a total of $917 in unamortized loan fees
and costs from establishing these notes payable. These costs have been
deferred and are being amortized over the term of the respective notes. For
the nine month periods ended March 31, 2006 and 2005, the Company amortized
$2,063 and $1,833, respectively, of the deferred loan costs as interest
expense.
For the nine month periods ended March 31, 2006 and 2005, interest expense
on the related party notes payable amounted to $60,825 and $44,011,
respectively.
F-55
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS
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.
In February and March 2006, the Company issued 142,860 shares of their
previously authorized but unissued common stock for cash of $100,000.
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.
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.
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.
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.
In November 2005, the Company issued 35,714 shares of their previously
authorized but unissued common stock for cash of $25,000.
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.
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with a
maximum of 8,000,000 shares of common stock reserved for issuance under the
Plan. The Plan provides for both the direct award of shares and for the
grant of options to purchase shares to employees, officers, directors,
agents, consultants, advisors and independent contractors. Awards under the
Plan will be granted as determined by the Board of Directors and the Board
of Directors shall determine which eligible persons are to receive
Incentive Stock Options, Non-Statutory Stock Options or stock issuances.
The Board of Directors also sets the number of shares, the exercise price
and the exercise terms for grants. Options granted to non-exempt employees
are required to have an exercise price of at least 85% of the fair market
value of the common stock at the time of grant. Incentive Stock Options
must be granted with an exercise price of at least 100% (110% for
shareholders who own at least 10% of the Company's outstanding stock) of
the fair market value of the common stock at the time of grant. Incentive
Stock Options are required to expire within 10 years. At March 31, 2006 and
2005, total awards available to be granted from the plan amounted to
3,150,000 and 3,150,000, respectively.
F-56
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS (CONTINUED)
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 significant weighted average assumptions relating to
the valuation of the Company's Stock Options for the nine months ended
March 31, 2006, and 2005, were as follows:
2006 2005
--------------- -------------
Dividend yield n/a 0%
Expected life n/a 5.6 years
Expected volatility n/a 302%
Risk-free interest rate n/a 3.9%
A summary of the status of options granted at March 31, 2006, and changes
during the period then ended are as follows:
Weighted Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value
-------------- -------------- ----------------- -------------
Outstanding at June 30, 2006 850,000 $ 0.25 5.9 years $40,000
Granted - -
Exercised 5,000 0.30
Forfeited - -
Expired - -
-------------- -------------- ----------------- -------------
Outstanding at March 31, 2006 845,000 0.25 5.2 years $1,011,750
Vested and expected to vest in the future 845,000 4.18 5.2 years $1,011,750
Exercisable at end of period 845,000 5.70 5.2 years $1,011,750
Weighted average fair value of options granted - -
F-57
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS (CONTINUED)
The Company had no non vested options at the beginning and end of the
period.
The total intrinsic value of options exercised during the nine months ended
March 31, 2006 was $3,750. Intrinsic value is measured using the fair
market value at the date of exercise (for shares exercised) or at March 31,
2006 (for outstanding options), less the applicable exercise price.
During the three month period ended March 31, 2006, the Company received
$1,500 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.
NOTE 11 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
which requires the Company to provide a net deferred tax asset or liability
equal to the expected future tax benefit or expense of temporary reporting
differences between book and tax accounting methods and any available
operating loss or tax credit carryforwards.
At March 31, 2006, the total of all deferred tax assets is approximately
$740,000 the total of all deferred tax liabilities is $61,000. 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 deferred tax assets, the Company has established a valuation allowance
of approximately $679,000 at March 31, 2006. The change in the valuation
allowance for the period ended March 31, 2006 was approximately $148,000.
The temporary differences, tax credits and carryforwards gave rise to the
following estimated deferred tax asset at:
March 31, 2006
--------------
Net operating loss carryover $ 731,000
Capital loss carryover 3,000
Excess of book over tax basis of fixed
And intangible Assets (61,000)
Inventory reserve 6,000
Valuation allowance (679,000)
-------------
Total deferred tax asset $ -
-------------
F-58
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED)
At March 31, 2006, the Company has available unused net operating loss
carryforwards of approximately $2,900,000, which may be applied against
future taxable income and expire in various years through 2026. Also, the
Company has unused capital loss carryovers at March 31, 2006 of
approximately $16,000, respectively, which expire in various years through
2009.
The estimated components of income tax expense (benefit) from continuing
operations for the period ended March 31, 2006 consist of the following:
2006
-------------
Current income tax expense (benefit):
Federal $ -
State -
-------------
Current tax expense -
-------------
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ -
Capital loss carryover -
Inventory reserve 4,000
Net operating loss carryover (152,000)
Valuation allowance 148,000
-------------
Net deferred tax (benefit) $ -
-------------
Deferred income tax expense/(benefit) results primarily from the reversal
of temporary timing differences between tax and financial statement income.
A reconciliation of income tax expense at the federal statutory rate to
income tax expense at the company's effective rate is as follows:
March 31, 2006
--------------
Computed tax at the expected statutory rate (15.00)%
State and local income taxes, net of federal benefit (4.67)
Valuation allowance 19.67
--------------
Effective income tax rates 0.00%
--------------
F-59
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
------------------------------- --------------------------------
2006 2005 2006 2005
------------- ------------- ------------- --------------
Loss from operations available to
common shareholders (numerator) $ (345,674) $ (667,737) $ (857,519) $ (841,020)
------------- ------------- ------------- --------------
Weighted average number of common
shares outstanding used in loss
per share for the period (denominator) 24,403,259 17,363,302 24,059,869 18,934,337
------------- ------------- ------------- --------------
At March 31, 2006, the Company had outstanding options 845,000 shares and
notes payable convertible into 6,135,744 shares which were not used in the
computation of loss per share because their effect would be anti-dilutive.
At March 31, 2005, the Company had outstanding options to purchase 850,000
shares and notes payable convertible into 3,406,667 shares which were not
used in the computation of loss per share because their effect would be
anti-dilutive.
NOTE 13 - RELATED PARTY TRANSACTIONS
RELATED PARTY ADVANCES - During the nine month periods ended March 31, 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 nine months ended March 31, 2006,
officers/shareholders of the Company and their relatives made advances
totaling $182,689 and the company repaid advances totaling $65,618. Since
the Company owed $5,144 from prior-year advances, the remaining balance
owed to the officers/shareholders of the Company and their relatives at
March 31, 2006 is $122,215. During the year ended June 30, 2005,
officers/shareholders of the Company and their relatives made advances
totaling $281,735 and the Company repaid advances totaling $286,825. Since
the Company owed $10,234 from prior-year advances, the remaining balance
owed to the officers/shareholders of the Company and their relatives at
June 30, 2005 is $5,144.
CONSULTING SERVICES - During the nine month periods ended March 31, 2006
and 2005, respectively, the Company paid a relative of an
officer/shareholder of the Company $0 and $10,250 for consulting services.
F-60
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
MANAGEMENT COMPENSATION - For the nine month periods ended March 31, 2006
and 2005, respectively, the Company expensed $109,095 and $251,570 as
salary to the Company's Chief Executive Officer. At March 31, 2006 and June
30, 2005, respectively, the Company owed $5,310 and $5,667 to the President
for accrued salary.
For the nine month periods ended March 31, 2006 and 2005, respectively, the
Company expensed $91,860 and $225,809 as salary to the Company's former
Chief Financial Officer. At March 31, 2006 and June 30, 2005, respectively,
the Company owed $5,310 and $5,667 to the Chief Executive Officer for
accrued salary.
EMPLOYEES - For the nine month periods ended March 31, 2006 and 2005,
respectively, the Company expensed $42,250 and $48,154 as salary to an
employee of the Company who is the spouse of an officer/shareholder of the
Company. At March 31, 2006 and June 30, 2005, respectively, the Company
owed $2,309 and $1,847 to this employee for accrued salary.
For the nine month periods ended March 31, 2006 and 2005, the Company
expensed $47,759 and $43,550 as salary to an employee of the Company who is
a relative of an officer/shareholder of the Company. At March 31, 2006 and
June 30, 2005, respectively, the Company owed $2,800 and $3,125 to this
employee for accrued salary.
For the nine month periods ended March 31, 2006 and 2005, the Company
expensed $82,941 and $2,771 as salary to employees of the Company who are
former owners of S&S Subsidiary and shareholders of the Company. At March
31, 2006 and June 30, 2005, respectively, the Company owed $4,880 and
$1,478 to these employees for accrued salary.
NOTE 14 - CONCENTRATIONS
ACCOUNTS RECEIVABLE - The following table lists the percent of the
receivables owed by those customers that accounted for 10% or more of the
total accounts receivable at:
March 31, 2006
--------------
Customer A 16%
Customer B 19%
Customer C 12%
REVENUES - During the nine month periods ended March 31, 2006 and 2005,
respectively, the Company had a significant customer which accounted for
36% and 67% of the Company's total sales. The loss of this significant
customer could adversely affect the Company's business and financial
condition.
F-61
PENGE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES
DERIVATIVE LIABILITY FOR THE REDEMPTION OF COMMON STOCK - The Company has a
convertible note payable which is convertible into common stock at $.30 per
share. At the time of conversion, the creditor can require the Company to
redeem any amount of the shares issued in the conversion at $.345 per
share. At March 31, 2006, the Company owed $370,125 in principal and $4,811
in accrued interest on the note. If the note had been converted into stock
on March 31, 2006, then the Company would have issued 1,249,786 shares of
common stock which would have been redeemable at the creditor's option for
$431,176. The Company has recorded a contingent derivative liability of
$56,240 associated with the option.
NOTE 16 - 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 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 17 - SUBSEQUENT EVENTS
In April 2006, the Company issued 35,715 shares of their previously
authorized but unissued common stock for cash of 25,000.
In June 2006, the Company issued 356,083 shares of their previously
authorized but unissued common stock for the conversion of $105,000 note
payable and $1,825 interest.
In April 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.
During June 2006, the Company cancelled the 408,296 common shares held in
treasury.
From April 2006 through July 2006 the Company borrowed an additional
$2,747,000 under various notes and convertible payable with interest rates
ranging from 12 to 24%, maturing on various dates through March 2021.
F-62