As filed with the Securities and Exchange Commission on October 4, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 1
ON
FORM 10-SB/A
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
PART I.
ITEM 1. 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 of Penge Nevada and its affiliates became the business of
Profile Diagnostic Sciences, Inc. Following the merger, we changed the name of
Profile Diagnostic Sciences, Inc. to "Penge Corp." Unless otherwise specified,
references to "Penge," "we," "us" or the "company" for periods prior to June 30,
2005 relate to Penge Nevada and its affiliates. For periods from and after June
30, 2005, those descriptions relate to Penge Corp (f/k/a Profile Diagnostic
Sciences, Inc.) and its affiliates, including Penge Nevada.
Since commencing business in August 2002, we have acquired the land and
certain other assets from three tree, shrub and plant farms, one of which is in
Arizona and two of which are in Texas. As we have acquired the 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
3.8 acres in Midland, Texas for the site of our first retail nursery. We
completed a $951,000 dollar conversion of the property including a complete
remodel of the building and the addition of 32,000 square feet of greenhouse and
40,000 feet of tree display area. Retail operations at the site commenced on
April 15, 2006, and in the first 10 weeks of operations we generated $617,000 in
retail business. We also did over $400,000 in business with our existing Midland
wholesale customers. Going forward both the wholesale and retail business in
Midland will be done at the retail center.
In 2005, we also purchased 7 acres of commercial property in San
Angelo, Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club.
We purchased the ground for $4.50 per foot. One-acre lots across the street from
Sam's Club have recently sold for $13.66 and $12.30 per square foot. We believe
that our property is currently worth more than we paid for it. We plan to 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 to 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.
2
OUR INDUSTRY AND WHOLESALE/RETAIL BUSINESS MODEL
The retail nursery business has been under attack for many years from
Home Depot, Lowe's and Wal-Mart. These big box stores buy nursery materials in
large quantities at big discounts from wholesale nursery growers. This allows
them to sell at a discount, using smaller margins, and to undercut the small
nurseries by 30%-50%. Small nurseries generally cannot compete on price and so
they try to compete by offering better service, better selection, and
convenience. Although this approach has worked for some small nurseries, it has
not worked for most of them, and a large number of small nurseries have gone out
of business in the last 10 years primarily because they are unable to compete on
price with the big box stores.
In the last 5 years, a new model has emerged in the nursery industry
that we believe is able to compete effectively with the big box stores. This
model requires a retail nursery to grow a substantial percentage its own plant
material (trees, shrubs, and flowers) instead of buying them from a wholesale
grower. It is capital intensive for a retail nursery to grow its own products
and it takes from 3-5 years to get up to speed. But, once the model is in place,
it can allow the retail nursery to offer products at prices that are lower than
or equal to those of the big box stores, while continuing to offer a level of
selection and service that the big box stores can not offer.
Over the last 4 years, we have purchased wholesale operations growing
trees, shrubs, and flowers and plan to continue to open retail operations in
addition to our Midland, Texas retail nursery. We believe that this new hybrid
retail/wholesale nursery business model will enable us to increase sales and
create and sustain a profitable operation. We also believe that the competition
in Texas and surrounding areas has not switched over to the new model, which
should give us at least a 3 - 5 year head start on rolling out the model in this
region.
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 and which we refer to as our Major Trees Houston Farm. In 2005, we
purchased the S&S Plant Farm in Midland, Texas which specializes in plants and
flowers. This last farm is a 50-acre property with 8 acres under greenhouse and
shade house, and a full complement of equipment and machinery for propagating
trees, shrubs, plants and flowers from seeds and plugs.
We now have over 300,000 trees and shrubs planted on the three
wholesale farms, and enough infrastructure and equipment to grow trees, shrubs,
and flowers for multiple locations in west Texas.
Our wholesale operations are able to provide products to our retail
nurseries, which we believe will allow us to offer competitive pricing, service
and selection. Although we plan to divert our landscape trees, shrubs, plants
and 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
3.8 acres in Midland, Texas for the site of our first retail nursery. We
completed a $951,000 dollar conversion of the property, including a complete
remodel of the building and the addition of 32,000 square feet of greenhouse and
40,000 feet of tree display area. Retail operations at the site commenced on
April 15, 2006, and in the first 10 weeks of operations we generated $617,000 in
retail business. We also did over $400,000 in business with our existing Midland
wholesale customers. Going forward both the wholesale and retail business will
be done at the retail center.
In 2005, we also purchased 7 acres of commercial property in San
Angelo, Texas that shares an intersection with Wal-Mart, Lowe's and Sam's Club.
We purchased the ground for $4.50 per foot. One-acre lots across the street from
Sam's Club have recently sold for $13.66 and $12.30 per square foot. We believe
that our property is currently worth more than we paid for it. We plan to 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.
3
As the availability of capital and other business factors permit, we
plan to aggressively open retail centers and ramp up our wholesale operations in
the coming years in Texas and surrounding areas. There are over 30 million
people in this region which we believe could allow us to build over fifty
nurseries to compete in these markets.
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 regions 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 46% of our sales in our
fiscal Fiscal 2005 ("Fiscal 2005") and 28% of our sales in our fiscal year ended
June 30, 2006 ("Fiscal 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 this 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 54% of our sales in
Fiscal 2005 and 72% of our sales in Fiscal 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.
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
currently employ a full-time, outside sales force or engage third-party
distributors. We due advertise our nursery products for the Texas Landscape
Center subsidiary in Midland, Texas. We do advertise our nurse 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.
4
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 $57,900. 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 we believe 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 the 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.
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 35% of our
revenues, and during Fiscal 2006, sales to Home Depot accounted for 20% 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."
5
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
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 June 30, 2006, we had had a total of 52 employees, which includes
9 executives/managers, and 43 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.
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."
6
Our operations are directly or indirectly run through a subsidiary,
Penge Corp, a Nevada corporation ("Penge Nevada"), which was organized in 2002
to engage in the nursery business. On June 30, 2005, Penge Nevada merged with a
subsidiary of Profile Diagnostic Sciences, Inc., a Delaware corporation with no
current operations. Following the merger, the officers and directors of Penge
Nevada became the officers and directors of Profile Diagnostic Sciences, Inc.
and the business Penge Nevada and its affiliates became the business of Profile
Diagnostic Sciences, Inc. Following the merger, we changed the name of Profile
Diagnostic Sciences, Inc. to "Penge Corp" Unless otherwise specified, references
to "Penge," "we," "us" or the "company" for periods prior to June 30, 2005
relate to Penge Nevada and its affiliates. For periods from and after June 30,
2005, those descriptions relate to Penge Corp (f/k/a Profile Diagnostic
Sciences, Inc.) and its affiliates, including Penge Nevada.
Since commencing business in August 2002, we have acquired the land and
certain other assets from three tree, shrub and plant farms, one of which is in
Arizona and two of which are in Texas. As we have acquired the properties, we
have taken steps to improve operations and to expand the number of trees, shrubs
and plants growing on, and harvested from, each such property.
In October 2005, we purchased a vacant 13,000 square foot building on
3.8 acres in Midland, Texas for the site of our first retail nursery. We
completed a $951,000 dollar conversion of the property including a complete
remodel of the building and the addition of 32,000 square feet of greenhouse and
40,000 feet of tree display area. Retail operations at the site commenced on
April 15, 2006, and in the first 10 weeks of operations we generated $617,000 in
retail business. We also did over $400,000 in business with our existing Midland
wholesale customers. Going forward both the wholesale and retail business will
be done at the retail center.
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 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 to expand a vertically
integrated wholesale and retail nursery business. We expect that our tree, shrub
and plant farms will be able to provide a substantial portion of the inventories
for our recently opened and planned retail nurseries in the coming years. By
owning the tree, shrub and plant farms that provide much of the inventory for
the retail nurseries, we believe that we will be able to compete with, and even
undercut, the "big box stores" that have become the dominant force in the retail
nursery business. These big box stores have been driving many retail nurseries
out of business by buying nursery materials in large quantities at big discounts
from wholesale nursery growers in the United States. This allows them to sell at
a discount using smaller margins and to undercut the small nurseries by 30% to
50%. We believe that our vertically integrated wholesale/retail nursery business
model will allow us to compete with the big box stores on price, while providing
better selection and service.
For our wholesale business, our goal is to expand the number of trees
and shrubs planted on our farms in the next few years while holding down
increases in our administrative and other general operating expenses. As we
spread our production costs over a larger inventory, we also hope to experience
a decline in our per-unit production and sales costs. We do not plan to expand
our wholesale sales. Instead, we plan to provide most of what we grow to our
retail centers.
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 June 30, 2006, we have an inventory of over 125,000 trees growing on our
Major Trees Tucson Farm.
During the fiscal Fiscal 2005 ("Fiscal 2005") and the fiscal year ended
June 30, 2006 ("Fiscal 2006"), our Major Trees Tucson Farm generated the
following amount of revenue:
Fiscal Year Gross Revenue
----------- -------------
2005 $840,145
2006 $761,753
7
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 Fiscal 2006 were to other wholesale customers.
RETAIL NURSERY LOCATION - MIDLAND, TEXAS. In October 2005, we purchased
a vacant 13,000 square foot building on 3.8 acres in Midland, Texas for the site
of our first retail nursery. We completed a $951,000 dollar conversion of the
property including a complete remodel of the building and the addition of 32,000
square feet of greenhouse and 40,000 feet of tree display area. Retail
operations at the site commenced on April 15, 2006, and in the first 10 weeks of
operations we generated $617,000 in retail business. We also did over $400,000
in business with our existing Midland wholesale customers. Going forward both
the wholesale and retail business will be done at the retail center.
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
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 the 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.
8
o Agricultural Production - We account for agricultural activities
in accordance with Statement of Position 85-3, "Accounting by
Agricultural Producers and Agricultural Cooperatives". All
direct and indirect costs of growing crops are either
accumulated as inventory or expensed as cost of goods sold.
Permanent land development costs are capitalized and not
depreciated. Limited-life land development costs and the
development costs to bring long-life and intermediate-life
plants into production are capitalized and depreciated using the
straight-line method over the estimated useful lives of the
assets.
o Inventories - Growing crops inventory is stated at the lower of
cost or market using the retail method as we have a large
quantity of inventory items that have similar costs and markups;
we do not have any individually significant items. Because our
inventory has these characteristics, it is not beneficial to
track inventory costs to each individual unit of inventory.
Under the retail method, we count and extend our inventory at
estimated sales prices, based upon historical sales, which we
then multiply by our cost ratio to determine inventory at cost.
Our cost ratio is determined by adding the total cost of the
beginning inventory and all direct and indirect costs of growing
crops divided by the total estimated sales price of ending
inventory, based on historical sales, plus sales revenues. Raw
material inventory is stated at the lower of market or cost
using the first-in first-out (FIFO) method.
o Property and Equipment - Property and equipment are stated at
cost or carryover basis. Expenditures for major renewals and
betterments that extend the useful lives of property and
equipment are capitalized upon being placed in service.
Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. In
accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", we periodically review our property and equipment for
impairment.
o Revenue Recognition - Our revenue comes primarily from the sale
of agricultural products. We recognize revenue from retails
sales at the time of retail purchase. We recognize revenue from
landscaping and wholesale customers when rights and risk of
ownership have passed to the customer, there is persuasive
evidence of a sales arrangement, product has been shipped
(delivered or picked up by the customer), the price and terms
are finalized and collection of the resulting receivable is
reasonably assured.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006 COMPARED WITH FISCAL 2005
The following table reflects selected operational results for the
fiscal years ended June 30, 2006 and June 30, 2005:
PERIODS ENDED
JUNE 30
-------
2006 2005
----------- -----------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 3,043,258 $ 1,919,770
COST OF GOODS SOLD 2,186,319 1,424,309
----------- -----------
GROSS PROFIT 856,939 495,461
OPERATING EXPENSES (1,161,641) (1,449,127)
----------- -----------
LOSS FROM OPERATIONS (304,702) (953,666)
INTEREST AND OTHER EXPENSE (903,058) (416,808)
----------- -----------
NET LOSS $(1,207,760) $(1,370,474)
----------- -----------
LOSS PER COMMON SHARE (0.05) (0.09)
----------- -----------
Our results of operations for Fiscal 2006 included the operations of
our Major Trees Houston Farm, Major Trees Tucson Farm, S&S Plant Farm and the
Texas Landscape Center, which was opened in April 2006.
9
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of trees and other nursery products. Revenues increased from $1,919,770
for the Fiscal 2005 to $3,043,258 for Fiscal 2006. Costs of Good Sold increased
from $1,424,309 for the Fiscal 2005 to $2,186,319 for Fiscal 2006. Our revenue
increased due to a full year of revenue from the S&S Plant Farm acquisition and
2 1/2 months of revenue from Texas Landscape Center. Cost of foods sold
increased due to higher sales and the Cost of goods sold as a percentage of
sales decreased from 74.2% for Fiscal 2005 to 71.8% for Fiscal 2006 as a result
of shipping a small amount of high margin product from our growing facilities to
our retail center.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and non-allocated depreciation. Operating
expenses decreased from $1,449,127 for the Fiscal 2005 to $1,161,641 for Fiscal
2006. Operating expenses as a percentage of revenue decreased from 75.5% in
Fiscal 2005 to 38.2% in Fiscal 2006 due to substantially increased revenues and
a substantial decrease in operating expenses. This decrease in operating expense
was primarily due to the absence in Fiscal 2006 of the approximately $300,000 in
stock-based executive compensation expense incurred in Fiscal 2005. We expect
our operating expenses as a percentage of revenue to continue to decrease.
OTHER EXPENSE. Other expense consists of interest paid on outstanding
notes payable, amortization of deferred loan costs, noncash notes payable, stock
conversions and losses on the disposal of fixed assets. Other expense increased
from $416,808 for the Fiscal 2005 to $903,058 for Fiscal 2006. An increase in
other expenses of $100,748 was attributed to a one time adjustment for the
conversion price on notes that were converted in Fiscal 2006. The majority of
the remaining increase in other expenses was a result of an increase in interest
expense due to an increase in indebtedness and interest on indebtedness which
primarily funded our first retail center as well as the expansion of inventory
and farm improvements. We expect our other expenses to increase as a percentage
of revenue short-term and then to decrease as a percentage of revenue long-term
as our short and long term notes are paid off and converted to stock.
NET LOSS. Our net loss decreased from $1,370,474 for the Fiscal 2005 to
$1,207,760 for Fiscal 2006. The decrease in net loss is due primarily to an
increase in gross margin and a decrease in operating expenses. We expect our net
loss to decrease substantially in the Fiscal 2007 as a result of higher sales,
increased gross margins, and lower operating expenses as a percentage of sales.
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 June 30,
2006.
LESS THAN
1 YEAR 2-3 YEARS 4-5 YEARS AFTER
(7/1/06 (7/1/07 (7/1/09 5 YEARS
CONTRACTUAL OBLIGATIONS TOTAL TO 6/30/07) TO 6/30/09) TO 6/30/11) (AFTER 7/1/11)
--------- --------- --------- --------- ---------
Operating leases -- -- -- -- --
Capital leases 416,199 97,746 204,766 113,687 --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 6,675,330 2,275,260 2,784,761 1,301,669 313,640
--------- --------- --------- --------- ---------
Total contractual cash obligations 7,091,529 2,373,006 2,989,527 1,415,356 313,640
--------- --------- --------- --------- ---------
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:
10
CONVERSION
PRINCIPAL BALANCE AS OF ORIGINATION MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 30, 2006 DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------------------------------------------------------------------------------------------------------------
$172,000 $99,851 3/1/05 7/1/06; extended 15% N/A Personal residence
to 1/1/07 monthly of employee of the
interest; Company
$20,000 $21,200 4/17/06 8/15/06; extended 6% N/A Unsecured
to 10/15/06
prorated annual
interest plus
principal due on
maturity
$200,000 $56,000 9/15/05 8/15/06; extended 24% N/A Second lien on San
to 10/15/06 Angelo
$1,120 monthly
payments
$50,000 $50,000 8/16/04 8/16/06; extended 10% (1) Lien on 7,500 trees
to 10/15/06 on the Major Trees
quarterly interest Tucson Farm
$50,000 $50,000 8/16/04 8/16/06; extended 12% N/A Lien on 7,500 trees
to 10/15/06 on the Major Trees
quarterly interest Tucson Farm
$280,646 $280,646 1/1/05 9/1/06; extended 15% N/A Lien on Major Trees
to 7/1/07 monthly Tucson Farm
interest;
$200,000 $147,500 6/15/06 12/15/06; monthly 24% N/A Second lien on San
interest payments Angelo
$100,000 $100,000 2/2/05 1/1/07; quarterly 12% (1) Lien on 15,400 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 1/10/06 1/10/07; quarterly 12% N/A Unsecured
payments
$100,000 $100,000 2/01/05 2/1/07; quarterly 12% N/A Lien on 15,400 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 3/12/05 2/28/07; quarterly 12% N/A Lien on 15,400 trees
interest payments on the Major Trees
Tucson Farm
$600,000 $201,081 9/27/2002 3/1/07; $150,000 7% N/A First lien on all
annually on March assets acquired from
1 M7 Farms
$200,000 $77,149 9/27/2002 3/1/07; $50,000 7% N/A First lien on
annually on March 1 outstanding shares
of Major Trees, Inc.
$28,000 $28,000 3/23/05 3/31/07; quarterly 12% N/A Lien on 4,300 trees
interest payments on the Major Trees
Tucson Farm
$85,577 $85,577 4/15/05 4/15/07; quarterly 12% N/A Lien on 14,400 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 5/03/05 5/01/07; quarterly 12% (1) Lien on 7,693 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 5/03/05 5/01/07; quarterly 12% (1) Lien on 7,693 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 5/03/05 5/15/07; quarterly 12% (1) Lien on 7,693 trees
interest payments on the Major Trees
Tucson Farm
$70,000 $70,000 5/20/05 5/15/07; quarterly 12% (1) Lien on 10,768 trees
interest payments on the Major Trees
Tucson Farm
$5,278 $5,278 6/06/05 6/15/07; quarterly 12% (1) Lien on 812 trees on
interest payments the Major Trees
Tucson Farm
11
CONVERSION
PRINCIPAL BALANCE AS OF ORIGINATION MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 30, 2006 DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------------------------------------------------------------------------------------------------------------
$19,722 $19,722 6/06/05 6/15/07; quarterly 12% (1) Lien on 3,034 trees
interest payments on the Major Trees
Tucson Farm
$25,000 $25,000 6/15/05 6/15/07; quarterly 12% (1) Lien on 3,847 trees
interest payments on the Major Trees
Tucson Farm
$25,000 $25,000 5/24/05 6/20/07; quarterly 12% (1) Lien on 3,847 trees
interest payments on the Major Trees
Tucson Farm
$25,000 $25,000 6/20/05 6/20/07; quarterly 12% (1) Lien on 3,847 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/15/05 7/01/07; quarterly 12% (1) Lien on 7,683 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/29/05 7/01/07; quarterly 12% (1) Lien on 7,683 trees
interest payments on the Major Trees
Tucson Farm
$370,125 $370,125 3/31/05 7/1/06; extended 15% N/A Lien on Major Trees
to 7/1/07monthly Tucson Farm and
interest; Major Trees Houston
Farm
$50,000 $50,000 6/15/05 7/01/07; quarterly 12% (1) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/20/05 7/01/07; quarterly 12% (1) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/20/05 7/01/07; quarterly 12% (1) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/21/05 7/01/07; quarterly 12% (1) Lien on 7,693 trees
interest payments on the Major Trees
Tucson Farm
$75,000 $75,000 6/22/05 7/01/07; quarterly 12% (1) Lien on 11,526 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/22/05 7/01/07; quarterly 12% (1) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$75,000 $75,000 6/29/05 7/01/07; quarterly 12% (1) Lien on 11,526 trees
interest payments on the Major Trees
Tucson Farm
$25,000 $25,000 6/30/05 7/01/07; quarterly 12% (1) Lien on 3,842 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 6/30/05 7/01/07; quarterly 12% (1) Lien on 7,693 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 6/7/05 7/01/07; quarterly 12% (2) Lien on 15,268 trees
interest payments on the Major Trees
Tucson Farm
$75,000 $75,000 6/15/05 7/1/07; quarterly 12% (3) Lien on 11,526 trees
interest payments on the Major Trees
Tucson Farm
$25,000 $25,000 9/28/05 9/28/07; quarterly 12% (2) Lien on 3,845 trees
interest payments on the Major Trees
Tucson Farm
$30,000 $30,000 9/13/05 10/01/07; 12% (2) Lien on 4,611 trees
quarterly interest on the Major Trees
payments Tucson Farm
$60,000 $60,000 11/03/05 11/01/07; 12% (2) Lien on 9,221 trees
quarterly interest on the Major Trees
payments Tucson Farm
12
CONVERSION
PRINCIPAL BALANCE AS OF ORIGINATION MATURITY DATE; INTEREST AND OTHER
AMOUNT JUNE 30, 2006 DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------------------------------------------------------------------------------------------------------------------
$12,500 $12,500 11/16/05 12/01/07; 12% (2) Lien on 1,923 trees
quarterly interest on the Major Trees
payments Tucson Farm
$25,000 $25,000 11/14/05 12/1/07; quarterly 12% (3) Lien on 3,845 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 1/26/06 1/01/08; quarterly 12% (3) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 1/26/06 1/01/08; quarterly 12% (3) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$100,000 $100,000 1/31/06 1/01/08; quarterly 12% (3) Lien on 14,850 trees
interest payments on the Major Trees
Tucson Farm
$450,000 $450,000 1/23/06 1/23/08; quarterly 12% (5) Lien on TLC's
interest payments buildings and land
in Midland, TX
$150,000 $129,551 12/31/05 2/12/08; $1,370 7.25% N/A Trust deed on S&S
monthly payments Plant Farm
$50,000 $50,000 2/24/05 2/28/07; quarterly 12% N/A Lien on 7,700 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 2/28/05 2/28/07; quarterly 12% N/A Lien on 7,700 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 2/25/06 3/01/08; quarterly 12% (2) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$80,000 $80,000 3/8/06 3/01/08; quarterly 12% (2) Lien on 12,308 trees
interest payments on the Major Trees
Tucson Farm
$242,000 $234,866 12/21/05 3/31/08; $2,016 10% (3) Trust deed on 119
monthly in Feb, acres of real
Mar, and April property located in
2006; $11,167 Midland County, Texas
monthly beginning
May 2006 until
maturity date
$70,000 $70,000 3/24/06 4/01/08; quarterly 12% (2) Lien on 10,770 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 4/12/06 5/1/08; quarterly 12% (2) Lien on 7,425 trees
interest payments on the Major Trees
Tucson Farm
$50,000 $50,000 4/12/06 5/01/08; quarterly 12% (2) Lien on 7,684 trees
interest payments on the Major Trees
Tucson Farm
$400,000 $271,198 5/26/04 5/01/09; $2,500 (4) N/A First Lien on all
monthly payments assets acquired from
Major Trees Arizona
Farm
$379,084 $376,632 5/26/04 3/1/21; $3,355 6.75% N/A Lien on TLC's
monthly payments buildings and land
in Midland, TX
$500,000 $367,282 3/1/05 3/1/10; quarterly 7% N/A All outstanding
payments as common stock of S&S
follows: $11,660 Plant Farm, Inc.
years 1 & 2;
$13,527 years 3 &
4; $15,483 year 5
$1,166,319 $1,166,319 6/29/05 7/11/10; $3,355 Prime + N/A Lien on San Angelo
quarterly interest 1/2% land
only payments
until 1/1/07;
monthly payments
thereafter
13
(1) Convertible with accrued interest into common stock at $0.65 per share
during the first twelve months and at $0.75 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.
(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.
(4) Accruing interest at 7% until May 2005, at 8% from May 2005 until May
2007, and at 9% from May 2007 until May 2009.
(5) Convertible with accrued interest into common stock at $0.70 per share
through 1/31/08; 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 June 30, 2006, we had $111,915 in cash and cash equivalents. This
represents a decrease of $226,376 compared to June 30, 2005. Cash used during
Fiscal 2006 includes approximately $419,312 used in operations as well as
$2,018,046 used in investing activities. Sources of cash during Fiscal 2006
included a net amount of $2,210,982 from financing activities. Of the $2,210,982
of net cash provided by financing activities, $1,538,590 represents net cash
received less payments made on non-convertible notes, and $151,501 represents
the proceeds from issuance of common stock less offering costs. The difference
between the $2,210,982 of net cash provided by financing activities and the cash
itemized above represents new notes payable, advances from related parties,
payments on related party advances and loan costs and payments on capital lease
obligations.
As of June 30, 2005, we had $338,291 in cash and cash equivalents. Cash
used during the Fiscal 2005 includes approximately $926,296 used in operations
as well as $953,119 used in investing activities. Sources of cash during the
Fiscal 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, $133,240 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 $48,150
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 net direct
costs of additions of approximately $600,000 to 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 Fiscal 2006 included net direct
cost additions of approximately $735,637 to plant tree, shrub, and flower
inventory, $2,018,046 to purchase property and equipment, including the build
out our Texas Landscape Center.
We anticipate making capital expenditures during Fiscal 2007.
Specifically, resources permitting, we plan to spend at least $1,500,000 to open
a second retail nursery and to replace inventory sold during Fiscal 2006.
Liquidity. The following table reflects selected balance sheet data as
of June 30, 2006:
JUNE 30, 2006
-------------
BALANCE SHEET DATA:
Cash and cash equivalents............................ 111,915
Working capital (deficit)............................ (1,568,792)
Total assets......................................... 9,159,259
Retained deficit..................................... (3,398,834)
Stockholders' equity................................. 263,275
As of June 30, 2006, we had $111,915 in cash and cash equivalents,
total current assets of $2,648,215 and current liabilities of $4,217,007,
representing a current working capital deficit of $1,568,792. Our current
liabilities as of June 30, 2006 include a $1,068,125 balance on secured
convertible notes due with one year, and a $1,207,135 principal balance on
non-convertible notes payable due within one year.
14
With respect to the current portion of our notes payable, we believe
that most of the holders of the convertible and non-convertible notes coming due
in the next year will either convert such debt to equity or replace existing
notes with notes with deferred payment dates. To the extent that does not occur,
we believe that we can raise capital sufficient to repay the current portion of
our long term debt through the issuance of additional notes and the sale of
equity securities and warrants.
In addition, members of our management have informally agreed to
provide up to $200,000 of short-term financing to us. Such financing bears
interest at 12% per annum. Management may demand payment on 30 days written
notice.
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 August 12, 2006
that includes an explanatory paragraph stating that recurring losses raise
substantial doubt about our ability to continue as a going concern. 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.
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.
15
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 $3,398,834 as of June 30, 2006. As we
continue to invest in the purchase of new properties or businesses, and to
expand our wholesale and retail operations, it is unlikely we will become
profitable in the near future. Even if we do become profitable, we may not be
able to maintain profitability or to increase profitability in the future.
OUR ACCOUNTANTS HAVE INCLUDED AN EXPLANATORY PARAGRAPH IN OUR FINANCIAL
STATEMENTS REGARDING OUR STATUS AS A "GOING CONCERN."
Our consolidated financial statements have been prepared on the
assumption that our Company will continue as a going concern. Our independent
registered public accounting firm has issued its report dated October 2, 2006
that includes an explanatory paragraph stating that recurring losses raise
substantial doubt about our ability to continue as a going concern. Our product
line is limited, and it has been necessary to rely upon financing from the
issuance of promissory notes and the sale of our equity securities to sustain
operations in the past. Additional financing will be required if we are to
continue as a going concern.
IF WE CANNOT RAISE SUFFICIENT CAPITAL AT REASONABLE PRICES, WE MAY BE UNABLE TO
MEET EXISTING OBLIGATIONS OR ADEQUATELY EXPLOIT EXISTING OR FUTURE
OPPORTUNITIES.
As of June 30, 2006, we had $111,915 in cash and cash equivalents and a
current account deficit of $1,658,512. We need to obtain significant additional
working capital to implement our business plan of expanding our retail nursery
operations and to be able to meet our financial obligations as they become due.
We may not be able to raise the additional capital needed, or we may be forced
to pay an extremely high price for capital. Factors affecting the availability
and price of capital may include the following:
o the availability and cost of capital generally;
o our financial results;
o market interest, or lack of interest, in our industry and business
plan;
o the success of our business;
o the amount of our capital needs; and
o the amount of debt, options, warrants and convertible securities we
have outstanding.
If we cannot raise sufficient capital or are forced to pay a high price
for capital, we may be unable to meet current or future obligations or
adequately exploit existing or future opportunities. If we are unable to obtain
capital for an extended period of time, we may be forced to discontinue
operations.
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.
16
o If initial sales are slower than expected, we may not have, or may
be unable to obtain, the capital necessary to continue operation of
our initial retail store or subsequent stores until sales expand.
o We may be unable to supply all variety or quantities of trees,
shrubs, flowers and other plants for our retail store. If not,
plant inventory may not be available from other sources or may be
available only at a high cost.
o We do not have, or expect to have, in place long-term supply
agreements for non-plant items typically sold at retail stores,
such as containers, fertilizers and tools. We may be unable to
purchase such inventory at cost that will permit us to be
competitive with the big box stores on those items.
We have invested significantly in, and borrowed extensively in order to fund,
our new retail nursery business. The failure of our retail business to grow as
expected or for individual stores to become profitable within a reasonable time
after opening would likely create a significant liquidity problem and otherwise
materially adversely affect our business, our operations, and our financial
condition.
WE ARE REQUIRED TO MAKE PAYMENTS UNDER OUTSTANDING NOTES IN AMOUNTS EXCEEDING
OUR EXISTING CASH AND CASH EQUIVALENTS BEGINNING IN 2007.
We have issued convertible and nonconvertible notes to fund operations
having a principal amount of $6,675,330 as of June 30, 2006. Of these notes,
$6,498,130 are secured by our farming and commercial properties, and by trees
contained in inventory. As of June 30, 2006, our monthly interest payment with
respect to such notes was approximately $58,547 per month, and we are required
to begin paying down principal on these notes at various times beginning in
2007.
The amounts payable under our outstanding notes in the current fiscal
year exceed our current cash and cash equivalents. If we default on payments
under these notes, the holders will have the right to accelerate principal and
interest payments and pursue remedies available at law and under governing
documents. The exercise of such remedies would likely result in our insolvency.
WE MAY BE UNABLE TO SELL A PORTION OF OUR PROPERTY IN SAN ANGELO, TEXAS OR
OTHERWISE OBTAIN CAPITAL IN ORDER TO BUILD A RETAIL STORE ON THAT SITE, WHICH IS
AN IMPORTANT COMPONENT OF OUR BUSINESS PLAN.
We own approximately 7 acres of commercial property in San Angelo,
Texas, a portion of which we plan to sell to partially fund the construction of
a retail store. We have not begun marketing such property and do not have any
commitments from any parties to purchase such property. Even if a portion of the
San Angelo property were sold, we would likely need additional capital in order
to complete the construction of a retail store on that site. We do not have the
capital in order to build the retail store and do not have any commitments to
provide capital. Because we are unprofitable and already highly leveraged, we
may be unable to obtain capital necessary to commence or complete construction
of a retail store. Even if we are able to obtain needed capital, we may not
obtain it on a timely basis and may be forced to pay a high price for capital.
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:
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.
17
o The owners of businesses and properties that we are interested in
acquiring may be unwilling to sell to us for various reasons,
including:
o an unwillingness to accept our restricted equity securities
or a promissory note as consideration;
o a desire to receive cash and a lack of confidence in our
ability to obtain the cash necessary to close;
o concerns with our ability to operate the business profitably
or appropriately, and
o a desire to be acquired by a larger company for strategic or
personal reasons (including the desire to be employed by a
larger, more stable acquirer).
o We may be unable to raise the capital necessary to purchase those
businesses or properties that we identify as potential acquisition
targets quickly enough or at all in order to be able to consummate
desired acquisitions.
If we cannot continue to identify appropriate acquisition targets and
consummate acquisitions, our business will not continue to grow as planned.
WE MAY BE UNABLE TO MANAGE SIGNIFICANT GROWTH.
To successfully implement our business strategy, we must establish and
achieve substantial growth in our customer base through expansion of production
and sales from existing properties, through business acquisitions, and through
expansion into the retail nursery business. If achieved, significant growth
would place significant demands on our management and systems of financial and
internal controls, particularly because of the number 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.
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
and plants. If our trees, shrubs and plants we grow are damaged or destroyed by
any of those elements, we could suffer a significant loss of revenue and assets.
The loss would be particularly significant if the affected plants were the
Eldarica Pine, which accounted for approximately 46% of our revenue in Fiscal
2005 and 28% of our sales in fiscal 2006.
18
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 low volume of trading limits significantly the number of shares that one can
purchase or sell in a short period of time. Consequently, an investor may find
it more difficult to dispose of large numbers of shares of our common stock or
to obtain a fair price for our common stock in the market.
EVEN IF A BROADER MARKET FOR OUR COMMON STOCK DEVELOPS, THE MARKET PRICE FOR OUR
COMMON STOCK WILL LIKELY CONTINUE TO BE VOLATILE AND MAY CHANGE DRAMATICALLY AT
ANY TIME.
Our common stock is quoted on the OTC Pink Sheets, but experiences
extremely low volume and is traded on a sporadic basis. Even if a broader market
for our common stock develops, the market price of our common stock, like that
of the securities of other early-stage companies, can be expected to be highly
volatile. Our stock price may change dramatically as the result of announcements
of our quarterly results, the execution or termination of significant contracts,
significant litigation or other factors or events that would be expected to
affect our business or financial condition, results of operations and other
factors specific to our business and future prospects. In addition, the market
price for our common stock may be affected by various factors not directly
related to our business, including the following:
o intentional manipulation of our stock price by existing or future
shareholders;
o short selling of our common stock or related derivative securities;
o a single acquisition or disposition, or several related
acquisitions or dispositions, of a large number of our shares;
o the interest, or lack of interest, of the market in our business
sector, without regard to our financial condition or results of
operations;
o the adoption of governmental regulations and similar developments
in the United States or abroad that may affect our ability to offer
our products and services or affect our cost structure; and
o economic and other external market factors, such as a general
decline in market prices due to poor economic indicators or
investor distrust.
OBTAINING ADDITIONAL CAPITAL THROUGH THE FUTURE SALE OF COMMON STOCK AND
DERIVATIVE SECURITIES WILL RESULT IN DILUTION OF SHAREHOLDER INTERESTS.
We plan to raise additional funds in the future by issuing additional
shares of common stock, or securities such as convertible notes, options,
warrants or preferred stock that are convertible into common stock. Any such
sale of common stock or other derivative securities will lead to further
dilution of the equity ownership of existing holders of our common stock.
OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS
OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK.
Shares of our common stock may be deemed to be "low-priced" or "penny
stock," resulting in increased risks to our investors and certain requirements
being imposed on some brokers who execute transactions in our common stock. In
general, a low-priced stock is an equity security that:
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.
19
We believe that our common stock is presently a "penny stock." At any
time the common stock qualifies as a penny stock, the following requirements,
among others, will generally apply:
o Certain broker-dealers who recommend penny stock to persons other
than established customers and accredited investors must make a
special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to
sale.
o Prior to executing any transaction involving a penny stock, certain
broker-dealers must deliver to certain purchasers a disclosure
schedule explaining the risks involved in owning penny stock, the
broker-dealer's duties to the customer, a toll-free telephone
number for inquiries about the broker-dealer's disciplinary history
and the customer's rights and remedies in case of fraud or abuse in
the sale.
o In connection with the execution of any transaction involving a
penny stock, certain broker-dealers must deliver to certain
purchasers the following:
o bid and offer price quotes and volume information;
o the broker-dealer's compensation for the trade;
o the compensation received by certain salespersons for the
trade;
o monthly accounts statements; and
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, consists of 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 annually at 7% and had
an outstanding balance of $201,081 as of June 30, 2006. Principal payments of
$75,000 are due 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 $77,150 note with yearly payments of $50,000, 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 annually 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
$271,198 as of June 30, 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. 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 interest annually at the
rate of 7.25% during the term of the note. This note had an outstanding balance
of $129,551 as of June 30, 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 upon maturity of the note 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
$100,000 note payable due August 2006 (subject to month-to-month extension).
Although we plan on increasing the amount of inventory planted on this S&S Plant
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.
20
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 $379,084 first
mortgage maturing in March 2026. The note accrues interest annually at the rate
of 6.75%, and we are required to make monthly payments of $3,354.55. This
property also secures a second mortgage of $450,000 maturing in January, 2008.
The note accrues interest annually at 12%, and we are required to make quarterly
payments of $13,500. In the opinion of our management, this 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 $1.16 million dollars maturing July 1, 2010.
The note accrues interest annually at 6% until July 1, 2006 and then will accrue
interest at the rate per year that will be the lesser of 0.5% in excess of the
Prime Interest Rate as published by the Wall Street Journal; or the maximum
nonusurious rate of interest permitted by applicable law. We are required to
make monthly interest payments of approximately $6,900. This property secures a
second mortgage of approximately $56,000 maturing in January, 2007. The note
accrues interest annually at 24%, 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 September 30, 2006, as to (1) each person
who beneficially owns of record more than 5% of our outstanding Common Stock,
(2) the Chief Executive Officer and each other executive officer whose
compensation from the Company for Fiscal 2006 exceeded $100,000 (the "named
executive officers"), (3) each director, and (4) 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%
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 September 30, 2006.
(2) The percentages set forth above have been computed assuming the number
of shares of common stock outstanding equals the sum of (a) 24,515,730,
which is the number of shares of common stock actually outstanding on
September 30, 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.
21
(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
KIRK FISCHER, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD. Mr.
Fischer, 39, 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, 60, 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 that did over $25 million in sales and had
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,
39, 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, 38, 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 a multi-million dollar business over 15
years.
22
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
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 to 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,
2006, June 30, 2005 and June 30, 2004 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, 06/30/06 132,000 - - - - - -
Chief Executive Officer 6/30/05 132,000 - - 150,000 - - -
6/30/04 60,000 - - - - - -
KC Holmes, 06/30/06 132,000 - - - - - -
President, CFO 6/30/05 132,000 10,000 - 150,000 - - -
6/30/04 112,250 10,000 - - - - -
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 2006.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES. None of the named executive officer held any options to
purchase common stock as of June 30, 2006 or exercised any options to purchase
common stock during Fiscal 2006.
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 2006, we
granted no options to directors. Directors, whether or not employees, are
permitted to participate in our stock incentive plan.
23
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 with us. Under the agreements, which have a
fixed term of five years, we are required to pay a base salary of $132,000 per
year, subject to increase beginning on July 1, 2006 of an amount equal to the
greater of 3% of the prior base salary or 1% of base salary for every 10%
increase in revenues over the prior fiscal year. We agreed to pay each a
one-time bonus of 500,000 shares of common stock in 2005 (for bonuses not paid
in 2002, 2003 and 2004), a bonus of $2,000 for each $100,000 in revenue growth
Fiscal 2005 over Fiscal 2004, and for Fiscal 2006 through the fiscal year ended
June 30, 2009, a bonus of $1,000 for each $.001 per share in earnings growth
achieved over the prior year (provided that the measurement shall begin at zero
if prior year earnings per share was negative). Each is also entitled to
standard employee benefits and a $500 monthly car allowance. Upon termination by
the Company of each of their employment with or without cause, the Company is
required to continue to pay the employee's then-current base salary throughout
the five-year term of the agreement, and all of the employee's stock options
immediately and automatically vest in full.
We have entered into an employment agreement dated February 15, 2005
with James Fischer, our Vice President of Operations for Arizona Tree Farm
operations and a director, governing his employment with us. Under the
agreement, which has a fixed term of five years, we are required to pay a base
salary of $75,000, subject to a 5% increase per year. We agreed to pay him 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.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following section 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 and Fiscal 2005, respectively, we paid Rocky
Fischer, the brother of Kirk Fischer, our Chief Executive Officer and Chairman
of the Board, $24,020 and $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 June 30, 2006:
BALANCE 2004 2004 BALANCE 2005 2005 BALANCE 2006 2006 BALANCE
INDIVIDUAL 6/30/03 ADVANCES PAYMENTS 6/30/04 ADVANCES PAYMENTS 6/30/05 ADVANCES PAYMENTS 06/30/06
---------------- --------- --------- ---------- -------- ---------- ---------- -------- --------- -------- --------
Jim Fischer -- 25,411 (25,411) -- -- -- --
KC Holmes 12,209 51,300 (63,509) -- 34,270 (29,126) 5,144 47,748 (5,144) 47,748
Kirk Fischer 511 36,700 (37,211) --
Lori Fischer 3,524 127,388 (120,678) 10,234 115,528 (125,762) 197,105 (60,473) 136,632
--------- --------- ---------- -------- ---------- ---------- -------- --------- -------- --------
Total 16,244 240,799 (246,809) 10,234 149,798 (154,888) 5,144 244,853 (65,617) 184,380
24
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.
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 $197,105 and was paid
back $60,473.
In Fiscal 2006, KC Holmes loaned the company $47,748 and was paid back
$5,144.
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 September 30, 2006, there were 24,515,730 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 September 30, 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;
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;
25
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.
26
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 June 30, 2006, the reported bid
price for our common stock was .20 and the ask price for our common stock was
$1.20 with a last trade of $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 June 30, 2006, there were 24,515,730 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,
3,150,000 shares of common stock reserved for the future grant of stock options
under that plan, and 4,703,767 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.
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, 2006. 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
Number of securities to be Weighted-average issuance under equity
issued upon exercise of exercise price compensation plans
outstanding options, of outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
-------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 845,000 $0.25 3,150,000
-------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders None None None
-------------------------------------------------------------------------------------------------------------
Total 845,000 N/A 3,150,000
-------------------------------------------------------------------------------------------------------------
27
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.
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 September 30, 2006 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 thirteen investors. Of these
shares, 450,664 were sold for cash totaling $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.
28
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, 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
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
29
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.
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 of 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 June 2005 and March 2006, we offered and sold 178,575 shares of
our common stock at $0.70 per share to a total of five investors. Of these
shares, all were sold for cash totaling $125,000. 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
30
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 August 2005, Richard Westin converted 5,000 shares of common stock
at $0.30 per share that were 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" 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 January 2006 and June 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. We issued 74,286 for services at $0.70 per share
valued at $52,000 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.
In December 2005, we issued 1,091,995 shares of our common stock for
notes payable conversion and accrued interest valued at $302,840 plus $100,748
in beneficial conversion. 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.
In June 2006, we issued 356,083 shares of our common stock for notes
payable conversions and accrued interest valued at $106,825. 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
31
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 2006 and September 2006, we offered and sold 81,429
shares of common stock at $0.70 per share to a total of five investors. The
shares were all sold for cash totaling $57,000. 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.
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 annually
at 10% 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 annually
at 10%, 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
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.
32
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 annually
at 10% 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 annually at 12%, 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
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.
33
In March 2005, we issued a convertible notes payable for $370,125 to
nine investors, secured by 56,942 inventory trees, bearing interest annually at
12% 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 annually at
10%-15%, 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 $662,500 and were secured by 99,275 inventory trees. These notes bear
interest annually at 12%, 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, and 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
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 2006 and September 2006, we issued convertible notes
payable totaling $50,000 and $50,000, and were secured by 7,425 and 7,684
inventory trees respectively. These notes bear interest annually at 12%, mature
May 2008 and are convertible into shares of our common stock at $0.95 per share
during the first 12 months, at $1.05 and $1.10 per share respectively 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 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
34
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
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.
35
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.
36
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.
--------------------------------------------------------------------------------
PENGE CORP AND SUBSIDIARIES BEGINNING ON
PAGE
--------------------------------------------------------------------------------
Independent Auditors' Report F-1
--------------------------------------------------------------------------------
Consolidated Balance Sheet as of June 30, 2006 F-2
--------------------------------------------------------------------------------
Consolidated Statements of Operations for the years ended
June 30, 2006 and June 30, 2005 F-4
--------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 2006 and June 30, 2005 F-5
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended
June 30, 2006 and June 30, 2005 F-8
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-12
--------------------------------------------------------------------------------
37
PART III
ITEMS 1 & 2. INDEX AND DESCRIPTION TO EXHIBITS
EXHIBIT NO. EXHIBIT INCORPORATED BY REFERENCE/FILED HEREWITH
-------------- ------------------------------------------------------- -----------------------------------------
2.1 Asset Purchase Agreement by and Among Penge Corp, Incorporated by reference to the
Kirk Fischer and H. Preston and Shirley M. Franks Company's Registration Statement on
along with Major Trees Houston Farm L.L.C. dated as Form SB-2, File Number 333-119947,
of May 20, 2004 and exhibits filed with the Commission on October
25, 2004.
2.3 Asset Purchase Agreement by and Among Penge Corp, Filed herewith
Kirk 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 Incorporated by reference to the
Corp., Penge Acquisition Corp., and Profile Company's Registration Statement on
Diagnostics Sciences, Inc. dated June 30, 2005 Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
4.1 Certificate of Incorporation, as amended to date Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
4.2 Bylaws, as amended to date Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
4.3 Form of Common Stock Certificate Filed herewith
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.
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 on
Houston Farm, L.L.C. and H. Preston Franks and Form SB-2, File Number 333-119947,
Shirley M. Franks dated May 26, 2004 filed with the Commission on October
25, 2004.
10.7 $200,000 Promissory Note between Penge Corporation Incorporated by reference to the
and 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 Incorporated by reference to the
and Roger Major and Barbara Major dated September 27, Company's Registration Statement on
2002 Form SB-2, File Number 333-119947,
filed with the Commission on October
25, 2004.
10.9 $100,000 Promissory Note between Penge Corporation Incorporated by reference to the
and Curtis & Tiffany Schmid Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
38
10.10 $200,000 Real Estate Lien Note between Penge Filed herewith
Corporation and Mark Reis
10.11 $20,000 Promissory Note between Penge Corporation and Incorporated by reference to the
Stefan Weiss Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.12 $200,000 Promissory Note between Penge Corporation Incorporated by reference to the
and Philip Oleson Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.13 $500,000 Note Payable between Penge Corporation and Filed herewith
Curtis Schmid
10.14 $172,000 Note Payable between Penge Corporation and Filed herewith
Monitor Finance/First Capital
10.15 $280,646 Note Payable between Penge Corporation and Filed herewith
Monitor Finance/First Capital
10.16 $100,000 Note Payable between Penge Corporation and Filed herewith
Chris Parker
10.17 $150,000 Promissory Note between S&S Farms, Inc. and Filed herewith
American State Bank
10.18 Form of Convertible Note Payable bearing 12% interest Incorporated by reference to the
and convertible at $0.65 per share during the first Company's Registration Statement on
year and $0.75 per share during the second year Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.19 Form of Convertible Note Payable bearing 12% interest Incorporated by reference to the
and convertible at $0.95 per share during the first Company's Registration Statement on
year and $1.05 per share during the second year Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.20 Form of Convertible Note Payable bearing 12% interest Incorporated by reference to the
and convertible at $0.95 per share during the first Company's Registration Statement on
year and $1.10 per share during the second year Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.21 Form of Convertible Note Payable bearing 12% interest Incorporated by reference to the
and convertible at $[ ] per share during the first Company's Registration Statement on
year and $[ ] per share during the second year Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.22 Employment Agreement with Kirk Fischer Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.23 Employment Agreement with KC Holmes Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.24 Employment Agreement with Jim Fischer Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
10.25 Employment Agreement with Curtis Schmid Incorporated by reference to the
Company's Registration Statement on
Form 10-SB, File No. 000-52180, filed
with the Commission on August 14, 2006.
21.1 Subsidiary List Filed herewith
23.1 Consent of Independent Registered Public Accounting Filed herewith
Firm
39
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: October 4, 2006 By: /s/ Kirk Fischer
-------------------------------------
Kirk Fischer, Chief Executive Officer
40
PENGE CORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
PENGE CORP. AND SUBSIDIARIES
CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets, June 30, 2006 and 2005 F-2
Consolidated Statements of Operations,
for the years ended June 30, 2006 and 2005 F-4
Consolidated Statement of Stockholders Equity, for the years
ended June 30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows, for the years
ended June 30, 2006 and 2005 F-10
Notes to Consolidated Financial Statements F-14
[GREGORY & ASOCIATES, LLC LOGO]
4631 SO. SYCAMORE DR. - SALT LAKE CITY, UTAH 84117
(801) 277-2763 PHONE - (801) 277-6509 FAX
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PENGE CORP. AND SUBSIDIARIES
Midland, TX 79707
We have audited the accompanying consolidated balance sheet of Penge Corp., and
subsidiaries as of June 30, 2006 and 2005, and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the years ended June 30, 2006 and 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 audits.
We conducted our audits 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 audits 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 audits 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 audits, 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, 2006 and 2005, and the results
of its consolidated operations and its consolidated cash flows for the years
ended June 30, 2006 and 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 18 to the
financial statements, the Company has a negative working capital, has incurred
reoccurring losses since its inception, and has not generated positive cash
flows from operations. 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 18. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
/s/ Gregory & Associates, LLC
Salt Lake City, Utah
August 12, 2006
F-1
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
2006 2005
---------- ----------
CURRENT ASSETS:
Cash $ 111,915 $ 338,291
Accounts receivable, net 89,062 129,152
Inventories 2,442,469 1,681,832
Prepaid assets 4,769 4,098
---------- ----------
Total Current Assets 2,648,215 2,153,373
PROPERTY, PLANT AND EQUIPMENT, net 4,710,650 2,624,858
LAND HELD FOR SALE 1,636,675 1,374,481
OTHER ASSETS:
Deferred loan costs 229 68,483
Deposits -- 560
Goodwill 150,000 150,000
Definite-life intangible assets, net 13,490 25,053
---------- ----------
Total Other Assets 163,719 244,096
---------- ----------
$9,159,259 $6,396,808
========== ==========
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-2
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY
(CONTINUED)
June 30, June 30,
2006 2005
----------- -----------
CURRENT LIABILITIES:
Current portion of notes payable 940,272 46,400
Current portion of related party notes payable 266,863 273,198
Current portion convertible notes payable 918,125 --
Current portion related party convertible notes payable 150,000 --
Current Portion of Lease Liability 63,700 --
Accounts payable 1,320,214 601,104
Related party accounts payable 217,590 45,478
Customer deposits -- 3,271
Contingent derivative liabilities 56,203 56,217
Other accrued liabilities 284,040 90,641
----------- -----------
Total Current Liabilities 4,217,007 1,116,309
LONG-TERM DEBT:
Notes payable, less current portion 1,500,154 1,735,312
Related party notes payable, less current portion 771,760 1,038,417
Convertible notes payable, less current portion 1,578,156 1,558,625
Related party convertible notes payable,
less current portion 550,000 450,000
Long-term capital lease obligations, less cur portion 225,596 --
Deferred Income 23,310 --
----------- -----------
Total Long-term Debt 4,678,976 4,782,354
----------- -----------
8,895,983 5,898,663
----------- -----------
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, 24,515,730 and 23,132,373 shares
issued and outstanding, respectively 24,516 23,132
Additional paid-in capital 3,637,593 3,249,364
Accumulated (deficit) (3,398,834) (2,191,074)
----------- -----------
263,275 1,081,422
Less stock subscriptions receivable - related party -- (583,277)
----------- -----------
263,275 498,145
----------- -----------
$ 9,159,258 $ 6,396,808
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
June 30,
2006 2005
----------- -----------
NET REVENUES:
Farm Crop Sales, net $ 3,043,258 $ 1,919,770
COST OF GOODS SOLD 2,186,319 1,424,309
----------- -----------
GROSS PROFIT 856,939 495,461
OPERATING EXPENSES:
Salaries, Wages and Related Expenses 596,088 808,521
Consulting 26,125 148,800
Travel 46,316 72,440
Advertising 57,900 --
Other General and Administrative 481,528 419,366
----------- -----------
Total Operating Expenses 1,161,641 1,449,127
LOSS FROM OPERATIONS (304,702) (953,666)
OTHER INCOME (EXPENSE):
Interest income 309 128
Interest expense related party (206,308) (85,268)
Interest expense (690,050) (287,524)
Loss on disposal of fixed assets (7,009) (44,144)
----------- -----------
Total Other (Expense) (903,058) (416,808)
----------- -----------
LOSS BEFORE INCOME TAXES (1,207,760) (1,370,474)
CURRENT TAX EXPENSE -- --
CURRENT TAX (BENEFIT) -- --
----------- -----------
NET LOSS $(1,207,760) $(1,370,474)
=========== ===========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.05) $ (0.09)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-4
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
Preferred Stock Common Stock Additional
---------------------- --------------------------- Paid-in Accumulated Subscriptions
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 -- --
Note payable proceeds
allocated
to warrants,
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 these consolidated financial
statements
F-5
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
(CONTINUED)
Preferred Stock Common Stock Additional
---------------------- --------------------------- Paid-in Accumulated Subscriptions
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 as
part of an
acquisition 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
for 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 these consolidated financial
statements
F-6
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
(CONTINUED)
Preferred Stock Common Stock Additional
---------------------- --------------------------- Paid-in Accumulated Subscriptions
Shares Amount Shares Amount Capital Deficit Receivable
--------- -------- ----------- ----------- ----------- ----------- -----------
Collected stock
subscription
receivable -- -- -- -- -- -- 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 -- -- -- -- -- (1,196,612) --
--------- -------- ----------- ----------- ----------- ----------- -----------
Balance
June 30, 2005 -- $ -- 23,132,373 $ 23,132 $ 3,249,364 $(2,017,212) $ (583,277)
Collected stock
subscription
receivable, July
through August 2005 -- -- -- -- -- -- 62,500
Exercised options to
purchase shares at
$.30 per share,
August 2005 -- -- 5,000 5 1,495 -- --
Collected stock and
option conversion
subscription
receivable,
September 2005 -- -- -- -- -- -- 80,777
Issuance of shares
for cash at $.70
per share,
November 2005 -- -- 35,714 36 24,964 -- --
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-7
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
(CONTINUED)
Preferred Stock Common Stock Additional
---------------------- --------------------------- Paid-in Accumulated Subscriptions
Shares Amount Shares Amount Capital Deficit Receivable
--------- -------- ----------- ----------- ----------- ----------- -----------
Convertible note
payable conversion
at $0.22 and $0.25
per share including
beneficial
conversion,
December 2005 -- -- 425,328 425 203,163 -- --
Collected stock and
option conversion
subscription
receivable,
December 2005 -- -- -- -- -- -- 5,700
Collected stock
subscription
receivable through
receipt of Treasury
Stock, December 2005 -- -- (408,296) (408) (358,892) -- 359,300
Convertible note
payable conversion
at $0.30 per share,
December 2005 -- -- 666,667 667 199,333 -- --
Issuance of shares for
employee services
rendered,
January 2006 -- -- 50,000 50 34,950 -- --
Issuance of shares for
cash at $.70 per
share, February
through March 2006 -- -- 142,860 143 99,857 -- --
Collected stock
subscription
receivable,
March 2006 -- -- -- -- -- -- 75,000
Issuance of shares in
payment of services
rendered for fixed
assets at $0.70 per
share, March 2006 -- -- 15,000 15 10,485 -- --
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-8
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
(CONTINUED)
Preferred Stock Common Stock Additional
---------------------- --------------------------- Paid-in Accumulated Subscriptions
Shares Amount Shares Amount Capital Deficit Receivable
--------- -------- ----------- ----------- ----------- ----------- -----------
Issuance of shares for
cash at $.70 per
share, April 2006 -- -- 35,715 36 24,964 -- --
Convertible note
payable conversions
at $0.30 per share,
June 2006 -- -- 356,083 356 106,469 -- --
Issuance of shares in
payment of services
rendered for fixed
assets at $0.70 per
share, April through
June 2006 -- -- 59,286 59 41,441 -- --
Net loss for the year
ended June 30, 2006 -- -- -- -- -- (1,196,612) --
--------- -------- ----------- ----------- ----------- ----------- -----------
-- $ -- 24,515,730 $ 24,516 $ 3,637,593 $(3,398,834) $ 0
========= ======== =========== =========== =========== =========== ===========
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-9
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,207,760) $(1,370,474)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 65,504 57,749
Amortization of discounts 21,813 62,096
Bad debt expense 682 5,334
Impairment of inventory (25,000) (100,000)
Depreciation and amortization 303,919 143,803
Contingent derivative liabilities (14) 12,229
Loss on sale of equipment 7,010 44,144
Non-cash expense related to equity instruments 188,948 494,868
Changes in assets and liabilities:
Accounts receivable 39,408 (119,693)
Inventories (735,637) (600,081)
Prepaid expenses (671) (1,776)
Refundable deposits -- (40)
Accounts payable 719,109 422,132
Accrued liabilities 206,647 20,142
Customer deposits (3,271) 3,271
----------- -----------
Net Cash Used by Operating Activities (419,312) (926,296)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to purchase property and equipment (1,998,412) (514,119)
Payments for land held for sale (20,194) --
Proceeds from sale of equipment -- 11,000
Changes in deposits 560 --
Cash paid for goodwill -- (150,000)
Cash paid for business acquisitions -- (300,000)
----------- -----------
Net Cash Used by Investing Activities (2,018,046) (953,119)
----------- -----------
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-10
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Year Ended
June 30,
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in related party advances 99,943 (5,090)
Proceeds from notes payable 1,192,500 287,666
Payment of loan costs -- (108,060)
Payments on notes payable (532,572) (40,750)
Proceeds from related party notes payable -- 85,000
Payments on related party notes payable (139,820) (198,676)
Proceeds from convertible notes payable 912,500 1,337,656
Payments on convertible notes payable (16,344) (10,000)
Proceeds from related party convertible notes payable -- 450,000
Payments on capital lease obligations (40,884) --
Proceeds from capital lease obligations 360,180 --
Proceeds allocated to beneficial conversion feature of
convertible notes payable -- 50,000
Proceeds allocated to warrants -- 15,000
Proceeds from stock subscription receivables 223,978 --
Proceeds from issuance of common stock 151,501 352,723
----------- -----------
Net Cash Provided by Financing Activities 2,210,982 2,215,469
----------- -----------
INCREASE IN CASH AND EQUIVALENTS (226,377) 336,054
CASH AND EQUIVALENTS AT THE BEGINNING OF
THE PERIOD 338,291 2,237
----------- -----------
CASH AND EQUIVALENTS AT THE END OF THE PERIOD $ 111,914 $ 338,291
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 558,374 $ 192,747
Income Taxes $ -- $ --
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-11
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, 2006
During the year ended, the Company obtained financing for the purchase of land
held For sale in the amount of $242,000.
During the year, a related party paid $72,169 from the sale of personal property
against a note payable of the Company.
During the year, the Company agreed the Company agreed to assume liability of a
related party, which reduced the amount which was owed to the related party in
the amount of $133,00.
During the year, the Company issued 1,448,078 shares of common stock for
$200,000 n convertible related party notes payable, $200,000 in convertible
notes payable and $9,164 in accrued interest.
Subsequent to the year end, but reflected in these financial statements, the
Company received and cancelled 408,296 shares of common stock as settlement of
$359,300 in stock subscription receivables.
During the year, the Company financed $375,000 for the purchase of land and a
building.
In November 2005, the Company purchased fixed assets under capital lease with a
value of $360,181.
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 value at $35,000.
In March 2006, the Company issued 15,000 shares of common stock in payment of
services valued at $10,500.
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.
[Continued]
The accompanying notes are an integral part of these consolidated financial
statements
F-12
PENGE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES (CONTINUED):
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.
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 these consolidated financial
statements
F-13
PENGE CORP. AND SUBSIDIARIES
NOTES TO 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 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. The financial statements
include operations of S&S Plant Farms, Inc. from March 1, 2005 through
June 30, 2006.
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 June 30, 2006.
Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary ("the
Company") grow landscaping and garden plants, flowers, shrubs, trees
and other agricultural products for sale to retail nurseries, landscape
professionals, and the general public in Southwestern United States.
The Company has, at the present time, not paid any dividends and any
dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
CONSOLIDATION -The financial statements presented reflect the accounts
of Parent, Penge, MT Subsidiary, S&S Subsidiary, and TLC Subsidiary;
all significant inter-company transactions have been eliminated in
consolidation.
AGRICULTURAL PRODUCTION - The Company accounts for their agricultural
activities in accordance with Statement of Position 85-3, "Accounting
by Agricultural Producers and Agricultural Cooperatives". All direct
and indirect costs of growing crops are either accumulated as inventory
or expensed as cost of goods sold. Permanent land development costs are
capitalized and not depreciated. Limited-life land development costs
and the development costs to bring long-life and intermediate-life
plants into production are capitalized and depreciated using the
straight-line method over the estimated useful lives of the assets.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
debt investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had $0 and $148,085 in excess
of federally insured limits at June 30, 2006 and June 30, 2005,
respectively.
F-14
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE - Accounts receivable consist of trade receivables
arising in the normal course of business. At June 30, 2006 and 2005,
the Company has an allowance for doubtful accounts of $6,193 and
$5,503, respectively, which reflects the Company's best estimate of
probable losses inherent in the accounts receivable balance. The
Company estimates allowances for doubtful accounts based on the aged
receivable balances and historical losses. The Company records interest
income on delinquent accounts receivable only when payment is received.
The Company first applies payments received on delinquent accounts
receivable to eliminate the outstanding principal. The Company charges
off uncollectible accounts receivable when management estimates no
possibility of collecting the related receivable. The Company considers
accounts receivable to be past due or delinquent based on contractual
terms.
INVENTORIES - Finished goods inventory is stated at the lower of cost
or market using the retail method as the Company has a large quantity
of inventory items that have similar costs and markups; 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
market or cost using the first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or
carryover basis. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized upon
being placed in service. Expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. In
accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company periodically reviews their property and equipment for
impairment.
LAND HELD FOR SALE - Land held for sale is recorded at the lower of
cost or net realizable value.
F-15
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS - The Company accounts for their intangible assets in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 establishes three
classifications for intangible assets including definite-life
intangible assets, indefinite-life intangible assets and goodwill and
requires different accounting treatment and disclosures for each
classification. In accordance with SFAS No. 142, the Company
periodically reviews their intangible assets for impairment.
PRODUCT WARRANTY - The Company does not warranty their agricultural
products against damage that may occur prior to delivery to the
customer. At June 30, 2006 and 2005, the Company has established a
reserve for future warranty expense of $0 and $0, respectively.
REVENUE RECOGNITION - The Company's revenue comes primarily from the
sale of agricultural products. The Company recognizes revenue from
retail sales at the time of retail purchase. The Company recognizes
revenue from landscaping and wholesale customers when rights and risk
of ownership have passed to the customer, there is persuasive evidence
of a sales arrangement, product has been shipped, (delivered to or
picked up by the customer), the price and terms are finalized and
collection of the resulting receivable is reasonably assured.
ADVERTISING COSTS - Cost incurred in connection with advertising of the
Company's products are expensed as incurred. Such costs amounted to
$57,900 and $0 for 2006 and 2005, respectively.
LEASE COMMITTMENTS - The Company accounts for lease commitments in
accordance with SFAS 98, wherein the underlying assets are capitalized
and the capital lease obligation recorded if the lease commitments meet
the requirement for capitalization. All other lease obligations
accounted for as operating leases wherein payments are expensed as the
obligation arise [See Note 11].
STOCK-BASED COMPENSATION - The Company has stock option plans that
provide for stock-based employee compensation, including the granting
of stock options, to certain key employees [See Note 12]. Prior to July
1, 2005, the Company applied APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations in accounting for
awards made under the Company's stock-based compensation plans. Under
this method, compensation expense was recorded on the date of grant
only if the current market price of the underlying stock exceeded the
exercise price.
F-16
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the periods presented in the accompanying financial statements,
the Company has granted options under its 2002 Stock Incentive Plan.
The Company has adopted the provisions of SFAS No. 123R using the
modified-prospective transition method and the disclosures that follow
are based on applying SFAS No. 123R. Under this transition method,
compensation expense recognized during the year ended June 30, 2006
included: (a) compensation expense for all share-based awards granted
prior to, but not yet vested as of July 1, 2005, and (b) compensation
expense for all share-based awards granted on or after July 1, 2005.
Accordingly, no compensation cost has been recognized for grants of
options to employees and directors in the accompanying statements of
operations with an associated recognized tax benefit of $0 of which $0
was capitalized as an asset for the period ended June 30, 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:
June 30,
2005
--------------
Net loss, as reported $ (1,370.474)
Add: Stock-based employee
compensation expense included in
reported net loss --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method --
--------------
Net loss (1,370.474)
--------------
Loss per common share, as reported $ (0.09)
Loss per common share, pro forma $ (0.09)
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" [SEE NOTE 13].
F-17
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOSS PER SHARE - The Company calculates loss per share in accordance
with the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share."
Basic loss per common share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per
common share when presented are based on shares outstanding as computed
under basic EPS and potentially dilutive common shares. Potential
common shares included in the diluted earnings per share calculation
include in-the-money stock options that have been granted but have not
been exercised and convertible notes payable. [SEE NOTE 14]
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimated.
FAIR VALUE OF FINANCIAL INSTRUMENTS -The fair value of the Company's
accounts receivable, accounts payable, accrued liabilities, and notes
payable approximate their carrying values based on their effective
interest rates compared to current market prices for similar assets and
liabilities.
RECLASSIFICATION - The financial statements for the period ended prior
to June 30, 2006 have been reclassified to conform to the headings and
classifications used in the June 30, 2006 financial statements.
RECENTLY ENACTED ACCOUNTING STANDARDS - In May 2005, the FASB issued
Statement of Financial Accounting Standards No. 154 ("SFAS 154"),
"Accounting Changes and Error Corrections" which replaces APB Opinion
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements--An Amendment of APB Opinion
No. 28". SFAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principal
unless it is not practicable. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005 and is required to be adopted by the Company in the
first quarter of fiscal 2006. The impact that the adoption of SFAS 154
will have on Penge Corp results of operations and financial position
will depend on the nature of future accounting changes adopted by Penge
Corp and the nature of transitional guidance provided in future
accounting pronouncements.
F-18
PENGE CORP. AND SUBSIDIARIES
NOTES TO 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 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 controlled by shareholders 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, 2006, prior to the
merger. The following shows how the acquisition 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
===============
The following unaudited proforma combined condensed results of operation
for the year ended June 30, 2005 of Penge Corp. and S&S Plant Farms, Inc,
as if the Company had purchased this entity at July 1, 2004:
Year ended June 30,
2005
-------------------
Net sales $ 3,752,742
Cost of Goods Sold (2,993,671)
-------------------
Gross Profit 759,071
-------------------
Operating expenses (1,279,082)
-------------------
Other expense (942,751)
-------------------
Loss from continuing operations (1,462,762)
-------------------
Net loss $ (1,462,762)
====================
S&S purchased and paid for $36,160 of inventory from July 1, 2004 to
February 28, 2005. These have been eliminated from the above proforma
combined results.
F-19
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 INVENTORIES
Inventories consist of the following at:
June 30,
-----------------------------
2006 2005
------------- -------------
Raw Materials $ 97,904 $ 255,701
Finished Goods 2,369,565 1,476,131
Allowance for obsolete / slow
moving inventory (25,000) (50,000)
------------- -------------
$ 2,442,269 $ 1,681,832
------------- -------------
All of the Company's inventories are collateral on various notes payable
[See Notes 7, 8, 9 and 10].
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following at:
Estimated June 30,
Useful Lives of -------------------------------
Assets (Years) 2006 2005
--------------- ------------- -------------
Office furniture and equipment 1 - 10 $ 78,944 $ 36,126
Retail furniture and equipment 1 - 10 613,113 -
Farm equipment 2 - 15 2,540,857 1,468,073
Buildings 20 - 30 1,394,278 715,110
Land not applicable 592,753 492,753
Construction in Progress not applicable 15,539 131,329
------------- -------------
Total 5,235,484 2,843,391
Less accumulated depreciation (524,834) (218,533)
------------- -------------
Property, Plant and Equipment, net $ 4,710,650 $ 2,624,858
------------- -------------
Depreciation expense for the years ended June 30, 2006 and 2005 was
$303,919 and $132,240, respectively. All of the Company's property and
equipment are collateral for certain notes payable [See Notes 7, 8, 9
and 10].
TEXAS LANDSCAPE CENTER, INC. - On January 6, 2006 the Company purchased
and improved for $951,382 a 13,000 square foot building for a retail
location and corporate offices situated on 2.6 acres and an adjoining
1.2 acre parcel in Midland, Texas. NOTE 5 LAND HELD FOR RESALE
F-20
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FARM LAND - On December 21, 2005, the Company purchased a 119 acre
parcel in Midland, Texas for $242,000. At June 30, 2006, the land is
held as collateral on a note payable [See Note 9].
COMMERCIAL PROPERTY - In 2005, the Company also purchased 7 acres of
commercial property in San Angelo, Texas for $1,394,675. At June 30,
2006, the land is held as collateral on a note payable [See Note 9].
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS
The following is a summary of goodwill and definite-life intangible assets:
June 30,
------------------------
2006 2005
---------- ---------
GOODWILL
Goodwill $ 150,000 $ 150,000
---------- ---------
DEFINITE-LIFE INTANGIBLES ASSETS
5-year non-compete contract with
shareholder 28,907 28,907
5-year non-compete contract with
shareholders 28,907 28,907
Less accumulated amortization (44,324) (32,761)
---------- ---------
Net Definite-Life Intangible Assets $ 13,490 $ 36,616
------------ ---------
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 1,927
Thereafter --
------------
13,490
NOTE 6 GOODWILL / DEFINITE-LIFE INTANGIBLE ASSETS (CONTINUED)
Definite Life Intangible Assets - The Company is amortizing their
definite-life intangible assets on a straight-line basis over five
years. Amortization expense of $11,563 and $11,563 was recorded for the
year ended June 30, 2006 and 2005, respectively, and has been included
in general and administrative expense.
F-21
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill - The Company recorded goodwill of $150,000 in connection with
the acquisition of Profile Diagnostic Sciences, Inc. as the purchase
price of $150,000 exceeds the $0 net book value of the assets acquired.
NOTE 7 CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable summarized in
groups with similar attributes at:
June 30,
------------------------------
2006 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 $0 and 4,500,
respectively $ -- $ 40,500
12% Note payable, maturing in May to June 2007, convertible at
$.65 per share for the first twelve months and $.75 per share
for the second twelve months, secured by UCC-1 lien against
inventory 270,000 270,000
12% Note Payable, maturing in February 2007,
convertible at $.30 per share through February
2007, secured by UCC-1 lien against inventory 228,000 378,000
12% Note Payable, maturing in June to October 2007, convertible at
$.65 per share for the first twelve months and $.75 per share
for the second twelve
months, secured by UCC-1 lien against inventory 750,000 500,000
12% Note payable, maturing in October 2007 to May 2008,
convertible at $.95 per share for the first twelve months and
$1.05 for the second twelve
months, secured by UCC-1 lien against inventory 452,500 --
Continued
F-22
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
15% Note Payable, maturing in 2007, convertible at $.30 per share
(At the time of conversion, the creditor can require the
Company to redeem any amount of the shares in the conversion at
$.345 per share), secured by a lien using a Trust Deed and
Trust Deed Note, against Major Trees, a lien using a Trust Deed
and Trust Deed Note, against Major Trees, TX, and a term life
insurance policy on two officers of the Company 370,125 370,125
12% Note payable, maturing in January 2008, convertible at $.95
per share for the first twelve months and $1.10 for the second
twelve months, secured by A UCC-1 lien against inventory 200,000 --
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 225,656 --
---------- ----------
Total 2,496,281 1,558,625
Less Current Portion (918,125) --
---------- ----------
$1,578,156 $1,558,625
---------- ----------
The convertible notes payable mature as follows for the twelve-month
periods ended:
Principle
June 30, Due
--------------
2007 $ 918,125
2008 1,578,156
2009 -
Thereafter -
--------------
$ 2,496,281
--------------
F-23
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONVERTIBLE NOTES PAYABLE (CONTINUED)
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the years
ended June 30, 2006 and 2005, the Company amortized $4,500 and $5,533,
respectively, the discounts on notes payable as interest expense.
At June 30, 2006, the Company had a total of $0 in loan fees and costs
from establishing these convertible notes payable. These costs have
been deferred and are being amortized over the term of the respective
notes. For the years ended June 30, 2006 and 2005, the Company
amortized $29,081 and $11,679, respectively, of the deferred loan costs
as interest expense.
For the years ended June 30, 2006 and 2005, interest expense on the
convertible notes payable amounted to $266,273 and $91,691,
respectively.
The Company verbally agreed with certain 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 6 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 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 in December 2005. One other notes payable had an original
conversion feature of $.25 on or before the 6 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 in December 2005. The Company
recognized an additional $100,748 in interest in connection with the
change in conversion prices.
NOTE 8 RELATED PARTY CONVERTIBLE NOTES PAYABLE
The Company had the following related party convertible notes payable
summarized in groups with similar attributes due to shareholders of the
Company at:
June 30,
------------------------------
2006 2005
---------- ----------
12% Notes payable, maturing in 2007, convertible at $.30 per share
through February 2007, secured by UCC-1lien against inventory,
greenhouses, and equipment $ -- $ 200,000
---------- ----------
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
UCC-1 lien against inventory 100,000 100,000
---------- ----------
Continued
F-24
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 RELATED PARTY CONVERTIBLE NOTES PAYABLE
12% Notes payable, maturing in 2008, convertible at $.65 per share
for the first twelve months and $.75 per share for the second
twelve months, secured by UCC-1 lien against inventory 50,000 50,000
12% Notes payable, maturing in 2007, convertible at
$.30 per share through February 2007, secured by
inventory 100,000 100,000
12% Notes Payable, maturing in 2008, convertible
at $.70 per share through January 31, 2008,
secured by TLC's building and land in Midland, TX 450,000 --
---------- ----------
Total 700,000 450,000
Less Current Portion (150,000) -
---------- ----------
$ 550,000 $ 450,000
---------- ----------
The related party convertible notes payable mature as follows for the
twelve-month periods ended:
Principle
June 30, Due
-------------
2007 $ 150,000
2008 550,000
Thereafter -
-------------
$ 700,000
-------------
The discounts due to the beneficial conversion feature of the notes are
being amortized over the term of the respective notes. For the years
ended June 30, 2006 and 2005, the Company amortized $0 and $50,000,
respectively, of the discounts on notes payable as interest expense.
At June 30, 2006, the Company had a total of $0 in loan fees and costs
from establishing these convertible notes payable. These costs have
been deferred and are being amortized over the term of the respective
notes. For the years ended June 30, 2006 and 2005, the Company
amortized $0 and $11,000, respectively, of the deferred loan costs as
interest expense.
For the years ended June 30, 2006 and 2005, interest expense on the
related party convertible notes payable amounted to $173,326 and
$19,792, respectively.
F-25
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE
The Company had the following notes payable summarized in groups with similar attributes at:
June 30,
------------------------------
2006 2005
---------- ----------
7% Notes payable, yearly payments of $50,000, mature in 2007,
secured by Major Tree's outstanding shares of capital stock,
financial
books and records, equipment, and furniture $ 77,150 $ 77,150
Unsecured 6% Notes payable, maturing
July 15, 2006 21,200 -
24% Notes payable, maturity extended to August
15, 2006, beginning balance of $200,000
secured by land. Security was released upon
principle payment of $144,000 in June 2006 56,000 -
24% Notes payable, maturing December 15, 2006
secured by land. 147,500 -
14% Notes payable maturing in 2007, secured by MT
Subsidiary's land in Cochise County, AZ 280,646 280,646
14% Notes payable, maturing in 2007, secured by the property of an
officer in Clark County, Nevada. In September 2005 an officer
of the Company paid $72,169 in behalf of the Company and the
lien on the property was released by the holder
of the note 99,851 172,020
12% Notes payable, balloon payment due upon
maturity, matures in 2007, secured by inventory 85,577 85,577
6.75% Note payable, monthly payments of
$3,355, matures in 2021, secured by TLC's building
and land 376,632 -
7% Note payable, monthly payments of $1,370,
mature in 2008, secured by S&S' land and office
building 129,551 -
Continued
F-26
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 NOTES PAYABLE (CONTINUED)
Interest rate will be 6% note payable until July 1, 2006.
Beginning July 1, 2006, interest will accrue at the rate per
year that will be the lesser of .5% in excess of the Prime
Interest Rate as published by the Wall Street Journal; or the
maximum nonusurious rate of interest permitted by applicable
law. Beginning January 2007, monthly payments necessary to
amortize the balance over a period ending July 2015 will be
required. The note matures on July 1, 2010 when the balance will
be due. Note is secured by land in San Angelo, TX
which is held for resale. 1,166,319 1,166,319
---------- ----------
Total 2,440,426 1,781,712
Less Current Portion (940,272) (46,400)
---------- ----------
$1,500,154 $1,735,312
---------- ----------
The notes payable mature as follows for the twelve-month periods ended:
Principle
June 30, Due
---------------
2007 $ 940,272
2008 313,817
2009 192,698
2010 659,860
2011 20,139
Thereafter 313,640
---------------
$ 2,440,426
---------------
At June 30, 2006, the Company had a total of $0 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, 2006 and 2005, the Company amortized $65,504 and
$32,549, respectively, of the deferred loan costs as interest expense.
For the years ended June 30, 2006 and 2005, interest expense on the
notes payable amounted to $157,225 and $57,440, respectively.
F-27
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE
The Company had the following related party notes payable summarized in
groups with similar attributes due to shareholders of the Company at:
June 30,
-----------------------------
2006 2005
---------- ----------
7% Note payable, yearly payments of $75,000,
maturing in 2009, secured by Major Tree's
farmland, buildings, and equipment $ 201,081 $ 240,901
8% Note payable, monthly payments of $2,500,
maturing in 2009, secured by land and inventory 271,198 279,151
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 367,282 500,000
Unsecured 12% Note payable, quarterly interest
payments beginning April 2006, maturing
January 10, 2007 100,000 -
10% Note payable, maturing in 2007, secured by
UCC-1 lien against inventory, net discount for
options issued of $938 and $8,438 49,062 41,563
12% Notes payable, balloon payment due upon
maturity, mature in 2007, secured by inventory 50,000 50,000
---------- ----------
Total 1,038,623 1,111,615
Less Current Portion (266,863) (73,198)
---------- ----------
$ 771,760 1,038,417
---------- ----------
At June 30, 2006, the Company had a total of $229 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, 2006 and 2005, the Company amortized
$2,750 and $2,521, respectively, of the deferred loan costs as interest
expense. For the years ended June 30, 2006 and 2005, interest expense
on the related party notes payable amounted to $32,982 and $65,476,
respectively.
F-28
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 RELATED PARTY NOTES PAYABLE (CONTINUED)
The notes payable mature as follows for the twelve-month periods ended:
June 30, Principle Due
----------------
2007 $ 266,863
2008 101,221
2009 48,869
2010 358,307
2011 263,363
Thereafter -
----------------
$ 1,038,623
----------------
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, 2006 and 2005, the Company amortized $7,232 and $6,563,
respectively, of the discounts on notes payable as interest expense.
NOTE 11 CAPITAL LEASES OBLIGATION
The Company leases equipment under capital leases and that expire on
October 2009 and July through November 2010. The gross amount of assets
recorded under capital leases and the associated accumulated
depreciation are included under property and equipment and are as
follows:
June 30,
2006
-----------
Farm equipment $ 360,181
-----------
Total 360,181
Less accumulated depreciation (44,970)
-----------
Net Leased Equipment $ 315,211
-----------
The Company amortizes its lease obligations over the term of each
lease. Amortization expense was $44,970 for year ended June 30, 2006.
F-29
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 CAPITAL LEASES OBLIGATION (CONTINUED)
The future minimum lease payments are as follows for the twelve-month
periods ended:
Amortization
June 30, Amount Due
-------------
2007 $ 97,746
2008 102,383
2009 102,383
2010 87,151
2011 26,536
Thereafter -
-------------
Total minimum obligations 416,199
Executory costs and interest (96,903)
-------------
PV of minimum obligations 319,296
Current portion (63,700)
-------------
Long-term obligations $ 255,596
-------------
NOTE 12 CAPITAL STOCK AND OPTIONS
PREFERRED STOCK - In October 2004, Parent amended its articles of
incorporation to authorize 10,000,000 shares of preferred stock, $.001
par value, with such rights, preferences and designations and to be
issued in such series as determined by the Board of Directors. At June
30, 2006 and 2005, no preferred shares were issued and outstanding.
COMMON STOCK - 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, or $.30 per share.
In March and June 2006, the Company issued 59,286 shares of their
previously authorized but unissued common stock for services and
supplies valued at $41,500 or $.70 per share.
In April 2006, the Company issued 35,715 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per
share.
F-30
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
In March 2006, the Company issued 15,000 shares of their previously
authorized but unissued common stock for services and supplies valued
at $10,500 or $.70 per share.
In February and March 2006, the Company issued 142,860 shares of their
previously authorized but unissued common stock for cash of $100,000,
or $.70 per share.
In January 2006, the Company issued 50,000 shares of their previously
authorized but unissued common stock for employee services rendered
valued at $35,000 or $.70 per share.
In December 2005, the Company issued 666,667 shares of their previously
authorized but unissued common stock for the conversion of $200,000
note payable, or $.30 per share.
In December 2005, the Company issued 308,921 shares of their previously
authorized but unissued common stock for the conversion of $75,000 note
payable and $2,230 interest, or $.25 per share. The Company recorded an
additional $55,117 in interest for the adjusting the conversion price
to $0.25 per share.
In December 2005, the Company issued 116,407 shares of their previously
authorized but unissued common stock for the conversion of $25,000 note
payable and $110 interest, or $.22 per share. The Company recorded an
additional $45,632 in interest for the adjusting the conversion price
to $0.22 per share.
In November 2005, the Company issued 35,714 shares of their previously
authorized but unissued common stock for cash of $25,000, or $.70 per
share
In August 2005, the Company issued 5,000 shares of their previously
authorized but unissued common stock for the exercise of options at
$.30 per share.
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, or $.50 per share.
In June 2005, the Company issued 847,032 shares of their previously
authorized but unissued common stock for conversion of $200,000 note
payable and $3,288 accrued interest, or $.24 per share.
F-31
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
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, or $.50 per share.
SUBSCRIPTION RECEIVABLE - During fiscal 2006, the Company received cash
of $233,977 in payment of subscriptions receivable due from officers of
the Company. Also during 2006, the Company received 408,296 common
shares valued at $0.88 per share in payment of $359,300 in
subscriptions receivable from officers of the Company. The 408,296
common shares were held in treasury until canceled during June 2006.
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with
a maximum of 8,000,000 shares of common stock reserved for issuance
under the Plan. The Plan provides for both the direct award of shares
and for the grant of options to purchase shares to employees, officers,
directors, agents, consultants, advisors and independent contractors.
Awards under the Plan will be granted as determined by the Board of
Directors and the Board of Directors shall determine which eligible
persons are to receive Incentive Stock Options, Non-Statutory Stock
Options or stock issuances. The Board of Directors also sets the number
of shares, the exercise price and the exercise terms for grants.
Options granted to non-exempt employees are required to have an
exercise price of at least 85% of the fair market value of the common
stock at the time of grant. Incentive Stock Options must be granted
with an exercise price of at least 100% (110% for shareholders who own
at 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, 2006 and 2005,
total awards available to be granted from the plan amounted to
3,150,000 and 3,150,000, respectively.
The fair value of each of the Company's stock option awards is
estimated on the date of grant using a Black-Scholes option-pricing
model that uses the assumptions noted in the table below. The fair
value of the Company's stock Option awards is expensed on a graded
vesting straight-line basis over the vesting period of the options,
which is generally immediate. Expected volatility is based on an
average of historical volatility of the company's stock. The risk-free
interest rate for periods within the contractual life of the stock
option award is based on the yield curve of a zero-coupon U.S. Treasury
bond on the date the award is granted with a maturity equal to the
expected term of the award. The expected term of awards granted is
derived from historical experience under the Company's stock-based
compensation plans and represents the period of time that awards
granted are expected to be outstanding.
F-32
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
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%.
A summary of the status of options granted at June 30, 2006, and
changes during the period then ended are as follows:
For the Year Ended
June 30, 2006
----------------------------------------------------------
Weighted
Average Aggregate
Weighted Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value
------- --------------- ---------------- ---------
Outstanding at beginning of period 850,000 $ 0.25 5.9 years
Granted - -
Exercised (5,000) 0.30
Forfeited -
Expired -
Outstanding at end of period 845,000 $ 0.25 4.9 years $378,000
Vested and expected to vest in the future 845,000 $ 0.25 4.9 years $378,000
Exercisable at end of period 845,000 $ 0.25 4.9 years $378,000
Weighted average fair value of options
granted - $ -
--------
The Company had no non vested options at the beginning of the period.
At June 30, 2006 the Company had no non vested options resulting in no
unrecognized compensation expense.
The total intrinsic value of options exercised during the year ended
June 30, 2006 and 2005 was $2,000 and $760,000 respectively. Intrinsic
value is measured using the fair market value at the date of exercise
(for shares exercised) or at June 30, 2006 and 2005 (for outstanding
options), less the applicable exercise price.
During the years ended June 30, 2006 and 2005, the Company received
cash of $31,977 and $30,223 and recorded a subscription receivable of
$0 and $389,777 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.
F-33
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 CAPITAL STOCK AND OPTIONS (CONTINUED)
Common shares issued upon exercise of options are issued from available
authorized but unissued common shares. As of June 30, 2006, the Company
has no plans to repurchase common shares issued upon exercise of
options.
A summary of the status of stock options outstanding at June 30, 2006
is presented below:
Options Outstanding Options Exercisable T
------------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Remaining
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------
$ 0.10 200,000 6.4 years $ 0.10 200,000 $ 0.10
0.30 645,000 4.5 years 0.30 645,000 0.30
=============== ============= ================= =============== =========== ===============
$0.10-0.30 845,000 4.9 years $ 0.25 845,000 $ 0.25
--------------- ------------- ----------------- --------------- ----------- ---------------
NOTE 13 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Which requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of
temporary reporting differences between book and tax accounting methods
and any available operating loss or tax credit carryforwards.
At June 30, 2006 and 2005, the total of all deferred tax assets is
approximately $804,000 and $543,000 and the total of all deferred tax
liabilities is $191,000 and $104,000. 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 $613,000 and $439,000 at June 30, 2006 and
2005. The change in the valuation allowance for the year ended June 30,
2006 and 2005 was approximately $174,000 and $371,000.
At June 30, 2006 and 2005, the Company has available unused net
operating loss carryforwards of approximately $4,650,000 and $3,055,000
respectively, which may be applied against future taxable income and
which expire in various years through 2026. Also, the Company has
unused capital loss carryovers at June 30, 2006 and 2005 of
approximately $81,000 and $73,000, respectively, which expire in
various years through 2009.
F-34
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The temporary differences, tax credits and carryforwards gave rise to
the following estimated deferred tax asset at:
June 30,
2006 2005
--------- ---------
Net operating loss carryover $ 790,000 $ 530,000
Capital loss carryover 12,000 11,000
Excess of tax over book basis
of intangible assets 2,000 2,000
Excess of book over tax basis
of fixed assets (191,000) (104,000)
Valuation allowance (613,000) (439,000)
--------- ---------
Total deferred tax asset $ -- $ --
--------- ---------
The estimated components of income tax expense (benefit) from continuing
operations for the years ended June 30, 2006 and 2005 consist of the
following:
2006 2005
--------- ---------
Current income tax expense (benefit):
Federal $ -- $ --
State -- --
--------- ---------
Current tax expense -- --
--------- ---------
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ 87,000 $ 53,000
Capital loss carryover (1,000) (6,000)
Accrued compensation -- 6,000
Net operating loss carryover (260,000) (424,000)
Valuation allowance 174,000 371,000
--------- ---------
Net deferred tax (benefit) $ -- $ --
--------- ---------
Deferred income tax expense/(benefit) results primarily from the
reversal of temporary timing differences between tax and financial
statement income.
F-35
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 INCOME TAXES
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, June 30,
2006 2005
-------- --------
Computed tax at the expected statutory rate (15.0)% (15.0)%
State and local income taxes, net of federal benefit (4.7) (4.7)
Compensation due to options - (13.00)
Valuation allowance 19.7 32.67
-------- --------
Effective income tax rates 0.0% 0.0%
-------- --------
NOTE 14 LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
June 30,
2006 2005
----------- -----------
Loss from operations available to
common shareholders (numerator) $(1,207,760) $(1,370,474)
----------- -----------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 23,793,625 15,304,956
----------- -----------
At June 30, 2006, the Company had outstanding options to purchase
845,000 shares and notes payable convertible into 4,703,767 shares
which were not used in the computation of loss per share because their
effect would be anti-dilutive. At 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 15 RELATED PARTY TRANSACTIONS
RELATED PARTY ADVANCES - During the years ended June 30, 2006 and 2005,
officers/shareholders of the Company and their relatives have made
advances to the Company and the Company has repaid the advances as
funds have been available. During the year ended June 30, 2006,
officers/shareholders of the Company and their relatives made advances
totaling $244,853 and the company repaid advances totaling $65,618.
Since the Company owed $5,144 from prior-year advances, the remaining
balance owed to the officers/shareholders of the Company and their
relatives at June 30, 2006 is $184,380.
F-36
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 RELATED PARTY TRANSACTIONS (CONTINUED)
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 $149,798 and the company repaid
advances totaling $154,888. 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, 2006 and 2005,
respectively, the Company paid a relative of an officer/shareholder of
the Company $0 and $10,250 for consulting services.
MANAGEMENT COMPENSATION - For the years ended June 30, 2006 and 2005,
respectively, the Company expensed $132,250 and $309,732 as salary to
the Company's Chief Executive Officer. At June 30, 2006 and 2005,
respectively, the Company owed $10,620 and $5,667 to the Chief
Executive Officer for accrued salary.
For the years ended June 30, 2006 and 2005, respectively, the Company
expensed $132,250 and $274,609 as salary to the Company's Chief
Financial Officer. At June 30, 2006 and 2005, respectively, the Company
owed $15,930 and $5,667 to the Chief Financial Officer for accrued
salary.
EMPLOYEES - For the years ended June 30, 2006 and 2005, respectively,
the Company expensed $60,250 and $59,236 as salary to an employee of
the Company who is the spouse of an officer/shareholder of the Company.
At June 30, 2006 and 2005, respectively, the Company owed $2,540 and
$1,847 to this employee for accrued salary.
For the years ended June 30, 2006 and 2005, the Company expensed
$71,875 and $62,437 as salary to an employee of the Company who is a
relative of an officer/shareholder. At June 30, 2006 and 2005
respectively, the Company owed $3,282 and $2,800 to this employee for
accrued salary.
For the years ended June 30, 2006 and 2005, the Company expensed
$108,510 and $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, 2006 and 2005 respectively, the Company owed $4,100 and $1,478
to theses employees for accrued salary.
F-37
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 CONCENTRATIONS
ACCOUNTS RECEIVABLE - At June 30, 2006, 41% of the Company's accounts
receivable was owed by three customers. At June 30, 2005, 17% of the
Company's accounts receivable was owed by one customer. 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 June 30,
2006 and 2005 respectively:
2006 2005
------------- -------------
Customer A 17% *
Customer B 14% 17%
Customer C 10% *
* Customer did not account for 10% or more of total
accounts receivable
REVENUES - During the years ended June 30, 2006 and 2005, respectively,
the Company had a significant customer which accounted for 20% and 35%
of the Company's total sales. The loss of this significant customer
could adversely affect the Company's business and financial condition.
NOTE 17 COMMITMENTS AND CONTINGENCIES
DERIVATIVE LIABILITY FOR THE REDEMPTION OF COMMON STOCK - The Company
has a convertible note payable which is convertible into common stock
at $.30 per share. At the time of conversion, the creditor can require
the Company to redeem any amount of the shares issued in the conversion
at $.345 per share. At June 30, 2006, the Company owed $370,125 in
principal and $4,563 in accrued interest on the note. If the note had
been converted into stock on June 30, 2006, then the Company would have
issued 1,248,961 shares of common stock which would have been
redeemable at the creditor's option for $430,892. The Company has
recorded a remaining contingent derivative liability of $56,203
associated with the option.
EMPLOYEEMENT AGREMENTS - 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% increase per year. We
agreed to pay each a one-time bonus of 50,000 shares of common stock in
2005 (for bonuses not paid in 2002, 2003 and 2004), a bonus of $7,200
for Fiscal 2005 and a bonus of 10% of base salary condition upon
successful management of our Major Trees 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.
NOTE 18 GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles of the United States of
America, which contemplate continuation of the Company as a going
concern. However, the Company has current liabilities in excess of
current assets, incurred significant, recurring losses and has not
generated positive cash flow from operating activities. These factors
raise substantial doubt about the ability of the Company to continue as
a going concern. In this regard, management is proposing to raise any
necessary additional funds not provided by operations through loans or
through additional sales of their common stock or through possible
business combinations. There is no assurance that the Company will be
successful in raising this additional capital or in achieving
profitable operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
F-38
PENGE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 SUBSEQUENT EVENTS
COMMON STOCK ISSUANCE - In July 2006, the Company issued 45,714 shares
of their previously authorized but unissued common stock for cash of
$32,000, or $.70 per share.
SECURED NOTES PAYABLE - In August 2006, the Company issued a $60,000
note payable. The note is secured by 4,611 trees which are part of the
Company's inventory. The note accrues interest at 24% per annum and is
due December 2006.
In July 2006, the Company issued a $150,000 note payable. The note is
secured by 400,000 shares of the Company stock held by the CFO. The
note accrues interest at 24% per annum and is due November 2006.
NOTES PAYABLE - In September 2006, the Company issued $80,000 in notes
payable. The notes accrue interest at 24% per annum and are due January
2007.
In August 2006, the Company issued $70,000 in notes payable. The notes
accrue interest at 24% per annum and are due November 2006.
In July 2006, the Company issued a $30,000 note payable. The note
accrues interest at 24% per annum and is due October 2006.
ACQUISITION - In August 2006, the Company entered into a real estate
contract to purchase 3.8 acres and buildings in Odessa, Texas for
$760,000.
F-39