Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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OR
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ý
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from September 5, 2005 to June 30,
2006
Commission
file number: 0-24641
PETALS
DECORATIVE ACCENTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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84-1016435
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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Executive
Pavilion
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90
Grove Street,
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06877
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Ridgefield,
Connecticut
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(Zip
Code)
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(Address
of principal executive offices)
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203.431.3300
(Registrant’s
telephone number, including area code)
ImmunoTechnology
Corporation, 1661 Lakeview Circle, Ogden, Utah 84403
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act: N/A
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $0.00001 par value per share
Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. o
Check
whether the issuer: (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90
days. Yes
ý No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o No
ý
As
of
September 25, 2006, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $1,007,913.60 based
on the closing sale price of $0.90 per share as quoted on the OTC Bulletin
Board.
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
Class
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Outstanding
at September 25, 2006
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Common
Stock, $0.00001 par value per share
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32,049,842
shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Document
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Parts
Into Which Incorporated
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Proxy
Statement for the 2006 Annual Meeting of Stockholders expected
to be held in the second quarter of fiscal 2007
(Proxy Statement).
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Part
III
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Transitional
Small Business Disclosure Format (check one): Yes
o No
ý
TRANSITION REPORT
ON FORM 10-KSB
TRANSITION
PERIOD FROM SEPTEMBER 5, 2005 TO JUNE 30, 2006
TABLE
OF CONTENTS
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Page
No.
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PART
I
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Item
1
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Description
of Business
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1
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Item
2
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Description
of Property
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19
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Item
3
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Legal
Proceedings
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20
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Item
4
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Submission
of Matters to a Vote of Security Holders
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20
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PART
II
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Item
5
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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21
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Item
6
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Management’s
Discussion and Analysis
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24
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Item
7
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Financial
Statements
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36
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Item
8
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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36
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Item
8A
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Controls
and Procedures
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36
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Item
8B
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Other
Information
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37
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PART
III
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Item
9
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act
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37
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Item
10
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Executive
Compensation
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37
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Item
11
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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38
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Item
12
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Certain
Relationships and Related Transactions
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38
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Item
13
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Exhibits
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38
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Item
14
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Principal
Accountant Fees and Services
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41
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SIGNATURES
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42
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POWER
OF ATTORNEY
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42
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PART
I
Except
for the historical information contained herein, the matters discussed in this
Report on Form 10-KSB are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements involve risks and
uncertainties. Petals Decorative Accents, Inc. makes such forward-looking
statements under the provision of the “Safe Harbor” section of the Private
Securities Litigation Reform Act of 1995. Any forward-looking statements should
be considered in light of the factors described below in the Section titled
“Risk Factors” beginning at page 7. Actual results may vary materially from
those projected, anticipated or indicated in any forward-looking statements.
In
this Report on Form 10-KSB, the words “anticipates,” “believes,” “expects,”
“intends,” “future,” “could,” and similar words or expressions (as well as other
words or expressions referencing future events, conditions or circumstances)
identify forward-looking statements. Unless the context otherwise requires,
all
references to “Petals,” “we,” “our,” “us” or “our company” in this Report on
Form 10-KSB refer to Petals Decorative Accents, Inc., a Delaware
corporation.
Item
1. Description of Business.
Overview
Petals
Decorative Accents, Inc. sells decorative silk flowers, plants and trees, along
with complimentary decorative accents, which include mirrors, small furniture
pieces, figurines, lamps and rugs. We sell our products through our mail order
catalog and website. We import most of the floral stems and other materials
used
in our products, primarily from China, and assemble them in our facility in
Portland, Tennessee. Our order fulfillment is performed on an outsourced basis
by a third party at a call center in Martinsville, Virginia and a distribution
facility in Portland, Tennessee.
Background
We
have
undergone substantial changes during the period covered by this report. On
June
23, 2006, we entered into a Contribution Agreement (the “Contribution
Agreement”)
with
Petals Decorative Accents, LLC (“Petals
LLC”)
pursuant to which we agreed to acquire substantially all the assets of Petals
LLC in exchange for the assumption by us of certain liabilities of Petals LLC
and the issuance to Petals LLC of shares of 10,800 shares of Series A Preferred
Stock, 240 shares of Series B Preferred Stock and 90,000,000 shares (pre-split)
of Common Stock (the “Acquisition”).
On
June
30, 2006, pursuant to the terms of the Contribution Agreement, we completed
the
Acquisition and on September 20, 2006, we changed our name from ImmunoTechnology
Corporation to Petals Decorative Accents, Inc. so that it would better reflect
our business going forward.
Our
Background Prior to the Acquistion
Prior
to
the Acquisition of the Petals LLC business, we were inactive and considered
a
“shell company” (as such term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended (17 CFR 240.12b-2)). The Company was
incorporated on November 30, 1989. Our predecessor was LJC Corporation, a Utah
corporation, organized on November 8, 1984 (“LJC”).
On
October 7, 1989, LJC acquired ImmunoTechnology Laboratories, Inc., a privately
held Colorado corporation (“ITL”),
in a
reverse merger transaction. As a result of this transaction, ITL became a wholly
owned subsidiary of LJC. On October 10, 1989, LJC changed its name to
ImmunoTechnology Laboratories, Inc. (“ITL-UT”).
ITL
was formed for the purpose of engaging in the business of operating a medical
test related laboratory. Prior to the Acquisition, our only business has been
the operation of ITL, whose operations were discontinued in 1992. In 1989,
we
changed our domicile from the State of Utah to the State of Delaware and our
name from ImmunoTechnology Laboratories, Inc. to ImmunoTechnology Corporation
through a reincorporation merger. The merger was effective on December 21,
1989.
The
Background of the Business Acquired From Petals LLC
Petals
Decorative Accents, LLC is a privately held Delaware limited liability company,
which has, until the Acquisition, been engaged in the business of designing,
assembling, marketing and selling high-quality silk flowers, plants and trees
through mail order catalogs and its website. Petals LLC was organized in
November 2003 to acquire the assets of Petals, Inc. (“Old
Petals”),
which
filed for protection from creditors under Chapter 11 of the bankruptcy code
in
May 2003. Old Petals was founded in 1939 as a wholesaler of paper flowers in
New
York City, eventually becoming a vertically integrated multi-channel retailer
and wholesaler of decorative accent products serving a national customer base.
Old
Petals was acquired in 1999 by Interiors, Inc., a provider of decorative
accessories to the home furnishings industry, which reported fiscal year 2000
sales by Old Petals of $48.4 million. Interiors, Inc. subsequently experienced
financial difficulties, which adversely affected the operations of its
subsidiaries, including Old Petals. Beginning in 2003, Old Petals reduced and
then eliminated its catalog mailings, was unable to maintain adequate inventory,
resulting in lost orders and delayed shipments, and failed to make refunds
to
customers. These actions resulted in a loss of revenue and significant damage
to
Old Petals’ business and its customer relationships.
In
November 2003 the senior secured creditor of Old Petals purchased substantially
all of the assets of Old Petals at a public foreclosure sale, and contributed
them to Petals LLC in exchange for its economic interest in Petals LLC. Stephen
M. Hicks, our President and Chairman, is the control person of the sole voting
member and the holders of all preferred economic interests of Petals
LLC.
Upon
acquiring control of the assets that now constitute our business, Petals LLC
set
out to rapidly establish its operations in an effort to reactivate as many
customers as possible from Old Petals’ customer database and to establish
purchasing and distribution systems as quickly as possible.
To
accelerate this process, Petals LLC initially outsourced all its assembly and
order fulfillment operations. During this start-up period, Petals LLC sought
to
preserve what it believed to be the company’s core strategic assets, its large
direct mail customer database and tradename, and develop an operating plan
to
capitalize on these strategic assets.
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During
the winter and spring of 2004, Petals LLC re-established contact
with its
customer base, mailing catalogs in January, March, April, May and
June.
Due to the initial challenges in procurement of inventory, these
catalogs
offered a limited number of products and included very few proprietary
floral arrangements or decorative accent
products.
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In
the summer of 2005, Petals LLC assumed responsibility for the assembly
of
its finished products, within its outsourced vendor’s warehouse facility.
In the fall of 2005, Petals LLC established a new assembly facility
in
leased premises in Portland, Tennessee, giving it complete control
over
the product assembly process.
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During
the twelve months ended September 5, 2005 (Petals LLC fiscal year
2005),
Petals LLC mailed 9.4 million catalogs in 13 mailings, generating
approximately 182,000 orders with an average order size, excluding
shipping and handling, of $88.36. Approximately 24% of its revenue
in
fiscal 2005 was attributable to orders placed on its website, generally
by
recipients of its catalog.
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The
Acquisition of the Petals Business
On
June
30, 2006, pursuant to the Contribution Agreement and an Assignment and
Assumption Agreement, we acquired substantially all the assets of Petals LLC
in
exchange for the assumption by us of all but certain specified liabilities
of
Petals LLC and the issuance to Petals LLC of shares of our capital
stock.
The
assets acquired by us consist of cash, in the amount of approximately $1.3
million representing the proceeds of an unsecured note offering, and all of
the
assets and property, real, personal and mixed, tangible and intangible, used
in
or forming a part of the business of Petals LLC, including, furniture,
furnishings, office equipment and other tangible personal property,
inventory,
trade
accounts and notes receivable,
intellectual
property,
customer, distributor, supplier and mailing lists of Petals and
rights
of Petals under contracts and agreements, including all open customer purchase
orders.
The
liabilities assumed by us consist
of substantially all of the liabilities of Petals LLC, including, liabilities
associated with or arising out of the business of Petals LLC, liabilities under
the assumed contracts (including leases and employment agreements), trade
payables and obligations of Petals LLC for borrowed money, but exclude term
indebtedness of Petals LLC to its equity holders identified in the Contribution
Agreement.
At
the
effective time of the Acquisition there were issued to Petals LLC shares of
our
newly designated Series A Preferred Stock, $.00001 par value (the “Series
A Shares”)
and
Series B Preferred Stock, $.00001 par value (the “Series
B Shares”)
and
shares of our Common Stock, $.00001 par value (“Common
Stock”),
as
follows:
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10,800
Series A Shares;
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240
Series B Shares; and
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90,000,000
(pre-split) shares of Common Stock
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Because
the shares issued to Petals LLC in the Acquisition represent a controlling
interest in us, the transaction was accounted for as a recapitalization, and
Petals LLC is considered the acquirer for accounting purposes. The historical
financial statements which are included in this current report are those of
Petals LLC.
The
liabilities assumed by us pursuant to the Assignment and Assumption Agreement
include, without limitation:
o |
all
obligations arising from the operations of the Petals LLC business
including accounts payable and accrued expenses of approximately
$3
million;
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a
five-year $1.5 million revolving line of credit from Ridgefield Bank
that
matures in December 2009 and requires monthly payments of principal
and
interest. At June 30, 2006, this line of credit was fully drawn.
Ridgefield Bank holds a first position security interest in all of
the
assets acquired in the Acquisition to secure payment of this line
of
credit. Stephen M. Hicks, our President and Chairman is an advisor
to
Ridgefield Bank;
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an
aggregate of $5.0 million of term notes maturing on December 31,
2008.
These term notes are payable to Southridge Partners, LP and Southshore
Capital Fund, Ltd., affiliates of Petals LLC and Stephen M. Hicks.
Southridge Partners, LP and Southshore Capital Fund, Ltd. hold security
interests in all of the assets acquired in the Acquisition to secure
payment of these term notes;
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a
series of fifteen (15) unsecured term notes totaling $2.135 million
in
outstanding principal and maturing on December 31, 2007. These term
notes
require pre-payments of principal on the 15th day of January, April,
July
and October based on the number of customer orders shipped in the
previous
calendar quarter;
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obligations
pursuant to employment agreements with the Petals LLC President and
Chairman, and Chief Executive Officer, each of whom were elected
as our
officers on June 30, 2006;
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obligations
pursuant to real estate leases for the Petals LLC corporate headquarters
in Ridgefield, Connecticut and the Petals distribution facility in
Portland, Tennessee, with total monthly rental payments of approximately
$36,000; and
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obligation
pursuant to the Master Services Agreement with Accretive Commerce,
a third
party inbound telemarketing, warehouse and product distribution
vendor.
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Copies
of
the agreements governing the material terms of the obligations and liabilities
listed above are included as Exhibits to our Current Report on Form 8-K filed
with the Securities and Exchange Commission (the “SEC”)
on
July 7, 2006.
The
Acquired Business
Our
Products
We
design
and assemble high-quality silk flower, plant and tree arrangements utilizing
unique stems and other materials purchased by us from our manufacturers. Our
products can be used to decorate homes, apartments and offices. We regularly
introduce new, original creations to meet the changing demands of our customers.
Some of the advantages of silk flowers compared with real flowers
are:
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Silk
flowers are long lasting and complement the décor of the home or
office.
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· |
Silk
flowers may be preferred by persons who are allergic to fresh flowers.
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All
designs can be previewed, knowing that a chosen bouquet or arrangement
will be exactly what was ordered.
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Favorite
flowers may be purchased even if they are out of
season.
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In
addition to silk botanicals, we sell mirrors, lamps, rugs, figurines, small
furniture pieces and a variety of other decorative accessories. Together, these
product categories typically comprise approximately 20% of our total merchandise
offering. We often present these products in lifestyle photographs, along with
our silk botanicals, to help our customer envision how our silk botanicals
will
accentuate their home décor.
Our
products are purchased principally for home décor. Our price point is above
average for these types of products. Over 95% of our customers are 35 or more
years of age and nearly 75% have an annual household income of $50,000, as
reported by our co-op database vendor, I-behavior, Inc.
Product
Design.
Our
chief
merchandising officer works with our product design and merchandising personnel
to review our sales trends as well as apparent trends in the market place to
design the floral products that will be offered during the next year. Because
of
the long lead time necessary to procure inventory, our merchandising planning
process starts approximately nine months prior to the sale of
product.
Purchasing.
Most
of
the components used in the assembly of our products are purchased from vendors
in China. Approximately 40% of overseas purchases are from one vendor and the
remainder is typically divided between six to ten other vendors. We are always
billed in United States dollars and assume no foreign currency risks. Our
purchases are often done through letters of credit issued by a major United
States bank. We are currently required to collateralize these letters of credit
with cash. For fiscal year 2007 we have arranged for credit lines that should
cover approximately 50% of our inventory purchases. There is generally a
six-month delivery time for inventory from the date ordered until the date
received.
Pricing. For
pricing, we review our sales trends and the apparent trends of competitors.
We
attempt to offer our customers a mix of higher price points and lower price
points. We focus on controlling our inventory in order to maximize full-price
sales and increase inventory turns. Our ability to attain our gross margin
goals
will depend in part on our ability to effectively price our products and
accurately forecast consumer demand for each product in order to achieve a
balance between having enough inventory to meet consumer demand, while not
ending up with excess overstock inventory. Marketing promotions will need to
be
effectively levered to sell through excess inventory.
Product
Assembly, Shipping and Telemarketing
Assembly.
In order
to expedite the start of its business in 2003, Petals LLC entered into an
agreement with an independent contractor, NewRoads, Inc., which has since
changed its name to Accretive Commerce, to receive inventory and assemble the
Petals’ products at a facility located in Tennessee. We currently have
supervisory personnel assigned to this independent contractor’s facility to
monitor the product storage and product shipping activities that are currently
performed by this vendor. In November 2005, Petals LLC started performing
product assembly in a facility located near the facility of Accretive Commerce
in Portland, Tennessee and made a payment of $60,000 to Accretive Commerce
to
allow Petals LLC to hire the entire labor force involved in the assembly
process. We currently employ approximately 10 former Accretive Commerce
employees as part of our assembly workforce.
Order
entry, customer support and shipment.
Accretive Commerce, our outsourced fulfillment subcontractor, remains
responsible for operating a call center for inbound telemarketing order entry
and customer service support. Accretive also operates a warehouse and
distribution center where it provides us with inventory management services
and
ships products to our customers. On May 11, 2006, Petals LLC entered into an
amendment to its Master Services Agreement with Accretive Commerce to amend,
among other things, the term of the agreement and the payment and fee schedule.
We have assumed this Master Service Agreement as part of the Acquisition. For
more information regarding the amendment to the Master Services Agreement see
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" below.
In July
of 2006 we entered into a lease for a 75,000 square foot scalable facility
in
Portland, Tennessee to serve as our own distribution center. The capital expense
for this transaction is estimated at $600,000. In addition, we anticipate
approximately $200,000 of additional costs to be incurred in connection with
transitioning the fulfillment functions to this facility. We do not anticipate
this facility to be operational before January 2007.
Our
Catalog and Customer Database
The
main
avenue for distribution of our silk botanical and decorative accessory products
is through direct mail-order sales. Our catalogs typically range from 36 to
92
pages and typically contain over 250 different floral designs and accessories.
Our catalogs are currently sent to customers fifteen times a year. We use our
own mailing lists as well as renting mailing lists from other catalogers and
database cooperatives to generate catalog sales.
Our
internal customer database is comprised of approximately 1,500,000 buyers of
which approximately 170,000 have placed orders during the past 12 months. Our
average order size for the 12 month fiscal year ended June 30, 2006 was $95.22,
excluding shipping, and was typically comprised of two items. For the 12 month
fiscal year ended June 30, 2006, we mailed 10.3 million catalogs in fifteen
mailings and generated approximately 221,000 orders. In comparison, during
the
12 month fiscal year ended July 2, 2005, we mailed 7.9 million catalogs in
10
mailings and generated 163,000 orders.
Our
chief
merchandising officer uses an in-house staff augmented by creative consultants
to design and lay out each catalog. As a guideline, the team tries to maximize
sales and profit per square inch of catalog space in determining the layout.
In
other words, products that are expected to have high sales and profit potential
receive more prominent catalog space than products that are expected to generate
lesser demand or profitability. Catalogs are designed for each season: spring,
spring/summer, summer, and fall/holiday. There are also two clearance catalogs
mailed in June and July.
Approximately
90% of our sales for the fiscal year ended June 30, 2006 resulted from the
contribution of customers calling our outsourced call center to place orders
from catalogs that they received from us and from customers going on our website
to place orders. Most of these customers pay for their orders by credit card.
We
accept all major credit cards and do not ship until the credit card number
provided by the customer has been accepted. Approximately 10% of our sales
are
paid for by check, and result from customers writing to the company directly
to
place orders, in which case shipment is not made until the check
clears.
Our
Website
We
also
use our website at www.petals.com
to sell
products offered in our catalogs, along with products exclusive to our website.
Internet orders accounted for 30% of our net revenue in the twelve months ended
June 30, 2006. To date, we believe that approximately 80% of the orders placed
through our website have been attributable to customers who received our
catalog. We believe our website can increasingly become a cost-effective means
of new customer acquisition. Our efforts to build e-commerce sales include
email
marketing, paid advertising programs on Yahoo and Google and affiliate
advertising programs.
Recent
enhancements have been made to our consumer website in an effort to increase
online sales. In July 2006, we launched online product zoom functionality,
allowing shoppers the ability to view products in greater detail than typically
available through traditional website and print catalog images. Product zoom
is
expected to help accentuate the fine craftsmanship and quality of our products
and give customers added confidence that silk florals are accurate reproductions
of fresh florals. The print catalog was launched electronically on the
Petals.com website in August 2006. Electronic catalogs will enable customers
to
shop coordinated collections of products in an easy manner, as they can view
product collections in a single page view. It is hoped that this will help
increase online sales conversion and average order levels.
Competition
Large
mass-market retailers, such as Wal-Mart, and specialty retailers, such as
Michael’s Stores, dominate the silk botanical retail market. Generally, these
retailers offer a mass-produced product at a significantly lower price point
than Petals. In comparison, we compete on the basis of higher quality,
proprietary products targeted to a more affluent customer base.
Numerous
other large retailers that have traditional brick and mortar locations and/or
direct-to-consumer operations also present us with competition in the broadly
defined decorative accents market segment. These competitors include Pier 1,
Bombay Company, Ballard Designs, Frontgate, Home Decorators Collection and
other
similar companies. These competitors focus on products other than the silk
flowers that form the core of our product offering. To the extent that these
competitors offer silk flowers, it is as an adjunct of their own home products
and decorative accents business. We do not believe that silk flowers are a
significant category for any of these competitors.
We
have
identified one other direct-to-consumer cataloger of permanent botanicals,
OfficeScapesDirect, which was established in 2001 and focuses on the small
business market rather than the retail consumer. There are many
direct-to-consumer retailers who compete with us on the internet. Online
competitors include Afloral, Catalina Flowers, Buds to Blooms and 1-800 Send
Silk.
Many
of
our competitors have substantially greater financial and other resources, more
established name recognition and customer goodwill and more consistent operating
histories than we do. There can be no assurance that we will be able to compete
successfully against these other companies.
Employees
At
September 25, 2006, we had 54 employees, of whom 30 are engaged in assembly
operations at our manufacturing facility in Tennessee. None of our
employees is subject to collective bargaining agreements.
Recent
Events
The
Reverse Stock Split and The Name Change
On
August
2, 2006, our board of directors and the requisite number of stockholders, acting
by written consent in lieu of a meeting, approved a plan of recapitalization
by
undertaking a 1-for-3 reverse stock split with respect to the outstanding shares
of our Common Stock (the “Reverse
Stock Split”),
without any change in the powers, preferences and rights and qualifications,
limitations or restrictions thereof, with
all
fractional shares to be paid cash in lieu thereof.
The
Reverse Stock Split will not reduce our authorized shares of Common Stock,
which
will remain at 100,000,000.
Also
on
August 2, 2006, our board of directors and
the
requisite number of stockholders, acting by written consent in lieu of a
meeting,
approved
an amendment to our Certificate of Incorporation to change the name of the
Company from "ImmunoTechnology Corporation" to "Petals Decorative Accents,
Inc".
The
Reverse Stock Split and name change were both effective as of September 20,
2006.
The
Debt Restructuring Agreements
The
Closing of the Contribution Agreement and the Acquisition were conditioned
upon
us entering into Debt Restructuring Agreements and the completion of certain
transactions with our creditors:
· |
the
payment of $244,506.65 of outstanding indebtedness and accrued expenses
which were to be paid in cash at the time of the
Closing;
|
· |
an
aggregate of 42,477 (pre-split) shares of our Common Stock were to
be
issued to our officers in satisfaction of loans payable by us to
such
officers in the aggregate amount of $8,494.84;
and
|
· |
an
aggregate of 987,507 (pre-split) shares of our Common Stock were
to be
issued to the holders of notes payable and creditors, in satisfaction
of
the indebtedness evidenced by the notes and accrued expenses due
from us
to such creditors.
|
The
balance of our indebtedness prior to the Acquisition was approximately $165,177.
We have agreed to pay $121,326 of the pre-Acquisition indebtedness in six
monthly installments beginning October 1, 2006, together with interest at the
rate of 7% per annum. A copy of the form of Payment of Debt, Notice of
Conversion and Subscription for Shares entered into by those creditors that
agreed to accept shares of our Common Stock in satisfaction of outstanding
obligations prior to the Closing of the Acquisition is included in our Current
Report on Form 8-K filed with the SEC on July 7, 2006, as Exhibit 10.1.
RISK
FACTORS
The
following summary of risks associated with our business gives effect to the
Acquisition. In addition to the following risks, an investor should be mindful
that the business is often subject to risks not foreseen by management.
Accordingly, in reviewing this Report, the reader should keep in mind other
risks that could be important. Any investment in our common stock is highly
speculative and involves a high degree of risk. Each prospective investor is
urged to carefully consider the risks and uncertainties described below, in
addition to the risks set forth elsewhere in this Report. While these are the
risks and uncertainties that we believe are most important to consider, these
risks may not be the only risks which we may face. If any of the following
risks
actually occur, our business, prospects, financial condition and results of
operations would likely suffer and the value of our Common Stock would decline.
Risks
Related to Investing in a Controlled Company
Our
controlling shareholder has significant influence over the Company.
As
of
September 25, 2006, after giving effect to the Acquisition and the transactions
related to the Contribution Agreement, Petals LLC controls us and beneficially
owns approximately 91.4% of our Common Stock, on a fully diluted, as-converted
to Common Stock basis. Petals LLC is controlled by affiliates of Stephen M.
Hicks, our President and the Chairman of our board of directors. As a result,
Mr. Hicks possesses significant influence over our affairs. Petals LLC stock
ownership and relationships with members of our board of directors may have
the
effect of delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of us, which in turn could materially and adversely affect the market
price of our Common Stock.
Risks
Related to our Recent Reverse Stock Split
A
decline in the market price for the common stock after the Reverse Stock Split
may result in a greater percentage decline than would occur in the absence
of
the Reverse Stock Split, and the liquidity of the Common Stock could be
adversely affected following the Reverse Stock Split.
The
market price of our Common Stock also will be based on our performance and
other
factors, some of which are unrelated to the number of shares outstanding. If
the
market price of our Common Stock declines for reasons unrelated to the
Reverse Stock Split, the decline as an absolute number and as a percentage
of
our overall market capitalization may be greater than would occur in the absence
of the Reverse Stock Split. In many cases, both the total market capitalization
of a company and the market price of a share of such company's stock following
a
reverse stock split are lower than they were before the reverse stock split.
Furthermore, the liquidity of the Common Stock could be adversely affected
by
the reduced number of shares that would be outstanding after the Reverse Stock
Split.
Although
the implementation of a Reverse Stock Split may facilitate the issuance of
shares of Common Stock to the Investors, these issuances would be dilutive
to
the ownership position of our existing common stockholders.
The
Reverse Stock Split will facilitate our ability to issue shares of our
Common Stock upon conversion of outstanding shares of our Series A Preferred
Stock and Series B Preferred Stock. Our existing common stockholders will
experience substantial dilution upon the issuance of additional shares.
Risks
Related to the Company’s Recent Organization and Limited Operating
History
Petals
LLC had a limited history of operations and has sustained continuous operating
losses, and there is no assurance that we will achieve profitability in the
future.
Petals
LLC had a limited history of operations and sustained continuous operating
losses from its inception. We cannot predict when, or if, we will ever achieve
profitability through operation of our business. Our current business, which
we
acquired in the Acquisition, began in November 2003 and resulted in
losses in each fiscal period. Our accumulated deficit as of June 30, 2006 was
$15.4 million. We will need to generate significantly greater revenues than
Petals LLC has in the past to achieve profitability. There can be no
assurance that we will be able to do so. Even if we achieve profitability,
we
may not be able to sustain or increase profitability on a quarterly or annual
basis in the future. If we continue to experience operating losses, you
may lose all or part of your investment.
Our
future prospects must be considered in light of the facts that plans of
relatively new and underfunded businesses often do not get implemented as
quickly or effectively as management initially intends and we may lack the
resources to respond quickly to opportunities or identify potential problems.
We
cannot be certain that our business strategy will be successful or that we
will
ever be able to maintain or significantly increase revenue-generating
activities. The Company’s management believes that it is probable that we will
incur periods of operating losses and negative cash flow for the foreseeable
future.
We
have limited financial resources and the auditors’ report on our
financial statements indicates that there is significant uncertainty
about our ability to continue as a going concern. Absent additional
financial resources, we will be unable to undertake programs designed to expand
our business.
We
have limited financial resources and substantial amounts of debt. Our
auditors indicated that there is significant uncertainty about our ability
to continue as a going concern in their report on our financial statements
for
the ten month period ended June 30, 2006. Absent sufficient cash from
operations, we will require additional financing to expand our business and
implement our strategic plan. There can be no assurance that our operations
will
generate sufficient cash or that outside financing will be available or found.
If we are unable to obtain additional financing, we may not be able to maintain
or expand our revenue producing activities or achieve
profitability.
Additional
financing, if available, could result in increased interest expenses or
additional dilution to the Company’s shareholders. If additional funds are
needed and are not available, our business could be negatively affected.
If
we
need to raise additional funds, we may not be able to do so on terms favorable
to us, or at all. We may need to modify or abandon our growth strategy,
eliminate product offerings or curtail catalog mailings, any of which could
negatively impact our results of operations and financial position. If
additional funds are raised through a bank credit facility or the issuance
of
debt securities, the terms of such indebtedness could impose restrictions on
our
operations.
Our
substantial amount of debt may limit the cash flow available for our operations
and place us at a competitive disadvantage and may limit our ability to pursue
our expansion plans.
Petals
LLC had a substantial amount of debt, most of which we have assumed. On June
30,
2006, we had total debt of approximately $11.3 million, including
approximately $2.135 million in indebtedness under the Bridge Notes. Our level
of indebtedness has important consequences to your investment in the Company.
For example, our level of indebtedness may:
·
|
require
us to use a substantial portion of our cash flow from operations
to pay
interest and principal on senior debt, for working capital, capital
expenditures and other general corporate purposes,
|
·
|
limit
our ability to obtain additional financing for working capital, capital
expenditures, expansion plans and other investments, which may limit
our
ability to implement our business strategy,
|
·
|
result
in higher interest expense if interest rates increase on our floating
rate
borrowings,
|
·
|
heighten
our vulnerability to downturns in our business, the industry or in
the
general economy and limit our flexibility in planning for or reacting
to
changes in our business and the retail industry, or
|
·
|
prevent
us from taking advantage of business opportunities as they arise.
|
We
cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in amounts sufficient to
enable us to make payments on our indebtedness or to fund our operations.
Risks
Related to the Company’s Catalog/Direct Marketing
Business
The
Company depends on a third party to carry out its customer call center, order
fulfillment and distribution operations, and any significant interruption in
these outsourced operations could disrupt our ability to process customer orders
and to deliver our merchandise in a timely manner.
The
Company’s customer call center is operated on an outsourced basis
by Accreative Commerce at its facility in Martinsville, Virginia, and
the Company’s order fulfillment and distribution operations are performed by
Accreative Commerce at its facility in Portland, Tennessee. A significant
interruption in the operation of either of these facilities due to natural
disasters, accidents, equipment failures or for any other reason would reduce
our ability to receive and process orders and ship products to our customers,
which could result in lost revenue and damage to our business. The efficient
flow of our merchandise requires that we have adequate capacity in our order
fulfillment and distribution facilities to support our current level of
operations, and the anticipated increased levels that may follow from our growth
plans. We believe that the Company’s current outsourcing arrangement, combined
with our planned new distribution facility, when it becomes operational, will
provide us with adequate capacity to support our planned operations. However,
any failure by us to provide adequate order fulfillment and distribution
facilities when necessary could impede our growth plans, and the expansion
of
these facilities could increase our costs in the near term.
If
we encounter delays or unexpected difficulties in establishing the planned
new
distribution facility, or if the savings achieved are less than we anticipated,
our business could be harmed.
We
expect
to have a new distribution facility operational by the end of January 2007.
Once
it is fully operational, we expect to reduce the order fulfillment costs
associated with our warehousing and product distribution facilities. However,
we
may encounter delays in completing the new facility and commencing operations
of
the new distribution facility. Also, we have little, if any, experience in
carrying out the activities involved in these operations, including receiving
and managing components and finished goods inventories, picking, packing and
shipping orders and processing returns. As a result, we may experience errors
or
inefficiencies that could adversely affect our operating costs. If we are unable
to commence operations in this facility on a timely basis, or if those
operations do not result in the cost savings we anticipated, our financial
condition and results of operations could be harmed.
We
rely on a small number of foreign suppliers from whom the components used to
assemble our finished products are purchased.
We
obtain
substantially all our floral components from a limited number of suppliers
located in China. Approximately 40% of the floral components of our business
are
purchased from a single vendor. Any business interruption experienced by our
vendors, or an inability to maintain a business relationship with our key
vendor, would have a material adverse effect on our business. We cannot control
all of the various factors, which include inclement weather, natural disasters
and acts of terrorism, that might affect our vendors’ ability to supply us with
components in a timely manner or to meet our quality standards. Late delivery
of
components or delivery of components that do not meet our quality standards
could delay timely delivery of merchandise to our customers. These events could
cause us to fail to meet customer expectations, cause our customers to cancel
orders or cause us to be unable to deliver merchandise, which could result
in
lost sales.
These
overseas sourcing operations may also be hurt by political and financial
instability, strikes, health concerns regarding infectious diseases in countries
in which our merchandise is produced, adverse weather conditions or natural
disasters that may occur in Asia or elsewhere or acts of war or terrorism in
the
United States or worldwide, to the extent these acts affect the production,
shipment or receipt of merchandise. Our future operations and performance will
be subject to these factors, which are beyond our control, and these factors
could materially hurt our business, financial condition and results of
operations or may require us to modify our current business practices and incur
increased costs.
If
we are unable to gauge trends and react to changing consumer preferences in
a
timely manner, our sales will decrease.
We
believe the future success of our business will depend in substantial part
on
our ability to anticipate, gauge and react to changing consumer demands in
a
timely manner, and to translate market trends into appropriate, saleable product
offerings far in advance of their sale in our catalog or on our website. Because
we enter into agreements for the purchase of materials well in advance of the
season in which merchandise will be sold, we are vulnerable to changes in
consumer demand, pricing shifts and suboptimal merchandise selection and timing
of merchandise purchases. If we misjudge the market for our products, we may
be
faced with significant excess inventories for some products and missed
opportunities for others. The occurrence of these events could hurt our
financial results by decreasing sales. We may respond by increasing markdowns
or
initiating marketing promotions to reduce excess inventory, which would further
decrease our gross profits and net income.
The
specialty retail industry is cyclical, and a decline in consumer spending on
decorative accessories could reduce our sales and slow our
growth.
The
industry in which we operate is cyclical. Purchases of silk flowers and
decorative accessories are sensitive to a number of factors that influence
the
levels of consumer spending, including general economic conditions and the
level
of disposable consumer income, the availability of consumer credit, interest
rates, taxation and consumer confidence in future economic conditions. Because
silk flowers and accessories generally are discretionary purchases, declines
in
consumer spending patterns may affect us more negatively as a specialty
retailer. Therefore, we may not be able to maintain our recent rate of growth
in
revenues if there is a decline in consumer spending patterns, and we may decide
to slow or alter our growth plans.
Our
plans to expand the Company’s product offerings and sales channels may not be
successful, and implementation of these plans may divert our operational,
managerial and administrative resources, which could impact our competitive
position.
We
intend, to grow our business by expanding the Company’s product offerings and
sales channels, including by selling our products through wholesale outlets.
These plans involve various risks including:
·
|
implementation
of these plans may be delayed or may not be successful,
|
·
|
if
our expanded product offerings and sales channels fail to maintain
and
enhance our distinctive brand identity, our brand image may be diminished
and our sales may decrease,
|
·
|
if
we fail to expand our infrastructure, including hiring and training
qualified employees, we may be unable to manage our expansion
successfully, and
|
·
|
implementation
of these plans may divert management’s attention from other aspects of our
business and place a strain on our management, operational and financial
resources, as well as our information systems.
|
In
addition, our ability to successfully carry out our plans to expand our product
offerings and our sales channels may be affected by, among other things,
economic and competitive conditions, changes in consumer spending patterns
and
changes in consumer preferences. Our expansion plans could be delayed or
abandoned, could cost more than anticipated and could divert resources from
other areas of our business, any of which could impact our competitive position
and reduce our revenue and profitability.
Our
business is seasonal and fluctuations in results of operations for the peak
season of October through April have a disproportionate effect on our overall
financial condition and results of operations.
Our
business experiences seasonal fluctuations in revenues and operating income,
with a disproportionate amount of revenues being generated in the months of
October through April, representing the fall, holiday and spring seasons.
Any factors that harm our operating results during this peak season, including
adverse weather or unfavorable economic conditions, could have a
disproportionate effect on results of operations for the entire fiscal
year.
In
order
to prepare for peak season, we must order and keep in stock significantly more
merchandise than we would carry at other times of the year. Any unanticipated
decrease in demand for our products during peak season could require us to
sell
excess inventory at a substantial markdown, which could reduce net sales and
gross profit.
Our
quarterly results of operations may also fluctuate significantly as a result
of
a variety of other factors, including the timing of new catalog mailings,
merchandise mix and the timing and level of inventory markdowns. As a result,
historical period-to-period comparisons of our revenues and operating results
are not necessarily indicative of our future period-to-period results. You
should not rely on the results of a single fiscal quarter, particularly
the second fiscal quarter holiday season, as an indication of our annual
results or future performance.
Third
party failure to deliver merchandise from our distribution center to our
customers could result in lost sales or reduce demand for our merchandise.
Our
success will depend on the timely delivery of merchandise to our customers.
Independent third party transportation companies deliver our products from
our
distribution center to our customers. Some of these third parties employ
personnel represented by labor unions. Disruptions in the delivery of
merchandise or work stoppages by employees of these third parties could delay
the timely receipt of merchandise, which could result in cancelled sales, a
loss
of loyalty to our brand and excess inventory. Timely receipt of merchandise
by
our customers may also be affected by factors such as inclement weather, natural
disasters and acts of terrorism. We may respond by increasing markdowns or
initiating marketing promotions, which would decrease our gross profits and
net
income.
A
failure in our internet operations, which are subject to factors beyond our
control, could significantly disrupt our business and lead to reduced sales
and
damage of our reputation.
Internet
operations are an increasingly substantial part of our business, representing
30% of revenues in the twelve months ended June 30, 2006. The success of our
internet operations will depend on certain factors that we cannot control.
In
addition to changing consumer preferences and buying trends relating to internet
usage, we are vulnerable to certain additional risks and uncertainties
associated with the internet, including changes in required technology
interfaces, website downtime and other technical failures, security breaches,
and consumer privacy concerns. Our failure to successfully respond to these
risks and uncertainties could reduce internet sales and damage our
business.
Future
acquisitions of other companies, if any, may disrupt our business and involve
additional expenses. As a result, our business could
suffer.
We
plan
to review potential acquisition candidates, and our business strategy may
include building our business through acquisitions. However, acceptable
acquisition candidates may not be available in the future or may not be
available on terms and conditions acceptable to us. Acquisitions involve
numerous risks including among others, difficulties and expenses incurred in
the
consummation of acquisitions and assimilations of the operations, personnel,
and
services and products of the acquired companies. Additional risks associated
with acquisitions include the difficulties of operating new businesses, the
diversion of management's attention from other business concerns and the
potential loss of key employees of the acquired company. If we do not
successfully integrate any businesses we may acquire in the future, our business
will suffer.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or accurately manage our inventory.
Consequently, investors could lose confidence in our financial reporting and
this may harm the trading price of our stock.
We
must
maintain effective internal controls to provide reliable financial reports
and
manage our inventory. We have been assessing our internal controls to identify
areas that need improvement. We have recently become aware of deficiencies
in
our procedures for managing and tracking our inventory. We are in
the process of implementing changes to internal controls, but have not yet
completed implementing these changes. Failure to implement these changes to
our
internal controls or any others that we identify as necessary to maintain an
effective system of internal controls could harm our operating results and
cause
investors to lose confidence in our reported financial information. Any such
loss of confidence would have a negative effect on the trading price of our
Common Stock.
Our
business relies on third parties to maintain critical systems, including control
over inventory and order fulfillment and, if these third parties fail to perform
their services adequately, we could experience disruptions in our
operations.
Our
business relies on a number of third parties for internet and telecommunications
access, fulfillment and delivery services, inbound telemarketing, credit card
processing and software services and inventory control. We have limited control
over these third parties. For example, our inventory processing and tracking
is
handled by systems deployed by Accretive Commerce.
Our
business operations depend on operating systems, database and server software
that was developed and produced by and licensed from third parties. We have,
from time to time, discovered errors and defects in the software and processes
from these third parties and we rely to some extent on these third parties
to
correct errors and defects in a timely manner. If we are unable to develop
and
maintain satisfactory relationships with these third parties on acceptable
commercial terms, or if the quality of products and services provided by these
third parties falls below a satisfactory standard, we could experience
disruptions in our operations.
We
may suffer disruption in our business because of changes in our systems,
facilities and fulfillment activities.
We
believe that our success is dependent in large part upon our ability to provide
prompt and efficient service to our customers. As a result, any disruption
of
our day-to-day operations could have a material adverse effect on our business,
and any failure of our information management systems or distribution
capabilities could impair our ability to receive and process customer orders
and
ship products on a timely basis and accurately account for and track our
inventory.
We
expect
to upgrade our software and hardware systems on a continuing basis. The
transition to, or upgrading of, our hardware and software systems could result
in delays, failures or execution difficulties that could impair our ability
to
receive and process orders and ship products in a timely manner. It may also
impact our physical, electronic and procedural controls and safeguards that
support our internal controls over financial reporting.
We
are
currently evaluating an upgrade to our enterprise resource planning
applications. These applications support our back office operations and
warehouse functions. Upgrades may be required to applications to ensure that
such applications stay current on the latest applicable version. These upgrades
are time consuming, expensive and intrusive to daily business operations.
Conducting such upgrades could result in a failure to our operating systems
or
may cause a delay in fulfillment of orders received through our online platform
or materially affect the internal control over financial reporting of the
Company. Undertaking such an upgrade will require a significant capital
expenditure that may result in a diversion of funds required for general
operating expenses, which may result in an adverse effect to our ongoing
business operations.
Any
significant interruption in the operations of our customer call, order
fulfillment and distribution facilities could disrupt our ability to process
customer orders and to deliver our merchandise in a timely manner.
Our
customer call center and order fulfillment operations are currently carried
out
by a third-party vendor and we will continue to outsource telemarketing
operations for the foreseeable future. We may not be able to prevent a
significant interruption in the operation of these facilities due to natural
disasters, accidents, failures of the inventory locator or automated packing
and
shipping systems we use or other events. In addition, we have identified
the
need to expand and upgrade our operations and systems in order to support
recent
and expected future growth. We are currently evaluating our options for
third-party vendors and have begun soliciting bids for future telemarketing
contracts. If we decide to transition to a new telemarketing vendor there
may be
significant disruptions in our customer call and order fulfillment operations.
Any significant interruption in the operation of these facilities, including
an
interruption caused by our transition to utilizing a new third-party provider,
could reduce our ability to receive and process orders and provide products
to
our customers, which could result in lost sales, cancelled sales and a loss
of
loyalty to our brand.
We
may be liable if third parties misappropriate our customers’ personal
information.
If
third
parties are able to penetrate our network security or otherwise misappropriate
our customers’ personal information or credit card information, or if we give
third parties improper access to our customers’ personal information or credit
card information, we could be subject to liability. Our entire customer database
is stored with and managed by an outside vender. This liability could include
claims for unauthorized purchases with credit card information, impersonation
or
other similar fraud claims. This liability could also include claims for other
misuses of personal information, including unauthorized marketing purposes.
These claims could result in litigation. Liability for misappropriation of
this
information could adversely affect our business. In addition, the Federal Trade
Commission and state agencies have been investigating various internet companies
regarding their use of personal information. We could incur additional expenses
from the introduction of new regulations regarding the use of personal
information or from government agencies investigating our privacy
practices.
Credit
card fraud could adversely affect our business.
Approximately
90% of our sales in fiscal 2005 were paid for with a credit card. The failure
to
control adequately fraudulent credit card transactions could reduce our net
revenues and gross margin. We have implemented technology to help us detect
the
fraudulent use of credit card information. However, we may in the future suffer
losses because of orders placed with fraudulent credit card data even though
the
associated financial institution approved payment of the orders. Under current
credit card practices, we may be liable for fraudulent credit card transactions
because we do not obtain a cardholder’s signature. If we are unable to detect or
control credit card fraud, our liability for these transactions could harm
our
business, results of operation or financial condition.
Increases
in costs of mailing, paper and printing will affect the cost of our catalog
and
promotional mailings, which will reduce our profitability.
Postal
rate increases and paper and printing costs affect the cost of our catalog
and
promotional mailings. We rely on discounts from the basic postal rate structure.
Our catalogs are mailed third class and we rely on the current bar coding,
postal destination entry savings and carrier route discounts offered by the
U.S.
Postal Service. In addition, we are not a party to any long-term contracts
for the supply of paper. Our cost of paper has fluctuated significantly,
and our
future paper costs are subject to supply and demand forces that we cannot
control. Future additional increases in postal rates or in paper or printing
costs would reduce our profitability to the extent that we are unable to
pass
those increases directly to customers or offset those increases by raising
selling prices or by implementing mailings that result in increased purchases.
Other
Risks Related to Our Capital Structure and the Company’s Common
Stock
If
we default on any of our outstanding indebtedness, some or all of our assets
could be liquidated, our operations will be disrupted and you may lose all
or
part of your investment.
All
of
our assets are subject to liens in favor of our secured creditors under security
agreements. We assumed Petals LLC’s obligations under notes totaling more than
$8 million, and the assumed indebtedness is secured by substantially all of
the
assets we acquired from Petals LLC. As a result, if we default under the terms
of any of these assumed notes, the holders of the notes could foreclose under
the security interest and liquidate some or all of the acquired
assets.
Future
sales by the Company’s stockholders may adversely affect our stock price
and our ability to raise funds in new stock
offerings.
Future
sales of the Company’s Common Stock in the public market could lower the market
price of our Common Stock. Such sales may also make it more difficult for the
Company to sell equity securities or equity-related securities in the future
at
a time and price that management deems acceptable or at all. Some of our
shareholders, including Petals LLC and the parties to the Debt Restructuring
Agreements, hold securities issued and sold in private transactions in reliance
upon exemptions from the registration requirements of the Securities Act.
These securities may be resold in the public market only if the resale is
registered or pursuant to an exemption from registration. We do not know when
these shares will be sold since sales will depend upon the market price for
the
Company’s Common Stock, the circumstances, needs and decisions of the selling
stockholders, and other factors.
The
holders of the Company’s preferred stock issued in the Acquisition have rights
and privileges that are senior to those of the Company’s common stockholders,
and we may issue additional shares of preferred stock without stockholder
approval that could adversely affect the price of our Common
Stock.
The
board
of directors of the Company has the authority to issue, without any further
vote
or action by you and the other common stockholders, a total of up to 10 million
shares of preferred stock and to fix the rights, preferences, privileges, and
restrictions, including voting rights, of the preferred stock, which typically
are senior to the rights of the common stockholders. As of September 25, 2006,
there were outstanding 10,800 shares of Series A Preferred Stock and 240 shares
of Series B Preferred Stock and we may, from time to time in the future, issue
additional preferred stock for financing or other purposes with rights,
preferences or privileges senior to the Common Stock. Our outstanding
preferred stock is entitled to preferential rights in liquidation and, in the
case of our Series A Preferred Stock, to the payment of dividends. Your
rights will be subject to, and may be adversely affected by, the rights of
the
holders of the preferred stock that have been issued or might be issued in
the
future. Preferred stock also could make it more difficult for a third party
to
acquire a majority of our outstanding voting stock. This could delay, defer
or
prevent a change in control. Furthermore, holders of preferred stock may
have other rights, including economic rights, senior to the holders of common
stock. As a result, the existence and issuance of preferred stock could have
a
material adverse effect on the market value of our Common Stock.
The
issuance of preferred stock may entrench management or discourage a change
in
control.
Our
certificate of incorporation authorizes the issuance of preferred stock that
would have designations rights and preferences determined from time to time
by
our board of directors. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with dividends,
liquidation, conversion, voting, or other rights that could adversely affect
the
voting power or other rights of the holders of common stock.
The
preferred stock could be used, under some circumstances, as a method of
discouraging, delaying or preventing a change in control of the company or,
alternatively, granting the holders of preferred stock such rights as to
entrench management. Current members of our management that are large
stockholders and members of our board of directors may have interests that
are
different from other stockholders. Therefore, conflicting interests of some
members of management and our stockholders may lead to stockholders desiring
to
replace these individuals. In the event this occurs and the holders of our
common stock desired to remove current management, it is possible that our
board
of directors could issue preferred stock and grant the holders thereof such
rights and preferences so as to discourage or frustrate attempts by the common
stockholders to remove current management. In doing so, management would be
able
to severely limit the rights of common stockholders to elect the members of
our
board of directors. In addition, by issuing preferred stock, management could
prevent other shareholders from receiving a premium price for their shares
as
part of a tender offer.
We
do not anticipate paying cash dividends on our Common Stock in the
foreseeable future. Investors should not rely on an investment in our stock
for
the payment of cash dividends.
We
have
not paid cash dividends to the holders of our Common equity to date. The
holders of the Company’s newly designated Series A Preferred Stock issued in
connection with the Acquisition are entitled to receive dividends at the rate
of
8% per annum paid semi-annually, beginning on January 1, 2007. The Company
currently intends to retain its future earnings, if any, after payment of
dividends to the holders of its preferred stock, to fund the development and
growth of our business. As a result, capital appreciation, if any, of our common
stock will be your sole source of gain for the foreseeable future.
The
sale of material amounts of our Common Stock could encourage short sales by
third parties and further depress the price of our Common Stock. As a result,
you may lose all or part of your investment.
The
significant downward pressure on our stock price caused by the sale of a
significant number of shares could cause our stock price to decline, thus
allowing short sellers of our stock an opportunity to take advantage of any
decrease in the value of our stock. The presence of short sellers in our common
stock may further depress the price of our Common Stock.
Risks
Related to the Dilutive Effect of the Company’s Agreements with Investors and
Other Arrangements
You
could suffer substantial dilution of your investment and our stock price could
decline significantly if we issue substantial shares of our Common Stock (i)
upon conversion of the outstanding preferred stock, or (ii) pursuant to
employment agreements, consulting agreements and equity compensation
plans.
We
are
obligated to issue a substantial number of shares of common stock pursuant
to
the terms of the arrangements described above. These include approximately
15,666,667 (post-split) shares issuable upon conversion of the outstanding
preferred stock and an employment agreement between Petals LLC and Mr. Hicks
which was assumed by the Company and which entitles him, at his election, to
receive compensation in the form of common stock issued at a discount to the
then current market price of our common stock. Should a significant number
of these securities be issued, exercised or converted, the resulting increase
in
the amount of the Common Stock in the public market could have a substantial
dilutive effect on the Company’s outstanding Common Stock. The conversion and
exercise of a substantial amount of the aforementioned securities or the
issuance of new shares of Common Stock may also adversely affect the terms
under
which the Company could obtain additional equity capital. The price, the Company
may receive for the shares of Common Stock, that are issuable upon conversion
or
exercise of such securities, may be less than the market price of the common
stock at the time of such conversions or exercise.
Risks
Relating to New Corporate Governance Standards
The
Company is not subject to the same corporate governance standards as listed
companies. This may affect market confidence and company performance. As a
result, our business could be harmed and the price of our stock could
decrease.
Registered
exchanges and the Nasdaq Stock Market have adopted enhanced corporate governance
requirements that apply to issuers that list their securities on those markets.
These standards deal with the rights and responsibilities of a company's
management, its board, shareholders and various stakeholders. A public company’s
corporate governance structure and process may affect market confidence as
well
as company performance. Our common stock is quoted on the OTC Bulletin Board,
which does not have comparable requirements. As a result, our business and
the
price of our stock may be adversely affected.
For
instance, the Company is not required to have, and does not have, any
independent directors, nor does its board of directors have a standing audit
committee, compensation committee or nominating committee. Therefore management
has significant influence over decisions made by the board of directors on
behalf of the stockholders.
In
some
circumstances, management may not have the same interests as other shareholders
and conflicts of interest may arise. We do not have a policy to resolve
conflicts of interest and it is not required to have one. Although the members
of our board of directors have fiduciary duties as directors to the Company
and
to our stockholders in general, these persons may have interests different
than
yours.
Because
we are not subject to the enhanced corporate governance requirements applicable
to companies whose securities are listed on a national securities exchange
or
with the Nasdaq Stock Market, investors may lack confidence in our management.
A
loss of confidence in our management could lead to a substantial stock price
decline.
Our
administrative costs and expenses resulting from new regulations may adversely
affect our financial condition and results of
operations.
We
face
new corporate governance requirements under the Sarbanes-Oxley Act of 2002
and
SEC rules adopted thereunder. These regulations increased our legal and
financial compliance and made some activities more difficult, time-consuming
and
costly. Our expenses will continue to increase as we continue to implement
these
new regulations.
The
Company will be required to comply with Section 404 of the Sarbanes-Oxley Act
of
2002, and if it fails to comply without exceptions in a timely manner, a loss
of
investor confidence in the Company’s financial reports could result and lead to
a substantial stock price decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of the Company’s internal control over financial
reporting, and attestation of this assessment by its independent registered
public accountant. The Company expects that this requirement will first apply
to
its annual report for the fiscal year ending June 30, 2008. The report will
contain, among other matters, an assessment of the effectiveness of its internal
control over financial reporting as of the end of the fiscal year, including
a
statement as to whether or not its internal control over financial reporting
is
effective. This assessment must include disclosure of any material weaknesses
in
our internal control over financial reporting identified by management. The
report must also contain a statement that the Company’s independent auditors
have issued an attestation report on management’s assessment of such internal
controls. The standards for Section 404 that must be met for management to
assess the effectiveness of the internal control over financial reporting are
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, we may encounter problems or delays
in
completing the implementation of any requested improvements and receiving an
attestation of the Company’s assessment by its independent registered public
accountants. If management cannot assess the Company’s internal control over
financial reporting as effective, or its independent registered public
accounting firm is unable to issue an unqualified attestation report on such
assessment, investor confidence and share value may be negatively
affected.
We
have
not yet begun the process of analyzing our internal controls and preparing
for
the evaluation needed to comply with Section 404. During this process, if
management identifies one or more material weaknesses in the Company’s internal
control over financial reporting that are not remediated, the Company will
be
unable to assert that its internal control is effective. Any failure to have
effective internal control over financial reporting could cause investors to
lose confidence in the accuracy and completeness of the Company’s financial
reports, which could lead to a substantial stock price decline.
The
Company could be the subject of securities class action litigation as a result
of future stock price volatility, which could divert management’s attention and
adversely affect its results of operations.
The
stock
market in general, and market prices for the securities of small companies
like
the Company in particular, have from time to time experienced volatility that
often has been unrelated to the operating performance of the underlying
companies. We expect a certain degree of stock price volatility. These broad
market and industry fluctuations may adversely affect the market price of our
common stock, regardless of our operating performance. In several recent
situations where the market price of a stock has been volatile, holders of
that
stock have instituted securities class action litigation against the issuer.
If
any of the Company’s shareholders were to bring a lawsuit against it, the
defense and disposition of the lawsuit could be costly and divert the time
and
attention of its management and harm its business.
The
Company’s certificate of incorporation provides for indemnification of officers
and directors at the expense of the Company, and limits their liability, which
may result in a major cost to the Company and conflict with the interests of
its
shareholders as corporate resources may be expended for the benefit of officers
and directors.
The
Company’s certificate of incorporation and applicable Delaware law provide for
the indemnification of its directors, officers, employees, and agents, under
certain circumstances, against attorney's fees and other expenses incurred
by
them in any litigation to which they become a party arising from their
association with or activities on behalf of the Company. The Company will also
bear the expenses of such litigation for any of its directors, officers,
employees, or agents, upon such person's promise to repay the Company therefor
if it is ultimately determined that any such person will not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by the Company, which it will be unable to recoup.
We
have
been advised that in the opinion of the SEC, this type of indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
these types of liabilities, other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceeding, is asserted by a director, officer
or
controlling person in connection with the securities being registered, the
Company will (unless in the opinion of its counsel, the matter has been settled
by controlling precedent) submit to a court of appropriate jurisdiction, the
question whether indemnification by the Company is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue. The legal process relating to this matter if it were to occur
is
likely to be very costly and may result in the Company receiving negative
publicity, both of which are likely to materially reduce the market and price
for its shares, if such a market ever develops.
Risks
Related to Investing in Illiquid and Low-Priced
Securities
Currently
there is very little trading in the Company’s securities, and there can be no
assurances that an active market will ever develop.
The
Company’s Common Stock is not traded on a registered securities exchange and it
does not meet the initial listing criteria for any registered securities
exchange or the NASDAQ Capital Market. It is quoted on the less-recognized
OTC
Bulletin Board. This factor may impair an investor’s ability to sell his shares
when he wants and/or could depress our stock price. As a result, an investor
may
find it difficult to dispose of, or to obtain accurate quotations of the price
of, the Company’s securities because smaller quantities of shares could be
bought and sold, transactions could be delayed and security analyst and news
coverage of the Company may be reduced. These factors could result in lower
prices and larger spreads in the bids and ask prices for the Company’s shares.
Due to the current price of the Company’s Common Stock, many brokerage firms may
not be willing to effect transactions in the Company’s securities, particularly
because of an SEC rule imposing additional sales requirements on broker-dealers
who sell low-priced securities (generally those below $5.00 per share). These
factors severely limit the liquidity of the Company’s Common Stock and likely
have a material adverse effect on the Company’s market price and on its ability
to raise additional capital. We cannot predict the extent to which investor
interest in the Company’s stock, if any, will lead to an increase in its market
price or the development of a more active trading market or how liquid that
market might become.
The
Company’s common stock is deemed to be "penny stock," which may make it more
difficult for investors to sell these shares due to suitability and disclosure
requirements.
Many
brokerage firms may not be willing to effect transactions in the Company’s
securities, particularly because low-priced securities are subject to SEC rules
(referred to as the "penny stock rules") imposing additional sales requirements
on broker-dealers who sell low-priced securities (generally defined as those
having a per share price below $5.00). These disclosure requirements may have
the effect of reducing the trading activity in the secondary market for the
Company’s Common Stock as it is subject to these penny stock rules. These rules
severely limit the liquidity, if any, of the Company’s Common Stock, and will
likely continue to have a material adverse effect on its market price and on
its
ability to raise additional capital through selling common stock.
The
penny
stock rules require a broker-dealer, prior to a transaction in a penny stock,
to
deliver a standardized risk disclosure document prepared by the Commission,
that: (a) contains a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary trading; (b) contains
a
description of the broker's or dealer's duties to the customer and of the rights
and remedies available to the customer with respect to a violation of such
duties or other requirements of Securities' laws; (c) contains a brief, clear,
narrative description of a dealer market, including bid and ask prices for
penny
stocks and the significance of the spread between the bid and ask price; (d)
contains a toll-free telephone number for inquiries on disciplinary actions;
(e)
defines significant terms in the disclosure document or in the conduct of
trading in penny stocks; and (f) contains such other information and is in
such
form, including language, type, size and format, as the SEC may require by
rule
or regulation.
In
addition, the broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with: (a) bid and ask quotations
for
the penny stock; (b) the compensation of the broker-dealer and its salesperson
in the transaction; (c) the number of shares to which such bid and ask prices
apply, or other comparable information relating to the depth and liquidity
of
the market for such stock; and (d) monthly account statements showing the market
value of each penny stock held in the customer's account.
Finally,
the penny stock rules require that prior to a transaction in a penny stock
not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving penny
stocks, and a signed and dated copy of a written suitability
statement.
These
requirements may reduce the potential market for the Company’s Common Stock by
reducing the number of potential investors, brokers and traders. This may make
it more difficult for investors in the Company’s Common Stock to sell shares to
third parties or to otherwise dispose of them. This could cause the Company’s
stock price to decline.
We
cannot
predict the extent to which investor interest in the Company’s common stock or a
business combination, if any, will lead to an increase in its market price
or
the development of an active trading market or how liquid that market, if any,
might become.
The
market price of our common stock may be volatile. As a result, you may not
be
able to sell our common stock in short time periods, or possibly at
all.
Our
stock
price may be volatile. Many factors may cause the market price of the Company’s
Common Stock to fluctuate, including:
·
|
variations
in our quarterly results of
operations;
|
·
|
the
introduction of new products or product categories by us or our
competitors;
|
·
|
acquisitions
or strategic alliances involving our
competitors;
|
·
|
future
sales of shares of common stock in the public market;
and
|
·
|
market
conditions in our industries and the economy as a
whole.
|
In
addition, the stock market has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our Common Stock. When the market price
of
a company's stock drops significantly, stockholders often institute securities
class action litigation against that company. Any litigation against us could
cause us to incur substantial costs, divert the time and attention of our
management and other resources or otherwise harm our business.
Sales
of shares of our Common Stock relying upon Rule 144 may depress prices for
our
Common Stock by a material amount.
Approximately
99% of the outstanding shares of our Common Stock, including all the shares
issued in the Acquisition and pursuant to the Debt Restructuring Agreements,
are
"restricted securities" within the meaning of Rule 144 under the Securities
Act
of 1933, as amended. As restricted shares, these shares may be resold only
pursuant to an effective registration statement or under the requirements of
Rule 144 or other applicable exemptions from registration under the Act and
as
required under applicable state securities laws. Rule 144 provides in essence
that a person who has held restricted securities for a prescribed period (at
least one year) may, under certain conditions, sell every three months, in
brokerage transactions, a number of shares that does not exceed 1.0% of a
company's outstanding common stock. The alternative average weekly trading
volume during the four calendar weeks prior to the sale is not available to
our
shareholders being that the OTCBB (if and when listed thereon) is not an
"automated quotation system" and market based volume limitations are not
available for securities quoted only over the OTCBB. As a result of revisions
to
Rule 144 which became effective on or about April 29, 1997, there is no limit
on
the amount of restricted securities that may be sold by a non-affiliate (i.e.,
a
stockholder who is not an officer, director or controlling person) after the
restricted securities have been held by the owner for a period of two years.
A
sale
under Rule 144 or under any other exemption from the Act, if available, or
pursuant to registration of shares of common stock of present stockholders,
may
have a depressive effect upon the price of our Common Stock in any market that
may develop.
Item
2. Description of Property.
We
currently operate out of office space located at 90 Grove Street, Ridgefield,
Connecticut, which serves as our headquarters. The lease agreement expires
on
December 31, 2008 and calls for monthly rent payments of approximately $21,010.
The lessor, Southridge Holdings, LLC, is an entity controlled by our president
and chairman, Stephen M. Hicks.
We
also
lease a 54,000 square foot facility in Portland, Tennessee, which serves as
our
principal assembly facility. The lease agreement expires on September 30, 2008
and calls for monthly rent payments of approximately $14,935.
On
July
17, 2006 we entered into a three year lease agreement with Smith
and
Cheynne Properties, LLC,
for a
75,000 square foot scalable facility in Portland, Tennessee to serve as our
distribution center. This facility is scheduled to be operational in January
2007. The lease agreement expires on July 30, 2009 and calls for monthly rent
payments of approximately $22,888.
We
anticipate that these facilities will be sufficient for our operations through
fiscal year 2007.
Item
3. Legal Proceedings.
Breach
of contract claim by James Hersh. On
November 17, 2005, a complaint was filed against Petals LLC in Connecticut
Superior Court for the Judicial District of Danbury (No. CV-05-4004676-S) by
James Hersh, Petals LLC's former Chief Financial Officer. The complaint
alleges that Petals LLC breached an employment contract with Mr. Hersh,
dated October 1, 2004, by its failure to pay approximately $215,000 in severance
payments due to Mr. Hersh after his termination of employment on October 18,
2005. In addition, the complaint seeks attorneys' fees, interest and costs.
On
or about September 12, 2006 a settlement of this matter was consummated. Petals
LLC agreed to pay $107,500.00 by September 18, 2006, which payment was timely
made. Mutual general releases have been exchanged and the action has been
withdrawn.
We
may be
subject to various legal proceedings and claims that arise, from time to time,
in the ordinary course of our business. Although the outcome of other claims
cannot be predicted with certainty, management does not believe that the
ultimate resolution of these matters will have a material adverse effect on
our
financial condition or results of operations.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of our security holders during the fourth
quarter of the year ended June 30, 2006.
On
August
2, 2006, our board of directors and the
requisite number of stockholders, acting by written consent in lieu of a
meeting,
approved the following: (i) the approval of an amendment to our Certificate
of
Incorporation to effect a 1-for-3 reverse split of our outstanding shares of
Common Stock; (ii) the approval of an amendment to our Certificate of
Incorporation to create a classified board of directors; (iii) the approval
of
an amendment to our Certificate of Incorporation to change our name from
“ImmunoTechnology Corporation” to “Petals Decorative Accents, Inc.”; and (iv)
the ratification of the adoption of the Petals Decorative Accents, Inc. 2006
Stock Incentive Plan. These actions became effective on September 20, 2006.
For
more information regarding these actions, please see our Definitive Schedule
14C, filed with the SEC on August 29, 2006 (file no. 000-24641).
PART
II
Item
5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities.
Until
September 21, 2006 our Common Stock was traded on the OTC Bulletin Board under
the symbol IMUO.OB. On September 21, 2006 our trading symbol was changed to
PDEC.OB. The table on the following page sets forth, for the respective periods
indicated the prices for the Company’s Common Stock in the over-the-counter
market as reported by the NASD’s OTC Bulletin Board. The bid prices represent
inter-dealer quotations, without adjustments for retail mark-ups, mark-downs
or
commissions and may not necessarily represent actual transactions. There is
currently limited trading volume in our shares:
Fiscal
Year
|
|
High
|
Low
|
|
|
|
|
Fiscal
Year Ended June 30, 2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$0.090
|
$0.025
|
Second
Quarter
|
|
$0.050
|
$0.023
|
Third
Quarter *
|
|
$0.550
|
$0.250
|
Fourth
Quarter **
|
|
$0.400
|
$0.260
|
|
|
|
|
Fiscal
Year Ended June 30, 2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$0.260
|
$0.260
|
Second
Quarter
|
|
$0.370
|
$0.260
|
Third
Quarter
|
|
$0.300
|
$0.260
|
Fourth
Quarter
|
|
$0.490
|
$0.260
|
*
On May
28, 2003, the Company effected a 5 for 1 forward split of its Common Stock.
The
high bid price for the quarter indicated of $1.80 represents the high bid on
May
23, 2003 immediately prior to the forward split. The low bid price of $0.10
represents the low bid on June 26, 2003, subsequent to the forward
split.
**
On
March 13, 2005, the Company effected a 10-for-1 forward split of its Common
Stock.
At
September 25, 2006, our Common Stock was quoted on the OTC Bulletin Board
(“PDEC.OB”) at a bid and asked price of $0.90 and $1.20 respectively.
On
September 20, 2006, the Company effected a 1-for-3 reverse split of its Common
Stock.
Holders
of Record
As
of
September 25, 2006, there were 32,049,842 shares of Common Stock outstanding
and
approximately 63 stockholders of record of Common Stock, 10,800 shares of our
Series A Preferred Stock outstanding and 1 stockholder of record of our Series
A
Preferred Stock and 240 shares of our Series B Preferred Stock outstanding
and 1
stockholder of record of our Series B Preferred Stock.
Purchases
of Equity Securities By the Company.
During
the fiscal year ended June 30, 2006, the Company did not purchase any of its
equity securities.
Dividend
Policy.
We
have
not paid cash dividends on our Common Stock to date, and currently intend to
retain our earnings, if any, to fund the development and growth of our business.
As a result, capital appreciation, if any, of our Common Stock will be the
sole
source of gain for the foreseeable future. Pursuant to the line of credit
between us and Ridgefield Bank, we
have
covenanted that so long as that note is outstanding, we will not declare, pay
or
make any provision for any cash dividend or cash distribution with respect
to
our Common Stock, without first obtaining the approval of Ridgefield
Bank.
In
addition, in connection with our term notes issued Southshore
Capital Fund, Ltd. and Southridge Partners, LP
we have
covenanted that so long as these notes are outstanding, we will not declare,
pay
or make any provision for any cash dividend or cash distribution with respect
to
our Common Stock, without first obtaining the approval of the note
holders.
Dividends
accrue on shares of Petals Series A Preferred Stock cumulatively at the rate
of
8% per annum and are payable as and when declared by our board of directors,
provided that, accrued dividends will be paid no less frequently than
semi-annually with the first payment to be made on January 1, 2007.
In
the
event we make, or fix a record date for the determination of holders of Common
Stock entitled to receive any distribution payable in our property or in our
securities, then and in each such event the holders of the Series A Preferred
Stock and the Series B Preferred Stock shall receive, at the time of such
distribution, the amount of our property or the number of our securities that
they would have received had their Series A Preferred Stock or Series B
Preferred shares been converted into Common Stock on the date of such
event.
Securities
Authorized for Issuance Under Equity Compensation Plans.
The
following table sets forth certain information concerning all equity
compensation plans previously approved by stockholders and all previous equity
compensation plans not previously approved by stockholders, as of June 30,
2006,
the end of the most recently completed fiscal year:
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders (1)
|
0
|
N/A
|
0
|
Equity
compensation plans not approved by security holders (2)
|
124,666†
|
N/A
|
(2)
|
Total
|
0
|
N/A
|
0
|
†
Shares
reported give effect to our September 20, 2006 reverse stock split.
(1) |
On
August 2, 2006, our board of directors and the requisite number of
stockholders, acting by written consent in lieu of a meeting,
adopted and ratified the
Petals Decorative Accents, Inc. 2006 Stock Incentive Plan (the
“2006
Plan”)
and reserved 5,000,000 (post-reverse split) shares for issuance pursuant
to the plan. Shares reserved pursuant to the 2006 Plan have not been
included in the table above because the 2006 Plan was adopted after
June
30, 2006. For more information regarding the 2006 Plan, please see
our
Definitive Schedule 14C filed with the SEC on August 29, 2006
(file
no. 000-24641).
|
(2) |
The
Company has a five-year employment agreement with its President and
Chairman which provides that our President, at his sole discretion,
may
elect to receive all or any part of his base salary in the form of
Common
Stock of the Company. The value of any common equity to be paid shall
be
determined as follows: (i) if there exists a public market for the
Company’s common equity, then the price per share shall be 75% of the
average of the closing trading prices for the ten trading days ending
on
the trading day immediately prior to the due date, or (ii) if no
public
market exists for the Company’s common equity, then the board of directors
of the Company, in its reasonable good faith judgment, will assign
a
value. As of June 30, 2006, the Company had deferred payment of
approximately $84,150 of salary due to Mr. Hicks pursuant to this
employment agreement. Using the closing price of our Common Stock
on
September 25, 2006, of $0.90, the Company could be required to issue
to
our President approximately 124,666 shares of our Common Stock in
satisfaction of the deferred salary owed as of June 30, 2006. This
employment agreement expires on March 31, 2011 and provides for an
annual
salary of $280,000. This agreement is attached to our current report
on
Form 8-K filed with the SEC on July 7, 2006, and is incorporated
herein by
reference.
|
Transfer
Agent and Registrar.
Our
transfer agent is Corporate Stock Transfer, 3200 Cherry Creek South Drive,
Denver, CO 80209-3244; telephone (303) 282-4800.
Item
6. Management’s Discussion and Analysis.
MANAGEMENT
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following management’s discussion and analysis of financial condition and
results of operations relates to our historical financial statements for the
ten
month periods ended July 2, 2005 and June 30, 2006, and should be read in
conjunction with those financial statements and the notes thereto. For
accounting purposes, the acquisition of the Petals LLC business is accounted
for
as a reverse acquisition of us (legal acquirer) by Petals LLC (accounting
acquirer). As a result, following the Acquisition, the historical financial
statements of Petals LLC became the historical financial statements of the
Company. We intend to operate the business formerly carried on by Petals LLC,
however, the historical operating results of Petals LLC are not necessarily
indicative of our future results.
The
following management's discussion and analysis of financial condition and
results of operations is organized as follows:
· |
Overview.
This section provides a general description of our business, as well
as
recent developments and events that have occurred since June 30,
2006 that
we believe are important in understanding the results of operations
and
financial condition and to anticipate future trends. In addition,
we have
provided a brief description of significant transactions and events
that
impact the comparability of the results being
analyzed.
|
· |
Results
of Operations.
This section provides an analysis of our results of operations for
the ten
month periods ended July 2, 2005 and June 30, 2006. From an historical
perspective, Petals LLC was deemed to have been the acquirer in the
Acquisition and Petals LLC is deemed the survivor of the reorganization.
Accordingly, the financial statements presented reflect the historical
results of Petals LLC prior to the Acquisition, and of the combined
entities following the Acquisition, and do not include the historical
financial results of us prior to the consummation of the
Acquisition.
|
· |
Financial
Condition And Liquidity.
This section provides an analysis of our cash flows for the ten month
periods ended July 2, 2005 and June 30, 2006, as well as a discussion
of
recent financing arrangements.
|
· |
Critical
Accounting Policies.
This section discusses certain critical accounting policies that
we
consider important to our financial condition and results of operations,
and that required significant judgment and estimates on the part
of
management in application. Our significant accounting policies, including
the critical accounting policies discussed in this section, are summarized
in the notes to the accompanying financial
statements.
|
· |
New
Accounting Pronouncements.
This section discusses newly issued accounting standards and the
impact we
expect they may have on our financial
statements.
|
Overview
We
sell
decorative silk flowers, plants and trees, along with complimentary decorative
accents, which include mirrors, small furniture pieces, figurines, lamps and
rugs. We sell our products through our mail order catalog and website. We import
most of the floral stems and other materials used in our products, primarily
from China, and assemble them in our facility in Portland, Tennessee. Our order
fulfillment is performed on an outsourced basis by a third party at a call
center in Martinsville, Virginia and a distribution facility in Portland,
Tennessee.
Operations
from inception to the Acquisition
Petals
LLC acquired control of the assets that now constitute the Petals business
in
the fall of 2003. Its first priority was to rapidly re-establish the operations
of the business. Its goals were to reactivate as many customers as possible
from
the Old Petals customer database and establish purchasing and distribution
systems as quickly as it could.
To
accelerate this process, Petals LLC initially outsourced all its assembly and
order fulfillment operations. During this start-up period, Petals LLC sought
to
preserve what it believed to be the company’s core strategic asset, its large
direct mail customer database, while developing an operating plan to capitalize
on this asset while controlling our cost structure.
· |
During
the winter and spring of 2004, Petals LLC re-established contact
with its
customer base, mailing catalogs in January, March, April, May and
June.
Due to the initial challenges in procurement of inventory, these
catalogs
offered a limited number of products and included very few proprietary
floral arrangements or decorative accent products.
|
· |
In
the summer of 2005, Petals LLC assumed responsibility for the assembly
of
its finished products, within its outsourced vendor’s warehouse facility.
In the fall of 2005, Petals LLC established a new assembly facility
in
leased premises in Portland, Tennessee, giving it complete control
over
the product assembly process.
|
· |
During
the twelve months ended September 5, 2005 (Petals LLC fiscal year
2005),
Petals LLC mailed 9.4 million catalogs in 13 mailings, generating
approximately 182,000 orders with an average order size, excluding
shipping and handling, of $88.36. Approximately 24% of its revenue
in
fiscal 2005 was attributable to orders placed on its website, generally
by
recipients of its catalog.
|
Description
of revenues, costs and expenses
Net
revenue.
Our net
revenue is comprised of product sales derived from mailing of catalogs and
from
visitors to our Internet site, shipping and handling charged on product sales,
and revenue from the renting of our mailing list less reductions for bad debt
and promotional discounts offered. Net revenues are reduced by credits for
product returns and chargebacks that may arise as a result of shipping errors,
product damaged in transit or other reasons that can only become known
subsequent to recognizing the revenue.
Cost
of sales.
Our cost
of sales includes the cost of finished goods bought directly from the
manufacturer or components purchased from our suppliers and assembled at our
plant, labor for product assembly, freight associated with the transport of
finished goods or components from the manufacturing vendor to our plant,
packaging materials used to box and secure our products during shipping to
our
customers and the freight expense associated with shipping finished products
to
our customers.
Operating
expense.
Our
operating expense includes credit card fees, telephone expense for its toll
free
number, order entry fees for telemarketing representatives to take phone calls,
answer customer questions relating to products for sales and record any orders,
customer service fees to handle after sales questions or concerns, labor related
to receiving inventory, inventory storage charges, labor related to picking,
packing and shipping of each order and the cost of invoices that get mailed
along with the product. We utilize and pay a third party provider for these
services at contracted rates. Also included in operating expense is the fixed
portion of our manufacturing overhead, including rent, taxes, utilities and
equipment rental.
Selling
and marketing expense.
Our
selling and marketing expense consists primarily of the cost of producing,
printing and mailing our catalogs. It also includes the cost of commissions
paid
to affiliate advertising programs, cost of e-mail campaigns and paid search
advertising fees, and amortization of the customer database we acquired from
Petals LLC.
Administrative
expense.
Our
administrative expense includes salaries and related payroll cost for our
executive officers, outside professional consulting and professional fees,
insurance, rent and related facilities costs for our Ridgefield, Connecticut
headquarters, travel, technology consulting and bank charges and depreciation
on
equipment.
Factors,
trends and challenges that have affected our results of
operations
In
reading our financial statements, you should be aware of the following factors,
trends and challenges that management believes are important in understanding
our financial performance, and actions we have taken and plan to take in
response.
Initiatives
to improve customer acquisition and retention and increase demand per
catalog.
The cost
of producing and mailing catalogs is substantial, amounting to nearly $6 million
in the ten months ended June 30, 2006. In order to meet our business
objectives, we must leverage this investment by continuing to improve our gross
product demand per catalog mailed. Gross product demand is the total value
of
orders we receive, before deduction for product returns and orders we are unable
to fill. Gross product demand per catalog mailed is the gross product demand
for
any period divided by the total number of catalogs we mail during that period.
This is a key measure of the success of our marketing and merchandising
efforts.
During
the ten months ended June 30, 2006, we mailed 9.2 million catalogs and generated
gross product demand of $18.8 million for a demand per catalog of $2.05, a
23%
increase over the $1.67 we achieved during the corresponding period of fiscal
year 2005. The period over period increase was primarily due to having
increased the average number of pages per catalog, along with having circulated
a larger portion of total catalog circulation to best buyers. For the fiscal
year 2007, we hope to increase demand per catalog. Our plan to achieve an
increase for the coming fiscal year is based on increasing the percentage of
core buyers to which we mail catalogs, along with continuing to improve
merchandising efforts. To stimulate demand, our catalog marketing will include
targeted promotional offers which are intended to reinforce the customer loyalty
of our existing core buyers, reestablish a relationship with lapsed buyers
and
accelerate the acquisition of new buyers.
To
increase demand, our merchandising will focus on reintroducing the catalog’s
prior top selling, designer-created, silk botanicals, in combination with
introducing new silk botanical products that capture current home design trends
and complement the mix of existing products. We are looking to add personnel
to
our product design staff to increase our ability to introduce successful new
floral designs. Catalog creative efforts will increasingly present product
in
lifestyle settings. We will utilize more location photography to accomplish
this.
Initiatives
to enhance and maintain our catalog yields.
Our merchandising planning cycle is long and typically takes about nine months,
including product planning and design, manufacture of components by our
suppliers in Asia, transport to our assembly facility by ship and product
assembly in our facility. We currently plan each catalog nine or more months
in
advance, in order to offer the best and most current product and meet our
manufacturers’ lead times, so as to have sufficient quantities of appropriate,
high quality merchandise on hand with which to fill orders.
When
Petals LLC first commenced operations, its ability to plan and choose the
product assortment based on projected customer response; as well as to obtain
the necessary merchandise in the correct quantity was limited. As a result
Petals LLC experienced inventory shortages and low product fill rates due to
unavailability of merchandise. This is an area we are still striving to
improve.
We
believe that a typical product return rate in our industry is in the range
of 4%
to 6% and that typical lost fill rates are in the range of 6% to 8%. In order
to
achieve our business objectives, we will need to achieve and then maintain
our
yields at or near those levels. For the ten months ended June 30, 2006, our
return rate was nearly 8% of gross revenue shipped and our lost fill was
approximately 13% of product demanded by our customers. In comparison, for
the
ten months ended July 2, 2005, returns were 7% and lost fill was 12%. The
decreased performance in these areas was due to delivery and customer servicing
problems on the part of our former package shipping company which increased
product returns and cancelled orders for product orders taken between February
and April of 2006.
We
are
currently using another premium shipping vendor to service customer package
orders and we are in the process of enhancing inventory management systems
in an
effort to improve product fill levels and reduce product return
rates.
Initiatives
to reduce cost of sales and improve the efficiency of our supply
chain.
We
purchase most of the components we use in assembling our products, and some
finished goods, primarily decorative accessory products, from suppliers in
China. Although the cost of the products that we purchase is advantageous in
China, the long lead times associated with the manufacturing and shipping of
the
goods to the United States often require us to commit capital resources for
as
long as three months before inventory is received.
The
long
lead times for components from our suppliers in China also require us to buy
in
larger quantities than are optimal, resulting in high inventory levels,
inventory turns which are below optimal levels and increased risk of inventory
obsolescence. In addition, shipping product from China to our distribution
center is expensive, averaging approximately 12% of the total cost of goods
sold.
We
are
currently looking to expand our overseas floral vendor base in an effort to
reduce our cost of goods sold. In addition, our purchases of existing core
floral stems are being put out to bid to multiple existing vendors to help
reduce the cost of our current product assortment.
A
significant component of our cost of goods sold is the cost of assembly of
our
products. In order to expedite the start-up of the business in 2004, Petals
LLC
contracted with our current operations vendor, Accretive Commerce, to receive
inventory and assemble its products at a facility located in Tennessee. During
the first half of calendar 2005, Petals LLC concluded that it would be more
cost
effective to undertake control of the assembly operations itself. As a result,
Petals LLC assumed responsibility for the assembly of finished products
commencing in June 2005, by leasing space within Accretive Commerce’s Tennessee
operations facility.
In
October 2005, Petals LLC entered into a three-year lease of a 54,000 square
foot
warehouse facility in Portland, Tennessee. Petals LLC started assembling product
within this facility in November 2005. The new procedures have resulted in
lower
assembly costs as well as significant increases in productivity per employee
labor hour.
Initiatives
to reduce order fulfillment costs.
Upon
commencing operations in 2003, Petals LLC used an outside vendor for its product
distribution and call center functions. We have entered into a three- year
lease, starting August of 2006, to utilize a 75,000 scalable facility in
Portland, Tennessee to serve as our own distribution center. The facility is
scheduled to be fully operational by January of 2007. Our goal is to reduce
warehouse and product distribution cost per order, although no assurances can
be
given that we will achieve this goal. This facility will be financed by the
proceeds of a private placement of unsecured promissory notes completed on
June
16, 2006, which is described in more detail under the heading “Recent
Developments” below.
Initiatives
to tighten inventory controls.
We are
in the process of implementing measures to improve inventory management and
control. A warehouse management system is being installed that will increase
management’s visibility to inventory levels, along with optimizing the
efficiency of how product is shipped to customers. The second piece of improving
inventory management is to create the data flow of all customer order
information into our internal software system. Both internal and external
information technology personnel are currently executing this initiative.
Our
inventory management initiatives are scheduled for completion by the end of
December 2006. Successful completion is critical to our plan to transition
product fulfillment from our current third party provider to managing these
processes in-house.
Initiative
to reduce telemarketing costs. We
will
continue to outsource telemarketing operations for the foreseeable future.
We
are currently evaluating our options for third-party vendors and have begun
soliciting bids for future telemarketing contracts. The
selection of a telemarketing provider for calendar year 2007 and a transition
to
the selected vendor will not likely occur prior to January or February of 2007.
The timely and successful transition of this function is critical to business
operations.
Initiatives
to enhance our internet website. Recent
enhancements have been made to our consumer website in an effort to increase
online sales. Our print catalog was launched electronically on the Petals.com
website in August of 2006. Electronic catalogs will enable customers to shop
coordinated collections of products in an easy manner, as they can view product
collections in a single page view. It is hoped that this will help increase
online sales conversion and average order levels.
In
July
of 2006, we launched online product zoom functionality, allowing shoppers the
ability to view products in greater detail than typically available through
traditional website and print catalog images. Product zoom should help
accentuate the fine craftsmanship and quality of our products and give customers
added confidence that our silk florals are accurate reproductions of fresh
florals.
Critical
accounting policies and estimates
The
preparation of financial statements and related notes in conformity with
accounting principles generally accepted in the United States of America
requires us to make judgments, estimates, and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to bad debts, inventories,
income taxes, restructuring, impairments, contingencies and litigation. We
base
our estimates on historical experience and on 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.
The
accounting policies discussed below are those that we consider to involve
estimates based on assumptions about matters that are highly uncertain at the
time the estimate is made, and where different estimates that reasonably could
have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially affect its financial statements.
Revenue
recognition. Our
revenue is comprised of product sales derived from:
· |
product
sales derived from mailing of catalogs to our core customer base
and to
prospective customers and from visitors to our Internet site,
|
· |
shipping
and handling revenue charged on product sales, and
|
· |
revenue
from the renting of our mailing list.
|
Generally,
sales orders are received via signed customer orders to our call center or
via
the Internet with stated fixed prices based on published prices set forth in
our
catalogs and on our Web site. We record estimated reductions to product revenue
for customer promotional programs, which may include special volume incentives,
free shipping and handling, percent off purchase, free gift with purchase and
other promotions. Should market conditions decline, we may increase customer
incentives with respect to future sales.
We
also
record estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise as a result
of
shipping errors, product damage in transit or for other reasons that can only
become known subsequent to recognizing the revenue. Purchased products may
be
returned by customers for a period of 30 days. Our sales
returns, as a percentage of product revenue shipped, have typically run between
5 to 10% and averaged around 7%. If
the
amount of actual customer returns and chargebacks were to increase significantly
from the estimated amount, revisions to the estimated allowance would be
required and made.
Approximately
90% of all sales are made by charging customer credit cards at the time of
shipment. Shipment is not made if the charge to the credit card is not accepted.
Approximately 10% of orders are paid by check. Revenues from the rental of
our
mailing list are recognized when the party renting the list is invoiced by
our
third party list manager.
Inventory
valuation. Inventories
are valued at the lower of cost or market. Cost is determined by the average
cost method. We record reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, market
conditions, and sales forecasts. If market acceptance of our existing products
or the successful introduction of new products should significantly decrease,
inventory write-downs could be required. Any such write-downs would increase
our
cost of sales. Potential additional inventory write-downs could result from
unanticipated additional quantities of obsolete finished goods and raw
materials, and/or from lower disposition values offered by the parties who
normally purchase surplus inventories. At June 30, 2006, we had obsolete
inventory reserves totaling approximately $300,000.
Long-lived
assets, including intangible assets. Petals
LLC acquired the customer database as part of the assets purchased from the
creditors of Old Petals in 2003. The customer database is being amortized on
a
straight-line basis over 5 years. In accordance with Financial Accounting
Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”)
No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review
the carrying value of its long-lived assets, including intangible assets subject
to amortization, for impairment whenever events and circumstances indicate
that
the carrying value of the assets may not be recoverable. Recoverability of
these
assets is measured by comparison of the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those assets over their
remaining economic life. If the undiscounted cash flows are not sufficient
to
recover the carrying value of such assets, the assets are considered impaired.
The impairment loss is measured by comparing the fair value of the assets to
their carrying values. Fair value is determined by either a quoted market price
or a value determined by a discounted cash flow technique, whichever is more
appropriate under the circumstances involved.
Recent
Developments
Adoption
of Stock Incentive Plan.
On
August 2, 2006, our board of directors and the requisite number of stockholders,
acting by written consent in lieu of a meeting, approved the adoption of the
Stock Incentive Plan. Under the Code, stockholder approval of the Plan is
necessary for stock options relating to the shares issuable under the Stock
Incentive Plan to qualify as incentive stock options under Section 422 of the
Code. The Stock Incentive Plan authorizes the grant of stock options to purchase
common stock intended to qualify as incentive stock options, as defined in
Section 422 of the Internal Revenue Code, nonstatutory stock options, awards
of
restricted stock, unrestricted stock, performance share awards and stock
appreciation rights. Our
officers, directors, employees, consultants and advisors are eligible to receive
awards under the Stock Incentive Plan. The
Stock
Incentive Plan initially authorizes the issuance of awards for up to 15,000,000
pre-split (or 5,000,000 post-split) shares of our Common Stock.
Change
in Control - Transaction with Petals LLC.
On
June
23, 2006, we entered into the Contribution Agreement, pursuant to which we
agreed to acquire substantially all the assets of Petals LLC in exchange for
the
assumption by us of all but certain specified liabilities of Petals LLC and
the
issuance to Petals LLC of shares of our capital stock. On
June
30, 2006, pursuant to the Contribution Agreement, we completed the Acquisition.
At the effective time of the Contribution Agreement, we issued to Petals shares
of our Series A Preferred Stock and Series B Preferred Stock, and shares of
our
Common Stock, as follows:
· |
10,800
shares of Series A Preferred Stock;
|
· |
240
shares of Series B Preferred Stock;
and
|
· |
90,000,000
shares (pre-split) of Common Stock.
|
The
assets acquired by us consist of cash in the amount of approximately $1.3
million, and all of the assets and property, real, personal and mixed, tangible
and intangible, used in or forming a part of the business of Petals LLC. The
liabilities assumed by us consisted of substantially all of the liabilities
of
Petals LLC, including, trade payables and obligations of Petals LLC for borrowed
money, but excluded term indebtedness of Petals LLC to certain of its equity
holders identified in the Contribution Agreement. For more information regarding
the assets and liabilities of Petals LLC assumed by us in the Acquisition,
please see our current report on Form 8-K filed with the SEC on July 7, 2006,
which is incorporated herein by reference.
Amendment
to Master Services Agreement with NewRoads, Inc.
Since
commencing operations in 2003, Petals LLC has used an outside vendor, Newroads,
Inc. (recently renamed Accretive Commerce), for warehouse and product
distribution functions. On May 4, 2006, Petals LLC was notified
by Accretive Commerce that Accretive Commerce believed that Petals LLC
had defaulted under the terms of the Master Services Agreement between the
two
parties and that Petals LLC owed Accretive Commerce approximately $845,000,
which included a retroactive consumer price index adjustment to fees paid and
owed over the past sixteen months. On May 11, 2006, Petals LLC agreed to
pay Accretive Commerce in accordance with the demand letter and entered
into an amendment to the Master Services Agreement. Pursuant to this amendment,
Petals LLC provided Accretive Commerce with an irrevocable bank letter of
credit for $200,000 to secure future payment of fees. In addition, the payment
terms of the Master Services Agreement were changed such that weekly fees would
be billed in advance and would later be reconciled to actual billings and
adjusted accordingly. The amendment also provided that the term of the Master
Services Agreement would be changed such that Accretive Commerce would have
the option of extending the contract to January 31, 2007 and if terminated
earlier, Petals LLC would be required to pay a termination payment equal to
the
product of (a) the greater of (i) $35,000, or (ii) the average weekly billing
for the last 12 months pursuant to the Master Services Agreement, multiplied
by
(b) the number of weeks remaining in the contract.
Temporary
Disruption of our Outbound Shipping. In
January of 2006, Petals LLC hired Total Logistic Services, or TLS, as its
principal package consolidator partner responsible for the transport and
delivery of customer packages to United Postal facilities throughout the
country. Soon thereafter, Petals LLC’s third party inbound telemarketing service
provider began receiving high numbers of complaints from customers, with
customers complaining that they received product shipments late, or hadn’t
received product orders at all. As a result, Petals LLC terminated its contract
with TLS in late April and reshipped thousands of customer orders with a
new package-shipping vendor in an effort to satisfy customer demand.
Petals
LLC was subsequently informed that TLS had failed to transport over 13,000
customer packages into the postal system. Petals LLC successfully recovered
unshipped packages from the vendor’s warehouses and returned them to inventory.
We now use FedEx as our package consolidator vendor.
Customer
service problems arising from TLS delivery issues had a significant impact
on
operating results for the ten months ended June 30, 2006. We experienced higher
product return rates due to TLS’s inability to service our customers and had a
higher cost of goods sold due to the need to reship thousands of customer orders
that were either delivered late, or never delivered. In addition, customer
service calls were elevated, as customers inquired as to the status of
undelivered packages. We were required to pay our operations vendor significant
telemarketing fees and overtime operation labor fees in order to handle excess
customer service calls and the replacement of product orders.
It
is
estimated that the TLS problems increased losses for the ten months ended June
30, 2006 by over $700,000. It is anticipated that these problems will continue
to impact operating results through the first quarter of our 2007 fiscal
year.
Inventory
Adjustment.
At end
of May 2006 a physical inventory was taken at our assembly facility in Portland,
Tennessee, which uncovered a shortfall in inventory of $349,000. The shortfall
is believed to be the result of procedural failures resulting from a lack of
a
warehouse management system being in place. A warehouse management system is
scheduled to be fully implemented by the end of December 2006, but until that
time we are susceptible to further procedural failures that could result in
inaccuracies in valuing the inventory.
Issuance
of unsecured promissory notes. On
June
16, 2006, Petals LLC sold nonnegotiable unsecured term promissory notes in
the
aggregate principal amount of $2,135,000 to fifteen investors (the “Bridge
Notes”).
The
aggregate gross proceeds of the offering were $1,525,000. The Bridge Notes
do
not bear interest, but instead were issued at a discount to their face amount.
Each Bridge Note has a principal amount due at maturity equal to one hundred
forty percent (140%) of the amount paid to purchase the Bridge Note. As of
June
30, 2006, there was an aggregate of $2,135,000 in principal amount of the Bridge
Notes outstanding.
The
Bridge Notes are due in full on December 31, 2007. Pursuant to terms of the
Bridge Notes, we must prepay the Bridge Notes in quarterly installments on
the
15th
day of
January, April, July and October, beginning with January 15, 2007 and continuing
until the earlier of the Bridge Notes
being paid in full or the maturity date. On each quarterly prepayment date,
each
Bridge Note holder will receive its pro-rata portion (based on the aggregate
amount of the outstanding principal of all of the Bridge Notes) of the amount
equal to the product of the (i) the number of orders shipped by the Company
during the previous quarter multiplied by (ii) $2.00. For example, if we were
to
complete 70,000 orders between September 1, 2006 and December 31, 2006, the
aggregate amount of the first payment due to the holders of the Bridge Notes
on
January 15, 2007 would be $140,000.
The
approximately $1.3 million of cash proceeds of the Bridge Notes were acquired
by
us, and the obligations associated with the Bridge Notes were assumed by us
as
part of the Acquisition. Approximately $175,000 of the proceeds was used by
Petals LLC to pay down a portion of the revolving line of credit from Southridge
Partners LP and Southshore Capital Fund, Ltd. Our president and chairman,
Stephen M. Hicks, and our director Henry Sargent, are affiliated with both
Southridge LP and Southshore Capital Fund, Ltd. The Form of Note Subscription
Agreement and the Form of Nonnegotiable Unsecured Promissory Note sold in this
offering are attached to our current report on Form 8-K, filed with the SEC
on
July 7, 2006, as exhibits 10.21 and 10.22 respectively.
New
Distribution Center. In
July
2006, we entered into a lease, effective August 2006, for a 75,000 square
foot scalable facility in Portland, Tennessee to serve as our own distribution
center. Our goal is to reduce our warehouse and product distribution cost per
order by approximately 35%, although no assurances can be given that we will
achieve this goal. The capital expense for this transition is estimated at
$600,000. In addition, we anticipate approximately $200,000 of additional costs
to be incurred in connection with transitioning our fulfillment functions from
our outside vendor to our new facility. A majority of the proceeds of the Bridge
Notes will be utilized to finance the commissioning of this new facility and
the
transitioning of our fulfillment function to the new facility. We do not
anticipate this facility to be operational before the beginning of February
2007.
Executive
Summary
The
primary objectives for the ten months ended June 30, 2006 were to start growing
the revenue base to a level capable of absorbing the company’s fixed expense
structure, while reestablishing the customer loyalty of our large customer
database. Gross revenue increased by 33.69% for the ten months ending June
30,
2006 compared to the same period in 2005, with Internet revenue growing by
over
75%.
Other
objectives for the ten months ended June 30, 2006 were to establish an
independent product assembly facility and to start planning the transition
of
all product warehouse and shipping operations to a Petals-operated warehouse
facility. We successfully launched our new product assembly operations in
November of 2005 and plan to launch a new product shipping facility in January
of 2007.
Results
of Operations
Ten
month periods ended June 30, 2006 and July 2, 2005
The
following table sets forth our results of operations data for the ten months
ended June 30, 2006 and July 2, 2005 as a percentage of our net revenue, and
the
percentage change in the dollar amount of each item from the ten months ended
July 2, 2005 to the ten months ended June 30, 2006.
|
|
Ten
Months Ended
|
|
|
|
|
|
June
30,
2006
|
|
July
2,
2005
|
|
Percentage
change 2005 to 2006
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
32.12
|
%
|
Cost
of sales
|
|
|
51.78
|
%
|
|
50.78
|
%
|
|
34.71
|
%
|
Gross
profit
|
|
|
48.22
|
%
|
|
49.22
|
%
|
|
29.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
23.48
|
%
|
|
19.51
|
%
|
|
59.01
|
%
|
Selling
and marketing expense
|
|
|
35.41
|
%
|
|
33.68
|
%
|
|
38.90
|
%
|
Administrative
expense
|
|
|
18.29
|
%
|
|
20.55
|
%
|
|
19.23
|
%
|
Interest
expense
|
|
|
2.55
|
%
|
|
.40
|
%
|
|
736.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(32.40
|
)%
|
|
(25.93
|
)%
|
|
65.06
|
%
|
Net
revenue.
Net
revenue increased 32.12%, from $12.7 million in the ten months ended July 2,
2005 to $16.7 million in the ten months ended June 30, 2006. The increase was
due primarily to the increase in the number of catalogs mailed, from 8.3 million
in the ten months ended July 2, 2005 to 9.2 million in the comparable period
in
fiscal year 2006, an increase in average catalog page count from 52 pages in
the
ten months ended July 2, 2005 to 66 pages in the ten months ended June 30,
2006,
an increase in web demand from $3.2 million the ten months ended July 2, 2005
to
$5.7 million in the ten months ended June 30, 2006 and having a larger 12-month
buyer list to mail to which typically results in higher demand per catalog.
Costs
of sales.
Cost of
sales increased 34.71%, from $6.4 million in ten months ended July 2, 2005
to
$8.7 million in the ten months ended June 30, 2006. The increase in dollar
amount was primarily attributable to increased volume of products shipped in
2006. We realized lower labor cost resulting from having assumed responsibility
for our assembly operations and improved product sourcing resulting in lower
costs for decorative accessory products. These savings were offset, however,
by
the cost of reshipping product connected with the TLS package shipping problem
and an inventory shrinkage adjustment.
Gross
profit.
Gross
profit increased 29.44%, from $6.2 million in the ten months ended July 2,
2005
to $8.1 million in the ten months ended June 30, 2006. Our gross margin, or
gross profit as a percentage of net revenue, decreased from 49.22% in the ten
months ended July 2, 2005 to 48.22% in the ten months ended June 30, 2006.
The
decrease in our gross margin was due primarily to the cost of reshipping product
connected with the TLS delivery problems and an inventory shrinkage adjustment.
Operating
expense.
Our
operating expense increased 59.01%, from $2.5 million in the ten months ended
July 2, 2005 to $3.9 million in the ten months ended June 30, 2006. Operating
expense as a percentage of net revenue increased from 19.51% in the ten months
ended July 2, 2005 to 23.48% in the ten months ended June 30, 2006. The increase
in dollar amount was attributable primarily to increased variable call center
and distribution costs payable to our third party fulfillment subcontractor
as a
result of our higher sales volumes. The increase as a percentage of sales was
primarily due to a retroactive consumer price index adjustment charged by our
third party vendor along with the costs associated with servicing customer
orders resulting from the TLS delivery problems.
Selling
and marketing expense.
Our
selling and marketing expense increased 38.90%, from $4.3 million in the ten
months ended July 2, 2005 to $5.9 million in the ten months ended June 30,
2006.
Selling and marketing expense as a percentage of net revenue increased from
33.68% in the ten months ended July 2, 2005 to 35.41% in the ten months ended
June 30, 2006. The increase in dollar amount was primarily attributable to
the
cost of producing and mailing the larger number of catalogs we mailed in 2006.
The increase as a percentage of sales is primarily due to catalog expense rate
increases in the areas of catalog postage and catalog paper.
Administrative
expense.
Administrative expense increased 19.23%, from $2.6 million in the ten months
ended July 2, 2005 to $3.1 million in the ten months ended June 30, 2006.
Administrative expense as a percentage of net revenue decreased from 20.55%
in
the ten months ended July 2, 2005 to 18.29% in the ten months ended June 30,
2006. The increase in dollar amount was due primarily to legal and accounting
expenses related to the acquisition of the Petals LLC business, along with
an
increase in corporate personnel to manage our growing operations.
Interest
expense.
Interest expense increased 736.41%, from $.05 million in the ten months ended
July 2, 2005 to $.4 million in the ten months ended June 30, 2006. The increase
was primarily attributable to the conversion of $5,000,000 from our revolving
credit line carrying interest at the rate of 2.5% to term notes carrying
interest at the rate of Prime +2%, plus higher outstanding debt balances carried
throughout the year.
Seasonality
The
Petals business is highly seasonal. Approximately 40% of revenues are generated
during the months of October through December. We typically realize about 33%
of
annual marketing expense during the same time period. Our operating results
are
thus dependent on the success of sales and through-put during such time
period.
Liquidity
and Capital Resources
Petals
LLC funded the business operations through loans and the issuances of preferred
economic membership interests. The loans assumed by us in the Acquisition are
as
follows:
Bank.
We have
assumed a five-year $1,500,000 revolving line of credit from a bank that matures
in December 2009 and requires monthly payments of interest. Interest is charged
at the rate of one percentage point above the prevailing interest rate, as
defined. This credit facility is guaranteed by our president and chairman and
an
entity controlled by him and is collateralized by all of business assets
acquired in the Acquisition and real estate owned by an entity controlled by
our
president and chairman. The revolving credit line requires an annual 30-day
cleanup period. Petals LLC was unable to effect a cleanup period in 2005. Our
average month-end balance outstanding for the ten months ended June 30, 2006
under the line of credit was $1,500,000. The outstanding principal balance
at
June 30, 2006 was $1,500,000, and no amount was available for additional
borrowing under the line of credit.
Term
Loans.
We have
assumed from Petals LLC two (2) three-year term notes in the aggregate principal
amount of $5,000,000 extended by two entities that are affiliated with our
president and chairman that mature in December 2008 and bear interest at the
rate of two percentage points above prime. Interest accruing on these term
notes
is payable, at the election of the lenders, in our common equity. Our
indebtedness under these term notes is reflected as long-term debt due to
affiliate on the accompanying balance sheets. The term notes require us to
obtain the lenders’ consent to enter into certain agreements and transactions,
including mergers, declaring dividends on our common stock, or make any changes
in accounting principles except those required under accounting principles
generally accepted in the United States. The term notes become due upon the
occurrence of (1) the issuance of any debt or equity securities (in any
combination) by Petals in one or more related transactions in exchange for
cash
consideration of at least $15,000,000, (2) a sale or transfer of all or
substantially all of its assets to another person, or (3) a transaction that
results in a change in control.
Sources
and uses of cash
Operating
activities. Net
cash
used by operating activities for the ten months ended June 30, 2006 was $3.7
million. The main use of funds was to finance our operating loss of $5.4. This
use was partially offset by a $1.4 million increase in its accounts payable
and
accrued expenses.
Investing
activities.
Net
cash used in investing activities was $0.3 million for the ten months ended
June
30, 2006, which was primarily attributable to fixed asset acquisitions,
principally computer equipment and software.
Financing
activities.
Our
financing activities provided net cash in the amount of $3.9 million the ten
months ended June 30, 2006, consisting of borrowings of $1.5 million under
our
bridge notes, and of $2.9 million under the lines of credit from entities
affiliated with our president and chairman and offset by a reduction in our
bank
overdraft of $0.5 million.
Off-Balance
Sheet Arrangements
We
do not
have any special purpose entities or off-balance sheet financing arrangements.
Contractual
Obligations
The
following table summarizes our contractual cash obligations at June 30, 2006
and
the effect such obligations are expected to have on our liquidity and cash
flow
in future periods:
|
|
Total
|
|
Less
than 1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Debt
|
|
$
|
8,076,326
|
|
$
|
121,326
|
|
$
|
6,455,000
|
|
$
|
1,500,000
|
|
Interest
on Debt
|
|
|
2,602,077
|
|
|
957,077
|
|
|
1,585,000
|
|
|
60,000
|
|
Operating
Leases
|
|
|
1,834,614
|
|
|
683,111
|
|
|
1,128,615
|
|
|
22,888
|
|
Purchase
Obligations
|
|
|
980,000
|
|
|
980,000
|
|
|
—
|
|
|
—
|
|
Employment
Contracts
|
|
$
|
1,400,000
|
|
$
|
350,000
|
|
$
|
840,000
|
|
$
|
210,000
|
|
Recently
Issued Accounting Pronouncements
SFAS
No. 123R
On
December 16, 2004, the Financial Accounting Standards Board, or the FASB, issued
SFAS No. 123(R) (revised 2004), “Share-Based
Payment”
(SFAS
No. 123(R)), which is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”.
SFAS
No. 123(R) supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees”,
and
Amends SFAS No. 95, “Statement
of Cash Flows”.
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in Statement No. 123. However, SFAS No. 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized
in
the income statement based on their fair values. Pro forma disclosure is not
an
alternative. SFAS No. 123(R) must be adopted no later than January 1, 2006.
SFAS
No.
123(R) permits public companies to adopt its requirements using one of two
methods: (1) a “modified prospective” approach or (2) a “modified retrospective”
approach. Under the modified prospective approach, compensation cost is
recognized beginning with the effective date based on (a) the requirements
of
SFAS No. 123(R) for all share based payments granted after the effective date
and (b) the requirements of SFAS No. 123(R) for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date. The modified retrospective approach, includes the requirements
of the modified prospective approach but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures either for all prior periods presented or prior interim
periods of the year of adoption. As of September 25, 2006, we do not have any
outstanding stock incentive awards and we are currently evaluating which method
to adopt for future awards.
SFAS
No.
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than an
operating cash flow under current accounting literature. Since we do not have
the benefit of tax deductions in excess of recognized compensation cost, because
of our net operating loss position, this change will have no immediate impact
on
our financial statements.
SFAS
No. 151
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No.
151 (SFAS No. 151), “Inventory
Costs,
an
Amendment of ARB 43, Chapter 4”.
SFAS
No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory
Pricing”,
to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). SFAS No. 151 requires that
idle
facility expense, excessive spoilage, double freight, and rehandling costs
be
recognized as current period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be based
on
the normal capacity of the production facilities. SFAS No. 151 is effective
for
inventory costs incurred during fiscal years beginning after June 15, 2005;
however, early adoption is permitted for inventory costs incurred during fiscal
years beginning after November 2004. We are assessing what effect, if any,
adopting SFAS No. 151 has had on our financial position or results of
operations.
SFAS
No. 154
On
June
7, 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections”,
a
replacement of APB Opinion No. 20, “Accounting
Changes”
and
Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements”.
SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition in a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods’ financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, this standard does not change the
transition provisions of any existing accounting pronouncements. We will
determine the impact of this standard on our consolidated financial statements
should an accounting change or error correction occur.
SFAS
No. 155
In
February 2006, FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments”.
SFAS
No. 155 amends SFAS No 133, “Accounting
for Derivative Instruments and Hedging Activities”,
and
SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”.
SFAS
No. 155, permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on our consolidated financial position or our results of
operations.
FIN
No. 48
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109
(FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in accordance with SFAS No. 109, Accounting
for Income Taxes
and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 will become effective for the Company
beginning in fiscal 2008. We are currently evaluating the impact of the adoption
of FIN 48 on our financial statements.
Management
does not believe that there are any recently issued but not yet effective
accounting pronouncements that, if adopted by the Company, would have a material
effect on the accompanying financial statements.
Item
7. Financial Statements.
Petals’ financial
statements together with the related notes and the report of Most & Company
LLP, an independent registered public accounting firm, are set forth beginning
on page F-1 of this Report on Form 10-KSB.
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
As
reported in our Current Report on Form 8-K filed with the SEC on August 25,
2006, which is incorporated herein be reference, on August 21, 2006, following
approval from our board of directors, we terminated Spector & Wong, LLP
("Spector")
as our
registered independent certified public accountant. Spector audited our
financial statements for the fiscal year ended June 30, 2005.
Spector's
report on our financial statements for the fiscal year ended June 30, 2005
did
not contain any adverse opinion or disclaimer of opinion and were not qualified
as audit scope or accounting principles. The report of Spector for the fiscal
year ended June 30, 2005, was qualified in that adverse financial conditions
identified by the accountants raised substantial doubt about our ability to
continue as a going-concern. During the fiscal year ended June 30, 2005, and
in
the subsequent interim periods through the date of this current report, (i)
there were no disagreements between us and Spector on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Spector, would have
caused Spector to make reference to the subject matter of the disagreement
in
connection with its reports and (ii) there were no "reportable events," as
defined in Item 304(a)(1)(iv) of Regulation S-B of the Securities Exchange
Act
of 1934, as amended. The decision to replace Spector was not the result of
any
disagreement between Spector and us on any matter of accounting principle or
practice, financial statement disclosure or audit procedure. Our board of
directors deemed it in the best interests of Petals to change independent
auditors following the closing of the Acquisition.
On
August
21, 2006, our board of directors approved the appointment of Most & Company
LLP, as our independent registered public accounting firm. The financial
statements for Petals LLC for fiscal years ended September 3, 2005 and August
28, 2004 were audited by Most & Company LLP.
Item
8A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures.
Petals
maintains disclosure controls and procedures designed to ensure that information
required to be disclosed in the Company’s filings under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported accurately within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to management
as
appropriate, to allow timely decisions regarding required disclosure. As of
the
end of the period covered by this report, an evaluation was performed under
the
supervision and with the participation of management, including our President,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon
this
evaluation, the Company’s management concluded that the Company’s disclosure
controls and procedures are effective as of June 30, 2006.
Changes
in internal controls over
financial reporting.
There
were no changes in Petals’ internal control over financial reporting that
occurred during the quarter ended June 30, 2006 that materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting. On August 27, 2006, Stephen Hieber tendered his resignation
as Chief Financial Officer of the Company. To the knowledge of the Company’s
executive officers, Mr. Hieber’s resignation was not due to any disagreement
with the Company’s operations, policies or practices. The
Board
of Directors of the Company has not yet chosen a permanent replacement for
Mr.
Hieber. Until a replacement for Mr. Hieber has been hired, the
extent to which our financial and general administrative functions will have
oversight and monitoring will be limited. Management believes that at this
time,
in light of existing newly instituted staff and controls and the ongoing search
for a new chief financial officer, the risks associated with the departure
of
Mr. Hieber are largely mitigated.
Item
8B. Other Information.
Not
applicable.
PART
III
Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with
Section 16(a) of the Exchange Act.
Certain
information relating to our directors, executive officers, promoters and control
persons is incorporated by reference herein from our proxy statement in
connection with our annual meeting of stockholders expected to be held in
the second quarter of fiscal 2007, which proxy statement will be filed with
the
Securities and Exchange Commission not later than 120 days after the close
of our fiscal year ended June 30, 2006.
Section
16 Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act")
requires our executive officers and directors, as well as persons who own more
than 10% of a registered class of its equity securities, to file reports of
ownership and changes in ownership with the SEC. These persons are also required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
Based
solely on our review of such forms received by us or written representations
from certain reporting persons provided to us, we believe that during the fiscal
year ended June 30, 2006 all applicable filing requirements were complied with
by our executive officers and directors.
Initial
reports under Section 16(a) of the Securities Exchange Act of 1934 were not
timely filed by Messrs. Dorzback, Hieber and Yenidjeian. These delayed reports
did not involve any transaction in our common stock but rather were related
to
each individual’s election as officers of the Company on June 30, 2006, in
connection with the Acquisition. The Company is not aware of any outstanding
report required to be filed by any of Messrs. Dorzback, Hieber and Yenidjeian.
Item
10. Executive Compensation.
Certain
information relating to remuneration of directors and executive officers and
other transactions involving management is incorporated by reference herein
from our proxy statement in connection with our annual meeting of
stockholders expected to be held in the second quarter of fiscal 2007, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of our fiscal year ended June 30, 2006.
Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Certain
information relating to security ownership of certain beneficial owners and
related stockholder matter is incorporated by reference herein from our
proxy statement in connection with our annual meeting of stockholders
expected to be held in the second quarter of fiscal 2007, which proxy statement
will be filed with the Securities and Exchange Commission not later than 120
days after the close of our fiscal year ended June 30, 2006.
Item
12. Certain Relationships and Related Transactions.
Certain
information relating to certain relationships and related transactions is
incorporated by reference herein from our proxy statement in connection
with our annual meeting of stockholders expected to be held in the second
quarter of fiscal 2007, which proxy statement will be filed with the Securities
and Exchange Commission not later than 120 days after the close of our
fiscal year ended June 30, 2006.
Item
13. Exhibits.
Petals
hereby files as part of this annual report on Form 10-KSB the exhibits listed
in
this Item 13 below. Exhibits which are incorporated herein by reference can
be
inspected and copied at the public reference rooms maintained by the Securities
and Exchange Commission in Washington, D.C., New York, New York, and Chicago,
Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the public reference rooms. Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the Web site maintained by the Securities and Exchange
Commission at http://www.sec.gov.
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
No.
|
|
Description
|
|
Filed
with this Form 8-K
|
|
Form
|
|
Filing
Date
|
|
Exhibit
No.
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Contribution
Agreement by and between Petals Decorative Accents LLC and
ImmunoTechnology Corporation, dated June 23, 2006.
|
|
|
|
8-K
|
|
June
30, 2006
|
|
10.1
|
2.2
|
|
Bill
of Sale and Assignment by and between Petals Decorative Accents LLC
and
ImmunoTechnology Corporation, dated June 30, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
2.2
|
2.3
|
|
Assignment
and Assumption Agreement by and between Petals Decorative Accents
LLC and
ImmunoTechnology Corporation, dated June 30, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
2.3
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of ImmunoTechnology
Corporation.
|
|
|
|
Schedule
14C
|
|
August
29, 2006
|
|
ANNEX
A
|
3.2
|
|
Second
Amended and Restated Bylaws of ImmunoTechnology Corporation, as adopted
by
the Board of Directors on August 2, 2006.
|
|
|
|
8-K
|
|
August
4, 2006
|
|
3.3
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
No.
|
|
Description
|
|
Filed
with this Form 8-K
|
|
Form
|
|
Filing
Date
|
|
Exhibit
No.
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Form
of Payment of Debt, Notice of Conversion and Subscription for Shares
Agreement by and among ImmunoTechnology Corporation and certain creditors
of ImmunoTechnology Corporation.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.1
|
10.2
|
|
Master
Service Agreement by and between Petals Decorative Accents LLC and
NewRoads, Inc., dated January 1, 2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.2
|
10.3
|
|
Amendment
#1, dated January 12, 2004, to the Master Service Agreement by and
between
Petals Decorative Accents LLC and NewRoads, Inc., dated January 1,
2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.3
|
10.4
|
|
Amendment
#2, dated May 11, 2006, to the Master Service Agreement by and between
Petals Decorative Accents LLC and NewRoads, Inc., dated January 1,
2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.4
|
10.5
|
|
Agreement
by and between Petals Decorative Accents LLC and RR Donnelley, dated
March
3, 2005.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.5
|
10.6
|
|
Service
Contract by and between Petals Decorative Accents LLC and Maersk
Sealand,
dated December 21, 2005.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.6
|
10.7
|
|
Employment
Agreement by and between Petals Decorative Accents LLC and James
Hersh,
dated October 1, 2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.7
|
10.8
|
|
Employment
Agreement by and between Petals Decorative Accents LLC and Christopher
Topping, dated August 12, 2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.8
|
10.9
|
|
Employment
Agreement by and between Petals Decorative Accents LLC and Stephen
M.
Hicks, dated March 31, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.9
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
No.
|
|
Description
|
|
Filed
with this Form 8-K
|
|
Form
|
|
Filing
Date
|
|
Exhibit
No.
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Commercial
Line of Credit and Loan Agreement by and among Petals Decorative
Accents
LLC, Southridge Holdings, LLC and Fairfield County Bank Corp., dated
December 10, 2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.10
|
10.11
|
|
Loan
Agreement by and among Petals Decorative Accents LLC, Southridge
Holdings,
LLC and Fairfield County Bank Corp., dated December 10,
2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.11
|
10.12
|
|
Security
Agreement by and among Petals Decorative Accents LLC, Southridge
Holdings,
LLC and Fairfield County Bank Corp., dated December 10,
2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.12
|
10.13
|
|
Loan
Assumption and Consent by and among Petals Decorative Accents LLC,
Southridge Holdings, LLC, Stephen M. Hicks, ImmunoTechnology Corporation
and Fairfield County Bank Corp., dated June 30, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.13
|
10.14
|
|
Loan
and Security Agreement by and among Petals Decorative Accents LLC
and
Southshore Capital Fund, Ltd. and Southridge Partners, LP, dated
January
3, 2005.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.14
|
10.15
|
|
Consent
to Transfer of Term Loans by and among Petals Decorative Accents
LLC,
Southshore Capital Fund, Ltd., and Southridge Partners, LP, dated
June 22,
2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.15
|
10.16
|
|
Lease
Agreement by and between Petals Decorative Accents LLC and Southridge
Holdings, LLC, dated January 16, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.16
|
10.17
|
|
Consent
to Transfer of Lease by and between Petals Decorative Accents LLC
and
Southridge Holdings, LLC, dated June 22, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.17
|
10.18
|
|
Lease
Agreement by and among Petals Decorative Accents LLC and Oscar Smith
and
Peggy Smith, dated August 24, 2005.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.18
|
10.19
|
|
Consent
to Transfer of Lease by and among Petals Decorative Accents LLC and
Oscar
Smith and Peggy Smith, dated June 20, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.19
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
No.
|
|
Description
|
|
Filed
with this Form 8-K
|
|
Form
|
|
Filing
Date
|
|
Exhibit
No.
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Sublease
Agreement by and between Petals Decorative Accents LLC and NewRoads,
Inc.,
dated May 6, 2005.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.20
|
10.21
|
|
Form
of Subscription Agreement by and between Petals Decorative Accents
LLC and
the investors in the offering of nonnegotiable unsecured promissory
notes
completed on June 16, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.21
|
10.22
|
|
Form
of Nonnegotiable Unsecured Promissory Note made by Petals Decorative
Accents LLC and issued to investors in the offering of nonnegotiable
unsecured promissory notes completed on June 16, 2006.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.22
|
10.23
|
|
Contract
for Technology Support Services between Petals Decorative Accents
LLC and
Southridge Technology Group, LLC, dated January 9, 2004.
|
|
|
|
8-K
|
|
July
7, 2006
|
|
10.23
|
10.24
|
|
Lease
Agreement dated July 17, 2006, by and between Petals Decorative Accents
LLC and Smith and Cheynne Properties, LLC.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Petals Decorative
Accents, Inc. 2006 Stock Incentive Plan |
|
|
|
Schedule
14C
|
|
August
29, 2006
|
|
ANNEX
B
|
16.1
|
|
Letter
of Spector & Wong, LLP dated August 23, 2006 regarding change in
certifying accountant.
|
|
|
|
8-K
|
|
August
25, 2006
|
|
16.1
|
31.1
|
|
Certification
by President of Periodic Report Pursuant to Rule 13a-14(a) or Rule
15d-14(a).
|
|
X
|
|
|
|
|
|
|
32.1
|
|
Certification
by President of Periodic Report Pursuant to 18 U.S.C. Section
1350.
|
|
X
|
|
|
|
|
|
|
Item
14. Principal Accountant Fees and Services.
Information
regarding principal auditor fees and services is set forth under “Principal
Auditor Fees and Services” in our proxy statement in connection
with our annual meeting of stockholders expected to be held in the second
quarter of fiscal 2007, which proxy statement will be filed with the Securities
and Exchange Commission not later than 120 days after the close of our
fiscal year ended June 30, 2006.
PETALS
DECORATIVE ACCENTS, INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheet at June 30, 2006
|
F-3
- F-4
|
Statements
of Operations for the ten months ended June 30, 2006 and July 2,
2005
(unaudited)
|
F-5
|
Statement
of Stockholders’ Deficit for the ten months ended June 30, 2006 and July
2, 2005 (unaudited)
|
F-6
|
Statements
of Cash Flows for the ten months ended June 30, 2006 and July 2,
2005
(unaudited)
|
F-7
|
Notes
to Financial Statements
|
F-8
|
|
|
The
following financial statements are not required to be included in this Form
10-KSB but have been included for informational purposes only.
PETALS
DECORATIVE ACCENTS, LLC
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-19
|
Balance
Sheet at September 3, 2005
|
F-20
|
Statements
of Operations for the year ended September 3, 2005 and the period
from
November 4, 2003 (inception) through August 28, 2004
|
F-21
|
Statements
of Members’ Equity for the year ended September 3, 2005 and the period
from November 4, 2003 (inception) through August 28, 2004
|
F-22
|
Statements
of Cash Flows for the year ended September 3, 2005 and the period
from
November 4, 2003 (inception) through August 28, 2004
|
F-23
|
Notes
to Financial Statements
|
F-24
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Petals
Decorative Accents, Inc.
Ridgefield,
Connecticut
We
have
audited the accompanying balance sheet of Petals Decorative Accents, Inc.
as of
June 30, 2006 and the related statements of operations, stockholders’ deficit
and cash flows for the ten month period ended June 30, 2006. 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 (United States). 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
control over financial reporting. Our audits included consideration of internal
control 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 control over financial
reporting. Accordingly, we express no such opinion. 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, the financial statements referred to above present fairly, in all
material respects, the financial position of Petals Decorative Accents, Inc.
as
of June 30, 2006 and the results of its operations and its cash flows for
the
ten month period ended June 30, 2006 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company had an accumulated deficit of $15,402,947 at June
30,
2006 and had a net loss and cash used in operations of $5,416,535 and
$3,640,082, respectively, in the ten month period ended June 30, 2006. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described
in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Most
& Company, LLP
New
York,
NY
September
19, 2006
PETALS
DECORATIVE ACCENTS, INC.
Balance
Sheet
|
|
|
|
|
|
June
30, 2006
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$
|
563
|
|
Restricted
cash
|
|
|
897,064 |
|
Accounts
receivable
|
|
|
111,759
|
|
Inventories
|
|
|
3,901,422
|
|
Prepaid
catalog expenses
|
|
|
534,252
|
|
Other
current assets
|
|
|
319,422
|
|
Total
current assets
|
|
|
5,764,482
|
|
|
|
|
|
|
Equipment
|
|
|
645,378
|
|
Accumulated
depreciation
|
|
|
(247,743
|
)
|
Net
|
|
|
397,635
|
|
|
|
|
|
|
Customer
lists
|
|
|
290,959
|
|
Accumulated
amortization
|
|
|
(144,038
|
)
|
Net
|
|
|
146,921
|
|
|
|
|
|
|
Other
long-term assets
|
|
|
83,450
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,392,488
|
|
|
|
|
|
|
PETALS
DECORATIVE ACCENTS, INC.
Balance
Sheet (Cont.)
|
|
|
|
|
|
June
30, 2006
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Note
payable - bank
|
|
$
|
1,500,000
|
|
Notes
payable
|
|
|
121,326
|
|
Bank
overdraft
|
|
|
19,152
|
|
Accounts
payable
|
|
|
2,276,228 |
|
Accrued
expenses
|
|
|
896,828 |
|
Total
current liabilities
|
|
|
4,813,534
|
|
|
|
|
|
|
Notes
payable to affiliate
|
|
|
5,000,000
|
|
Bridge
notes payable - face amount
|
|
|
2,135,000
|
|
Less
original issue discount on bridge notes
|
|
|
(610,000
|
)
|
Total
liabilities
|
|
|
11,338,534
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
Preferred
stock, par value $0.00001; 9,988,960 shares authorized;
none outstanding
|
|
|
—
|
|
Series
A Preferred Stock, par value $0.00001 per share, 10,800 shares
designated,
issued and outstanding (aggregate liquidation value equal to
$10,800,000)
|
|
|
—
|
|
Series
B Preferred Stock, par value $0.00001 per share, 240 shares designated,
issued and outstanding
|
|
|
—
|
|
Common
Stock, par value $0.00001 per share; 100,000,000 shares authorized;
32,050,000 shares issued and outstanding
|
|
|
320
|
|
Additional
paid-in capital
|
|
|
10,456,581
|
|
Accumulated
deficit
|
|
|
(15,402,947
|
)
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
|
(4,946,046
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
6,392,448
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Statements
of Operations
|
|
|
|
|
|
Ten
Months Ended
|
|
|
|
June
30, 2006
|
|
July
2, 2005
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Gross
revenue
|
|
$
|
18,151,550
|
|
$
|
13,576,860
|
|
Less:
returns and allowances
|
|
|
(1,434,884
|
)
|
|
(923,942
|
)
|
Net
revenue
|
|
|
16,716,666
|
|
|
12,652,918
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
8,655,848
|
|
|
6,425,559
|
|
Gross
profit
|
|
|
8,060,818
|
|
|
6,227,359
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
3,925,365
|
|
|
2,468,705
|
|
Selling
and marketing expense
|
|
|
5,918,945
|
|
|
4,261,351
|
|
Administrative
expense
|
|
|
3,056,795
|
|
|
2,603,557
|
|
Depreciation
and amortization expense
|
|
|
150,164
|
|
|
124,325
|
|
Interest
expense
|
|
|
426,084
|
|
|
50,942
|
|
Net
loss
|
|
$
|
(5,416,535
|
)
|
$
|
(3,281,521
|
)
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
$
|
(0.17
|
)
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
32,050,000
|
|
|
32,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Statement
of Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
Series
B
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
deficit
|
|
Total
|
|
Balance
July 1, 2004 |
|
|
— |
|
$
|
—
|
|
|
— |
|
$
|
—
|
|
|
1,666,672
|
|
$
|
17
|
|
$
|
442,027
|
|
$
|
(619,784
|
)
|
$
|
(177,740
|
)
|
Stock
options exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,000
|
|
|
—
|
|
|
12,000
|
|
|
—
|
|
|
12,000
|
|
Issuance
of stock options in lieu of notes payable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,884
|
|
|
—
|
|
|
32,884
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,000
|
|
|
—
|
|
|
31,000
|
|
Net
loss for the fiscal year ended June 30, 2005 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(323,791
|
)
|
|
(323,791
|
)
|
Balance
June 30, 2005 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,706,672
|
|
|
17 |
|
|
517,911
|
|
|
(943,575
|
)
|
|
(425,647
|
)
|
Issuance
of common stock for debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
343,328
|
|
|
3
|
|
|
139,512
|
|
|
—
|
|
|
139,515
|
|
Contributed
services
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,000
|
|
|
—
|
|
|
31,000
|
|
Effects
of Acquisition
|
|
|
10,800
|
|
|
—
|
|
|
240
|
|
|
—
|
|
|
30,000,000
|
|
|
300
|
|
|
9,768,158
|
|
|
(9,042,836
|
)
|
|
725,622
|
|
Net
loss for the period ended June 30, 2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,416,535
|
)
|
|
(5,416,535
|
)
|
Balance
June 30, 2006
|
|
|
10,800
|
|
$
|
—
|
|
|
240
|
|
$
|
—
|
|
|
32,050,000
|
|
$
|
320
|
|
$
|
10,456,581
|
|
$
|
(15,402,947
|
)
|
$
|
(4,946,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Statements
of Cash Flows
|
|
Ten
Months
Ended
June
30,
|
|
Ten
Months
Ended
July
2,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,416,536
|
)
|
$
|
(3,281,521
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
150,164
|
|
|
124,325
|
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
(140,619
|
)
|
|
689,250
|
|
Decrease
in accounts receivable
|
|
|
18,323
|
|
|
117,737
|
|
Decrease
(increase) in inventories
|
|
|
276,022
|
|
|
(2,580,452
|
)
|
Decrease
(increase) in prepaid expenses and other
|
|
|
233,382
|
|
|
(69,772
|
)
|
Decrease
(increase) in other current assets
Decrease
(increase) in other assets
|
|
|
(175,066)
6,270
|
|
|
—
(102,421
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
1,407,978
|
|
|
1,182,824
|
|
Net
cash used in operating activities
|
|
|
(3,640,082
|
)
|
|
(3,920,030
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(283,445
|
)
|
|
(175,161
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
(Decrease)
increase in bank overdraft
|
|
|
(459,023
|
)
|
|
282,045
|
|
Increase
in notes payable to affiliate
|
|
|
2,841,282
|
|
|
3,826,420
|
|
Increase
in bridge notes payable
|
|
|
1,525,000
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
3,907,259
|
|
|
4,108,465
|
|
|
|
|
|
|
|
|
|
(DECREASE)
INCREASE IN CASH
|
|
|
(16,268
|
)
|
|
13,274
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
16,831
|
|
|
9,239
|
|
CASH
AT END OF PERIOD
|
|
$
|
563
|
|
$
|
22,513
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH FLOW ACTIVITIES:
|
|
|
|
|
|
|
|
Cash
Paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
104,135
|
|
$
|
41,604
|
|
Non-Cash
Transactions:
|
|
|
|
|
|
|
|
Short-term
debt due to affiliate converted to long-term debt due to
affiliate
|
|
|
5,000,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
Note
1. OPERATIONS AND ORGANIZATION
Operations
Petals
sells decorative
silk flowers, plants and trees, along with complimentary decorative accents,
which include mirrors, small furniture pieces, figurines, lamps and rugs
through
its mail order catalog and website.
Organization
Petals
Decorative Accents, Inc. (formerly ImmunoTechnology
Corporation)
Petals
Decorative Accents, Inc., formerly, ImmunoTechnology Corporation, a Delaware
corporation, was incorporated on March 8, 1989. Prior to June 30, 2006, the
date
of the Acquisition (defined below), the Company was inactive and considered
a
“shell company” (as such term is defined by the Securities Exchange Act of 1934.
On September 20, 2006, the Company changed its name to Petals Decorative
Accents, Inc.
Petals
Decorative Accents, LLC (“Petals LLC”)
Petals
LLC was organized on November 4, 2003 to acquire the assets of Petals, Inc.
(“Old
Petals”),
which
had filed for protection from creditors under Chapter 11 of the Bankruptcy
Code
in May 2003. Petals LLC initially was organized as a Delaware corporation.
In
December 2003, Petals LLC was reorganized as a limited liability company
under
the laws of Delaware.
The
Acquisition of the Petals LLC Business
On
June
23, 2006, ImmunoTechnology Corporation, a Delaware corporation (“Immuno”
or
the
“Company”)
and
Petals Decorative Accents LLC, a privately held Delaware limited liability
company (“Petals LLC”),
entered into a Contribution Agreement (the “Contribution
Agreement”)
pursuant to which Immuno agreed to acquire substantially all the assets of
Petals LLC in exchange for the assumption by Immuno of all but certain specified
liabilities of Petals LLC and the issuance to Petals LLC of shares of Immuno’s
capital stock. In connection with the proposed acquisition, Immuno also entered
into debt restructuring agreements with certain creditors (the “Debt
Restructuring Agreements”).
The
transactions contemplated by the Contribution Agreement were consummated
on June
30, 2006 (the “Acquisition”).
Because
the shares issued to Petals LLC in the Acquisition represent a controlling
interest, the Acquisition has been accounted for as a reverse acquisition
for
financial reporting purposes. The net assets of Petals LLC (the accounting
acquirer) have been carried forward to Immuno (the legal acquirer and the
reporting entity) at their carrying value before the combination. Although
Petals LLC was deemed to have been the acquiring corporation for financial
accounting and reporting purposes, the legal status of Immuno as the surviving
corporation does not change. The Company’s financial statements included with
this report for the ten months ended June 30, 2006 utilize the capital structure
of Immuno. The assets and assumed liabilities of Petals LLC acquired in the
Acquisition by the Company were recorded at historical cost. In the accompanying
financial statements, Petals LLC is the operating entity for financial reporting
purposes and the financial statements for all periods presented represent
Petals
LLC’s financial position and historical results of operations. The equity of
Immuno presented on the accompanying balance sheet retroactively gives effect
to
the equity issued in connection with the Acquisition. The operations of the
Company (the legal acquirer), to the extent they exist, are included
prospectively from the date of acquisition.
The
Contribution Agreement provided that at the effective time of the Acquisition
there would be issued to Petals LLC 10,800 shares of Series A Convertible
Preferred Stock, $.00001 par value (the “Series
A Shares”),
240
shares of Series B Convertible Preferred Stock, $.00001 par value (the
“Series
B Shares”)
and
30,000,000 (post-reverse split) shares of Common Stock, $.00001 par value
(“Common
Stock”)
of
Immuno.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
In
addition, the Contribution Agreement and the Debt Restructuring Agreements
provided that at the effective time of the Acquisition:
|
·
|
Immuno
would acquire $1.35 million of cash held by Petals, representing
the
proceeds of a private placement of unsecured promissory notes (the
“Petals
Bridge Notes”)
effected by Petals on June 16,
2006;
|
|
·
|
Immuno
would use approximately $245,000 of that cash to repay in part
certain
loans payable to officers, convertible promissory notes and accrued
expenses of Immuno;
|
|
·
|
Immuno
would issue an aggregate of 343,328 (post-reverse split) shares
of Immuno
Common Stock to such officers, holders of convertible notes and
other
creditors in partial satisfaction of the indebtedness of Immuno
to such
persons; and
|
|
·
|
the
balance of the indebtedness of Immuno to such persons would remain
outstanding, with the majority of such remaining indebtedness payable
by
Immuno in six monthly installments beginning October 1, 2006, together
with interest at the rate of 7% per
annum.
|
The
accompanying financial statements for the ten-month period July 2, 2005 are
unaudited, have been prepared on the same basis as the accompanying audited
financial statements, and include all adjustments, consisting only of normal
recurring adjustments, considered necessary by management for a fair
presentation. The results of operations realized during this ten-month period
are not necessarily indicative of results to be expected for a full
year.
Note
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Fiscal
year and the transition period
The
Company’s fiscal year is the twelve months ended June 30, 2006. Petals LLC’s
fiscal year has historically been the 52 or 53-week period ending on the
Saturday closest to August 31 in each year. Because Petals LLC is considered
the
accounting acquirer and because the Company (the legal acquirer) is continuing
its historical June 30, 2006 fiscal year, the Company is considered to have
changed its fiscal year and is required to file audited financial statements
covering the resulting transition period between the closing date of the
accounting acquirer’s most recent fiscal year and the opening date of legal
acquirer’s new fiscal year. This report contains the audited financial
statements for the resulting ten-month transition period ended June 30, 2006
and
the comparable unaudited results for the same period ended July 2,
2005.
(b) Income
taxes
Deferred
income taxes have been provided for temporary differences between financial
statement and income tax reporting under the liability method, using expected
tax rates and laws that are expected to be in effect when the differences
are
expected to reverse. A valuation allowance is provided when realization is
not
considered more likely than not.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
(c) Cash,
letters of credit and restricted cash
A
bank
has issued letters of credit for the Company’s account. The letters of credit,
which have been issued to certain suppliers of the Company and are
collateralized by restricted cash. Letters of credit, can be drawn down as
purchase orders are filled. Financial instruments, which potentially subject
the
Company to concentrations of credit risk, consisted of cash and cash
equivalents. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance
limit.
(d) Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(e) Inventories
The
Company values inventories, consisting of components and finished goods,
at the
lower of average cost or market. To the extent that inventory is considered
to
be obsolete or unmarketable, reserves are provided to reflect the estimated
loss
in value, in an amount equal to the difference between the cost of inventory
and
the estimated market value based upon assumptions about future demand, market
conditions, and sales forecasts. At June 30, 2006, the Company had recorded
reserves of $294,103 for excess and obsolete inventory.
Inventories,
net of reserves, consist of:
|
|
June
30, 2006
|
|
Components
|
|
$
|
1,648,701
|
|
Finished
goods
|
|
|
2,252,721
|
|
Total
|
|
$
|
3,901,422
|
|
(f) Equipment
Equipment
is stated at cost and is depreciated on a straight-line basis over the estimated
useful lives of the related assets of three to five years. Depreciation expense
for the ten months ended June 30, 2006 and July 2, 2005 was $102,164 and
$79,173
respectively. Upon the sale or retirement of assets, the cost and related
accumulated depreciation is eliminated from the respective accounts and any
resulting gains or losses are reflected in operations. Expenditures for repairs
and maintenance costs are expensed as incurred.
(g) Accounts
receivable
Product
sales are generally paid for by credit card or check prior to
shipment.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
(h) Revenue
recognition
Product
revenues and revenues from shipping and handling charges are recorded at
the
time that a product is shipped. The Company records estimated reductions
to
revenue for promotional programs, which may include special volume incentives
and other promotions upon sale. The Company also records estimated reductions
to
revenue, based primarily on historical experience, for chargebacks that may
arise as a result of shipping errors, product damage in transit or for other
reasons that can only become known subsequent to shipment upon sale.
(i) Cost
of goods sold
Cost
of
sales includes the cost of finished goods bought directly from the manufacturer
or components purchased from our suppliers and assembled at our plant, the
labor
for product assembly and packing, freight associated with the transport of
finished goods or components from the manufacturing vendor to our plant,
packaging materials used to box and secure our products during shipping to
our
customers and the freight and labor expense associated with shipping finished
products to our customers.
(j) Long-lived
assets, including intangible assets
The
Company acquired customer mailing lists in the Acquisition that were originally
acquired by Petals LLC as part of the assets acquired from Old Petals in
2003.
The customer mailing lists are being amortized on a straight-line basis over
5
years. Amortization expense was $48,000 and $48,000 for the ten months ended
June 30, 2006 and July 2, 2005, respectively.
In
accordance with Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”)
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
Company reviews the carrying value of its long-lived assets, including
intangible assets subject to amortization, for impairment whenever events
and
circumstances indicate that the carrying value of the assets may not be
recoverable. Recoverability of these assets is measured by comparison of
the
carrying value of the assets to the undiscounted cash flows estimated to
be
generated by those assets over their remaining economic life. If the
undiscounted cash flows are not sufficient to recover the carrying value
of such
assets, the assets are considered impaired. The impairment loss is measured
by
comparing the fair value of the assets to their carrying values. Fair value
is
determined by either a quoted market price or a value determined by a discounted
cash flow technique, whichever is more appropriate under the circumstances
involved. The Company determined that the value of the customer mailing list
was
unimpaired at June 30, 2006.
(k)
Loss per share
The
Company computes net loss per share in accordance with SFAS No. 128,
Earnings
per Share (SFAS 128),
and
related interpretations. Under the provisions of SFAS 128, basic net loss
per common share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding.
Diluted net loss per common share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common shares and
dilutive common share equivalents then outstanding. Common share equivalents
consist of the common shares issuable upon the conversion of preferred stock,
shares issuable upon the exercise of stock options and the conversion of
preferred stock upon the exercise of warrants. The Company has excluded the
impact of all convertible preferred stock, stock options and warrants from
the
calculation of historical diluted net loss
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
per
common share because all such securities are antidilutive for all periods
presented. All share and per share amounts have been retroactively adjusted
to
reflect the reverse stock split.
Shares
of
common stock that could potentially dilute basic earnings (loss) per share
in
the future, and that were not included in the computation of diluted loss
per
share because to do so would have been anti-dilutive for the periods presented,
consists of the following:
|
|
Shares
Potentially
Issuable
at
June
30, 2006
|
|
Series
A Preferred Stock
|
|
|
6,000,000
|
|
Series
B Preferred Stock
|
|
|
8,000,000
|
|
(l) Impact
of new accounting standards
Management
does not believe that there are any recently issued but not yet effective
accounting pronouncements that, if adopted by the Company, would have a material
effect on the accompanying financial statements.
Note
3. GOING
CONCERN
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As reflected in the accompanying financial
statements, the Company had an accumulated deficit of $15,402,947 at June
30,
2006 and had a net loss and cash used in operations of $5,416,535 and
$3,640,082, respectively, in the ten month period ended June 30, 2006. These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The Company’s current cash position may not be adequate to
support the Company’s continuing operations. Management intends to attempt to
raise additional funds by way of debt or equity financing. The ability of
the
Company to continue as a going concern is dependent on improving the Company’s
profitability and cash flow and securing additional financing. While the
Company
believes in the viability of its strategy to increase revenues and profitability
and in its ability to raise additional funds, and believes that the actions
presently being taken by the Company provide the opportunity for it to continue
as a going concern, there can be no assurances to that effect. The accompanying
financial statements do not include any adjustments that might be necessary
if
the Company is unable to continue as a going concern.
Note
4. NOTES
AND LOANS PAYABLE
Bank.
The
Company has a $1,500,000 revolving line of credit with a bank through December
2009 and requires monthly payments of interest. Interest is charged at the
rate
of one percentage point above the prevailing interest rate, as defined, per
annum. This line of credit is guaranteed by the Company’s president and chairman
and an entity controlled by him and is collateralized by all of the Company’s
business assets and a building owned by an affiliate of the Company’s president
and chairman. The credit line requires an annual 30-day cleanup period. The
Company was unable to effect a cleanup period in the ten months ended June
30,
2006. The Company’s average month-end balance outstanding during the ten month
period ended June 30, 2006 was $1,500,000.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
Notes
Payable. In
connection with the Debt Restructuring Agreements, notes payable in the
principal amount of $121,326 will be payable by in six monthly installments
beginning October 1, 2006, with interest at the rate of 7% per annum.
Affiliated.
In
connection with the Contribution Agreement and the Acquisition, the Company
assumed two term notes with an aggregate face value of $5,000,000 payable
to two
entities that are affiliates of the Company’s president/chairman. The notes
mature and interest at the rate of two percentage points above prime,
per annum, are payable on December 31, 2008.
Bridge
Notes. On
June
16, 2006, Petals LLC sold nonnegotiable unsecured term promissory notes in
the
aggregate principal amount of $2,135,000 to fifteen investors (the “Bridge
Notes”).
The
Bridge Notes do not bear interest, but instead were issued at an aggregate
discount of $610,000. The
Bridge Notes, are payable in quarterly installments on the 15th
day of
January, April, July and October, beginning on January 15, 2007 and continuing
until the earlier of the Bridge Notes
being paid in full or December 31, 2007. On each quarterly payment date,
each
Bridge Note holder will receive its pro-rata portion (based on the aggregate
amount of the outstanding principal of all of the Bridge Notes) of the amount
equal to the (i) the number of orders shipped by the Company during the previous
quarter multiplied by (ii) $2.00.
Note
5. ACCRUED
EXPENSES
Accrued
expenses consist of the following at June 30, 2006:
|
|
June
30, 2006
|
|
Accrued
interest
|
|
$
|
365,375
|
|
Accrued
returns and customer deposits
|
|
|
163,694
|
|
Professional
services
|
|
|
151,667
|
|
Accrued
general and administrative expenses
|
|
|
216,092
|
|
Total:
|
|
$
|
896,828
|
|
Note
6. STOCKHOLDERS’
DEFICIT
The
Company’s capital accounts consist of common stock, Series A preferred stock and
Series B preferred stock.
Pursuant to the Company’s certificate of incorporation, the board of directors
has the authority to issue, without any further vote or action by stockholders,
a total of up to 10 million shares of preferred stock and to fix the rights,
preferences, privileges, and restrictions, including voting rights, of the
preferred stock, which typically are senior to the rights of the common
stockholders. In connection with the Contribution Agreement and the Acquisition,
the
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
board
of
directors designated 10,800 and 240 shares of preferred stock as Series A
and
Series B Preferred Stock respectively. All of the designated Series A Preferred
Stock and Series B Preferred Stock were issued to Petals LLC on June 30,
2006 in
connection with the Acquisition.
Common
shares reserved for future issuance at June 30, 2006 consist of the
following:
Series
A Preferred Stock
|
|
|
6,000,000
|
|
Series
B Preferred Stock
|
|
|
8,000,000
|
|
Employment
agreement with president and chairman
|
|
|
1,666,667
|
|
Total:
|
|
|
15,666,667
|
|
Not
included in the table above are an aggregate of 5,000,000 shares of common
stock
reserved for the 2006 Stock Incentive Plan, effective August 2, 2006.
Series
A Preferred Stock
Voting
Rights.
Shares
of Series A Preferred Stock vote on an as-if-converted basis with the Common
Stock on all matters. Shares of Series A Preferred Stock also are entitled
to
vote as a separate class on, among other things, any amendment to the terms
or
authorized number of shares of Series A Preferred Stock and the issuance
of any
equity security ranking senior to the Series A Preferred Stock. Where pursuant
to the Certificate of Designation, Preferences and Rights of the Series A
Preferred Stock, the Series A Preferred Stockholders do have the right to
vote
as a series, the affirmative vote of the holders of not less than a majority
of
the outstanding shares of Series A Preferred Stock is necessary to constitute
approval.
Dividends.
Dividends accrue on shares of Series A Preferred Stock cumulatively at the
rate
of 8% per annum and are payable as and when declared by the Company’s Board of
Directors, provided that accrued dividends will be paid no less frequently
than
semi-annually with the first payment to be made on January 1, 2007. In addition,
in the event we make, or fix a record date for the determination of holders
of
common stock entitled to receive any distribution payable in our property
or in
our securities other than shares of common stock, then, and in each such
event,
the holders of the Series A Preferred Stock will receive, at the time of
such
distribution, the amount of property or the number of our securities that
they
would have received had their Series A Preferred Stock shares been converted
into Common Stock on the date of such event.
Conversion.
Beginning on the first anniversary of the original issue date, each share
of the
Series A Preferred Stock is convertible at option of the Series A stockholder
at
any time and from time to time, without the payment of additional consideration.
Each share of Series A Preferred Stock converts into such number of fully
paid
and nonnassessable shares of Common Stock as is determined by dividing $1,000
by
the Series A Conversion Price (as defined in the Certificate of Designations,
Preferences and Rights of the Series A Preferred Stock) which is currently
$1.80
(post-September 20, 2006 reverse split), and which will be subject to adjustment
from time to time. In the event that such a conversion would
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
result
in
the issuance of fractional shares of Common Stock, the number of shares of
Common Stock issued will be rounded down to the nearest whole number. Any
shares
of Series A Preferred Stock so converted will be retired and cancelled.
Antidilution.
Upon
the occurrence of a stock distribution, stock combination or stock dividend,
the
conversion rate will be adjusted so that the conversion rights of the Series
A
Preferred Stock stockholders will be nearly equivalent as practicable to
the
conversion rights of the Series A Preferred Stock stockholders prior to such
event. If the Company issues additional shares of its equity securities,
or
securities or debentures exchangeable for or convertible into additional
shares
of its equity securities, at a purchase price less than the then applicable
conversion price of the Series A Preferred Stock (excluding shares issued
to
employees, directors and consultants in the form of Board of Director approved
stock options and stock purchase plans), then the applicable conversion price
will be reduced on a weighted average formula basis to diminish the effect
of
the dilutive issuance on the Series A Preferred Stock.
Redemption.
The
Company may not redeem shares of the Series A Preferred Stock.
Liquidation.
In the
event of any voluntary or involuntary liquidation, dissolution or winding
up of
the Company’s affairs, holders of the Series A Preferred Stock will be entitled
to receive a liquidation preference of $1,000 per share plus accrued and
unpaid
dividends. The Series A Preferred Stock is senior in right of distribution
in
liquidation to the Series B Preferred Stock and the Common Stock. If, upon
any
winding up of the Company’s affairs, the assets available to pay the holders of
Series A Preferred Stock are not sufficient to permit payment in full, then
all
assets will be distributed to those holders on a pro rata basis.
Series
B Preferred Stock
Voting
Rights.
Shares
of Series B Preferred Stock vote on an as-if-converted basis with the Common
Stock on all matters. Shares of Series B Preferred Stock also are entitled
to
vote as a separate class on, among other things, any amendment to the terms
or
authorized number of shares of Series B Preferred Stock and the issuance
of any
equity security ranking senior to the Series B Preferred Stock.
Dividends.
In the
event the Company makes, or fixes a record date for the determination of
holders
of Common Stock entitled to receive any distribution payable in the Company’s
property or in our securities, then and in each such event the holders of
the
Series B Preferred Stock will receive, at the time of such distribution,
the
amount of property or the number of securities that they would have received
had
their Series B Preferred Stock shares been converted into Common Stock on
the
date of such event.
Conversion.
Provided that sufficient shares of authorized and unissued shares of Common
Stock are available, each share of the Series B preferred stock is convertible,
at the option of the holder into 100,000 fully paid and nonnassessable shares
of
common stock. Any shares of Series B preferred stock so converted will be
retired and cancelled.
Antidilution.
Upon
the occurrence of a stock split, stock dividend, combination or reclassification
of common stock, the conversion rate of the Series B preferred stock will
be
proportionately adjusted so that the conversion rights of the Series B preferred
stock stockholders will be nearly equivalent as practicable to the conversion
rights of the Series B preferred stock stockholders prior to such
event.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
Redemption.
The
Company may not redeem shares of the Series B preferred stock.
Liquidation.
In the
event of any voluntary or involuntary liquidation, dissolution or winding
up of
the Company’s affairs, holders of the Series B preferred stock will be entitled
to participate with the common stock in the distribution of assets or funds
on a
pro rata basis as if the shares of Series B preferred stock had been converted
immediately prior to such liquidation, dissolution, or winding up of the
Company.
Note
7. COMMITMENTS
AND
CONTINGENCIES
Leases
The
Company is committed under noncancellable lease agreements, for office,
assembly and distribution space with required minimal rent (annualized) of
approximately $706,000 through fiscal year 2008. The lessor of the office
space
is an entity controlled by the Company’s president and chairman. Future minimum
lease payments under these leases to which the Company is subject as
of September 19, 2006, are as follows:
Fiscal
Year Ended June 30,
|
|
Affiliated
|
|
Unaffiliated
|
|
Total
|
|
2007
|
|
|
252,120
|
|
|
430,991
|
|
|
683,111
|
|
2008
|
|
|
252,120
|
|
|
453,869
|
|
|
705,989
|
|
2009
|
|
|
126,060
|
|
|
319,454
|
|
|
445,514
|
|
|
|
$
|
630,300
|
|
$
|
1,204,314
|
|
$
|
1,834,614
|
|
Litigation
In
February 2005, a complaint was filed against Petals LLC in the Connecticut
Superior Court by a former marketing consultant. On March 6, 2006, Petals
LLC
settled the litigation and agreed to pay $87,500 in installments. As of
September 20, 2006, all payments have been made and the action has been
dismissed.
On
February 17, 2005, a complaint was filed against Petals LLC in Connecticut
Superior Court by a former employee. On or about September 12, 2006
the Petals LLC settled the action and agreed to pay
$107,500.00 by September 18, 2006, which payment was timely made. Mutual
general releases have been exchanged and the action has been dismissed.
Note
8. INCOME
TAXES
Petals
LLC, as a
limited
liability company, was not required to pay Federal and state income taxes.
The
Company (Immuno) has filed corporate income tax returns through June 30,
2006.
As
of
June 30, 2006, the Company has net operating loss (NOL) carryforwards of
approximately $900,000 to reduce future Federal taxable income through
2026. At
June 30 2006, the Company had ownership changes, as defined by the Internal
Revenue Service, which may subject the NOL's to annual limitations which
could
reduce or defer the use of the NOL's.
As
of
June 30, 2006, realization of the Company's net deferred tax assets of
$300,000
was not considered more likely than not to be realized and, accordingly,
a
valuation allowance of $300,000 has been provided.
As
of
June 30, 2006, deferred tax assets consisted of the following:
Net
operating loss
|
|
$
|
300,000
|
|
Valuation
allowance
|
|
|
(300,000
|
)
|
|
|
|
NONE
|
|
Note
9. RELATED
PARTY TRANSACTIONS
Employment
agreement with the Company’s chief executive officer
On
August
12, 2004, Petals LLC entered into an employment agreement with its chief
executive officer and this agreement was assumed by the Company. The
initial term of the agreement is for two years and renews automatically for
successive one year periods unless terminated earlier pursuant to its terms.
The
agreement provides for an annual base salary of $240,000 and bonus compensation
equal to 4% of the Company’s earnings before interest, taxes, depreciation and
amortization.
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
Information
technology services agreement with an affiliated
entity
The
Company incurred expenses of $74,974 during the ten months ended June 30,
2006, and $67,124 in the ten months ended July 2, 2005, for information
technology services provided by a company affiliated with the Company’s
president and chairman.
Employment
agreement with Company president and chairman
Petals
LLC entered into a five-year employment agreement with its president and
chairman as of March 31, 2006 which provides for an annual salary of $280,000.
This agreement was assumed by the Company in connection with the Acquisition.
The Company may defer payment of the salary to him until December 31, 2006.
From
time to time, the chairman, at his sole discretion, may elect to receive
all or
any part of his salary in the form of common stock of the Company. The value
of
any common stock to be issued to the chairman shall be determined as follows:
(i) if there exists a public market for the Company’s common equity, then the
price per share shall be 75% of the average of the closing trading prices
for
the ten trading days ending on the trading day immediately prior to the due
date, or (ii) if no public market exists for Company’s common equity, then by
the Board of Directors of the Company in its reasonable good faith judgment.
The
president/chairman shall also be granted an annual equity bonus in each year
during the term of the agreement equal to two percent of the then outstanding
common stock of the Company in the event that the Company generates annual
earnings before interest, taxes, depreciation and amortization of at least
$2,000,000. The equity grant is payable to the chairman within 30 days after
the
end of each fiscal year. As of June 30, 2006, the Company had deferred payment
of this employment agreement.
The
agreement automatically renews for successive one year periods unless either
party declines to renew this agreement by giving the other party hereto written
notice within 90 days of the end of any one-year renewal period.
As
part
of the Agreement, the chairman agreed to devote such time as he, in his sole
discretion, deems reasonable necessary to fulfill his obligations under the
Agreement, recognizing that his employment does not require his full business
time or limit his association with other entities.
NOTE
9. EMPLOYEE
BENEFIT PLANS
The
Company sponsors a defined contribution 401(k) benefit plan for all employees
over the age of 21. Employees may elect to defer up to 17% of their annual
compensation, up to the statutory limits. The Company will not match any
employee contribution.
NOTE
10. SUBSEQUENT
EVENTS
Reverse
Stock Split
On
August
2, 2006, the Company’s board of directors approved a plan of recapitalization by
undertaking a 1-for-3 reverse stock split with respect to the outstanding
shares
of our common stock (the “Reverse
Stock Split”),
without any change in the powers, preferences and rights and qualifications,
limitations or restrictions thereof, with all fractional shares to be paid
in
cash. The Reverse Stock Split was effective for stockholders of record on
September 20, 2006. Immediately after the Reverse Stock
PETALS
DECORATIVE ACCENTS, INC.
Notes
to Financial Statements
(Information
for the ten-month
period
ended July 2, 2005 is unaudited)
Split,
the Company had approximately 30,049,842 shares of common stock outstanding.
.
All
share and per share amounts have been retroactively adjusted to reflect the
reverse stock split.
The
Petals Decorative Accents, Inc. 2006 Stock Incentive
Plan
On
August
2, 2006, the Company’s Board of Directors and stockholders adopted the 200 Stock
Incentive Plan (the 2006 Plan). The 2006 Plan provides for the granting of
up to
5,000,000 (post-reverse split) shares of common stock pursuant to incentive
stock options, nonqualified option awards, stock grants and other restricted
stock awards for officers, directors, employees, consultants and
advisers.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Petals
Decorative Accents LLC
Ridgefield,
Connecticut
We
have
audited the accompanying balance sheet of Petals Decorative Accents LLC as
of
September 3, 2005 and the related statements of operations, stockholders’
deficit and cash flows for the fiscal year ended September 3, 2005 and the
period November 4, 2003 (inception) to August 28, 2004. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
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 control over financial
reporting. Accordingly, we express no such opinion. 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, the financial statements referred to above present fairly, in all
material respects, the financial position of Petals Decorative Accents LLC
as of
September 3, 2005 and the results of its operations and its cash flows for
the
fiscal year ended September 3, 2005 and the period November 4, 2003 (inception)
to August 28, 2004 in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company had an accumulated deficit of $10,793,231 at September
3, 2005 and had a net loss and cash used in operations of $4,588,931 and
$6,557,562, respectively, for the fiscal year ended September 3, 2005. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described
in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Most
& Company, LLP
New
York,
NY
November
11, 2005
PETALS
DECORATIVE ACCENTS LLC
Balance
Sheet
|
|
September
3, 2005
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$
|
16,831
|
|
Restricted
cash
|
|
|
756,445 |
|
Accounts
receivable
|
|
|
130,082
|
|
Inventories
|
|
|
4,177,444
|
|
Prepaid
catalog expenses
|
|
|
767,634
|
|
Other
current assets
|
|
|
144,356
|
|
Total
current assets
|
|
|
5,992,792
|
|
|
|
|
|
|
Equipment
|
|
|
361,933
|
|
Accumulated
depreciation
|
|
|
(145,579
|
)
|
Net
|
|
|
216,354
|
|
|
|
|
|
|
Customer
list
|
|
|
289,421
|
|
Accumulated
amortization
|
|
|
(94,500
|
)
|
Net
|
|
|
194,921
|
|
|
|
|
|
|
Other
assets
|
|
|
89,720
|
|
TOTAL
ASSETS
|
|
$
|
6,493,787
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Note
payable
|
|
$
|
1,500,000
|
|
Note
payable - affiliate
|
|
|
4,665,000
|
|
Bank
overdraft
|
|
|
478,175
|
|
Accounts
payable and accrued expenses
|
|
|
1,761,760 |
|
Accrued
distributions
|
|
|
806,820
|
|
Total
current liabilities
|
|
|
9,211,755
|
|
|
|
|
|
|
Term
note due to affiliate
|
|
|
|
|
Total
liabilities
|
|
|
9,211,755
|
|
Members’
deficit:
|
|
|
|
|
First
class preferred economic interests, bearing dividends at 8% per
annum,
redeemable at the Company’s option, at liquidation value
|
|
|
6,325,263
|
|
Second
class preferred economic interests, bearing dividends at 6% per
annum,
redeemable at the Company’s option, at liquidation value
|
|
|
1,500,000
|
|
Common
membership interests
|
|
|
250,000
|
|
Accumulated
deficit
|
|
|
(10,793,231
|
)
|
|
|
|
|
|
Total
members’ deficit
|
|
|
(2,717,968
|
)
|
TOTAL
LIABILITIES AND MEMBERS’ DEFICIT
|
|
$
|
6,493,787
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS LLC
Statements
of Operations
|
|
Year
Ended
|
|
Period
from November 4, 2003 (inception) to
|
|
|
|
September
3,
2005
|
|
August
28,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
14,800,145
|
|
$
|
4,274,326
|
|
Costs
of sales
|
|
|
7,799,751
|
|
|
2,591,037
|
|
Gross
profit
|
|
|
7,000,394
|
|
|
1,683,289
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,795,669
|
|
|
1,158,342
|
|
Selling
and marketing expenses
|
|
|
5,458,519
|
|
|
1,920,390
|
|
Administrative
expenses
|
|
|
3,228,953
|
|
|
3,999,781
|
|
Interest
expense
|
|
|
106,184
|
|
|
2,256
|
|
|
|
|
11,589,325
|
|
|
7,080,769
|
|
Net
loss
|
|
|
(4,588,931
|
)
|
|
(5,397,480
|
)
|
|
|
|
|
|
|
|
|
Distributions
on preferred interests
|
|
|
601,584
|
|
|
205,236
|
|
Net
loss attributable to common membership interests
|
|
$
|
(5,190,515
|
)
|
$
|
(5,602,716
|
)
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS LLC
Statement
of Members’ Equity (Deficit)
|
|
Preferred
Economic Interests
|
|
|
|
|
|
|
|
|
|
First
Class
|
|
Second
Class
|
|
Common
Membership Interests
|
|
Accumulated
Deficit
|
|
Total
|
|
Sales
of membership interests
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
|
|
$
|
250,000
|
|
Contribution
of assets
|
|
|
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
1,500,000
|
|
Sales
of membership interests
|
|
$
|
5,605,263
|
|
|
|
|
|
|
|
|
|
|
|
5,605,263
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,397,480
|
)
|
|
(5,397,480
|
)
|
Distributions
accrued
|
|
|
|
|
|
|
|
|
|
|
|
(205,236
|
)
|
|
(205,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
August 28, 2004
|
|
|
5,605,263
|
|
|
1,500,000
|
|
|
250,000
|
|
|
(5,602,716
|
)
|
|
1,752,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of first membership interests
|
|
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
720,000
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(4,588,931
|
)
|
|
(4,588,931
|
)
|
Distributions
accrued
|
|
|
|
|
|
|
|
|
|
|
|
(601,584
|
)
|
|
(601,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 3, 2005
|
|
|
6,325,263
|
|
|
1,500,000
|
|
|
250,000
|
|
|
(10,793,231
|
)
|
|
(2,717,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS LLC
Statements
of Cash Flows
|
|
Year
Ended September 3,
|
|
Period
November 4, 2003 (inception) to
August
28,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,588,931
|
)
|
$
|
(5,397,480
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
151,091
|
|
|
88,988
|
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
372,871
|
|
|
(1,129,316
|
)
|
Decrease
in accounts receivable
|
|
|
34,455
|
|
|
597,510
|
|
Increase
in inventories
|
|
|
(3,148,694
|
)
|
|
(726,764
|
)
|
Increase
in prepaid expenses and other current assets
|
|
|
(296,612
|
)
|
|
(543,275
|
)
|
Decrease
(increase) in other long-term assets
|
|
|
(89,720
|
)
|
|
—
|
|
Increase
in accounts payable and accrued expenses
|
|
|
1,007,978
|
|
|
753,783
|
|
Net
cash used in operating activities
|
|
|
(6,557,562
|
)
|
|
(6,
356,554
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(183,017
|
)
|
|
(149,874
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
363,170
|
|
|
115,005
|
|
Proceeds
of note payable to affiliates
|
|
|
4,165,000
|
|
|
500,000
|
|
Proceeds
of note payable
|
|
|
1,500,000
|
|
|
—
|
|
Sales
of common membership interests
|
|
|
—
|
|
|
250,000
|
|
Sales
of preferred economic membership interests
|
|
|
720,000
|
|
|
5,605,263
|
|
Net
cash provided by financing activities
|
|
|
6,748,170
|
|
|
6,470,268
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH:
|
|
|
7,591
|
|
|
(36,160
|
)
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
9,240
|
|
|
45,400
|
|
CASH
AT END OF PERIOD
|
|
$
|
16,831
|
|
$
|
9,240
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH FLOW ACTIVITIES:
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
67,184
|
|
$
|
2,256
|
|
Non-Cash
Transactions:
|
|
|
|
|
|
|
|
Dividends
accrued
|
|
$
|
601,584
|
|
$
|
205,236
|
|
Conversion
of notes payable to affiliate term loans to affiliate
|
|
|
|
|
|
—
|
|
Contribution
of assets
|
|
|
|
|
$
|
1,500,000
|
|
See
notes
to financial statements.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
Note
1. ORGANIZATION
Petals
Decorative Accents LLC (“Petals” or the “Company”) was organized as Petals
Decorative Accents Corporation in the state of Delaware on November 4, 2003
and
converted to a limited liability company also in the state of Delaware on
December 29, 2003. In December 2003, assets consisting of inventory of
$1,210,579 and customer lists of $289,421 were contributed in exchange for
the
second class economic interest in Petals.
The
Company designs, assembles, markets and sells silk flowers and trees utilizing
unique floral stems and other materials purchased by it from manufacturers,
primarily in Asia. The Company sells its products through its mail order
catalog
and website.
Note
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation - interim financial statements
The
accompanying interim financial statements and related notes are unaudited
and do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements for interim financial statements. In the opinion of management,
all
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods have been included.
Interim
results are not necessarily indicative of the results for a full
year.
(b) Fiscal
year
The
Company’s fiscal year has historically been the 52 or 53-week period ending on
the Saturday closest to August 31 in each year.
(c) Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(d) Accounts
receivable
Accounts
receivable are recorded at cost. Product sales are generally paid for by
credit
card or check prior to shipment.
(e) Inventories
Inventories,
consisting of components and finished goods are stated at the lower of average
cost or market. To the extent that inventory is considered to be obsolete
or
unmarketable, reserves are provided to reflect the estimated loss in value,
based upon assumptions about future demand, market conditions, and sales
forecasts. At February 28, 2006 and September 3, 2005, the Company had a
recorded reserve of $366,190 for excess and obsolete inventories.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
Inventories,
net of reserves, consist of:
|
|
February
28, 2006 (Unaudited)
|
|
September
3, 2005
|
|
Components
|
|
$
|
2,356,404
|
|
$
|
1,958,462
|
|
Finished
goods
|
|
|
2,546,580
|
|
|
2,218,982
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,902,984
|
|
$
|
4,177,444
|
|
(f) Equipment
Equipment
is stated at cost and is being depreciated on a straight-line basis over
the
estimated useful lives of the related assets of 3 to 5 years. Depreciation
expense for the six months ended February 28, 2006 (unaudited) and the fiscal
years ended September 3, 2005 and August 28, 2004 was $57,900, $95,007 and
$50,572 respectively. Upon the sale or retirement of assets, the cost and
related accumulated depreciation is eliminated from the respective accounts
and
any resulting gains or losses are reflected in operations. Expenditures for
repairs and maintenance costs are expensed as incurred.
(g)
Customer list
Customer
list is being amortized using the straight-line basis over the useful life
of
the asset.
(h) Revenue
recognition
Revenues
from product sales and shipping and handling charges are recorded at the
time
that a product is shipped. The Company provides for estimated reductions
to
revenue for customer returns and chargebacks that may arise as a result of
shipping errors, product damage in transit or for other reasons that can
only
become known subsequent to shipment, based primarily on historical experience,.
At February 28, 2006 (unaudited) and September 3, 2005, the Company had provided
allowances for customer returns and chargebacks in the amount of $81,100.
(i)
Shipping and handling costs
Shipping
and handling costs are included in cost of sales.
(j) Long-lived
assets
In
accordance with Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
Company reviews the carrying value of its long-lived assets, including customer
list for impairment whenever events and circumstances indicate that the carrying
value of the assets may not be recoverable. Recoverability of these assets
is
measured by comparison of the carrying value of the assets to the undiscounted
cash flows estimated to be generated by those assets over their remaining
economic life. If the undiscounted cash flows are not sufficient to recover
the
carrying value of such assets, the assets are considered impaired. The
impairment loss is measured by comparing the fair value of the assets to
their
carrying values. Fair value is determined by either a quoted market price
or a
value determined by a discounted cash flow technique, whichever is more
appropriate under the circumstances involved. The Company determined that
the
value of the customer mailing list was unimpaired at September 3,
2005.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
(k) Impact
of new accounting standards
Management
does not believe that there are any recently issued but not yet effective
accounting pronouncements that, if adopted by the Company, would have a material
effect on the accompanying financial statements.
Note
3. GOING
CONCERN
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As reflected in the accompanying financial
statements, the Company has an accumulated deficit of $10,793,231 at September
3, 2005, incurred a net loss of $4,588,931 and used $6,557,562 of cash in
its
operations in fiscal 2005. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The Company’s current cash
position may not be adequate to support the Company’s continuing operations.
Management intends to attempt to raise additional funds by way of debt or
equity
financing. The ability of the Company to continue as a going concern is
dependent on improving the Company’s profitability and cash flow and securing
additional financing. While the Company believes in the viability of its
strategy to increase revenues and profitability and in its ability to raise
additional funds, and believes that the actions presently being taken by
the
Company provide the opportunity for it to continue as a going concern, there
can
be no assurances to that effect. The accompanying financial statements do
not
include any adjustments that might be necessary if the Company is unable
to
continue as a going concern.
Note
4. INTANGIBLE
ASSETS
Intangible
assets consist of the following
|
|
February
28, 2006 (Unaudited)
|
|
September
3, 2005
|
|
Customer
lists
|
|
$
|
289,421
|
|
$
|
289,421
|
|
Less:
accumulated amortization
|
|
|
(123,299
|
)
|
|
(94,500
|
)
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
166,122
|
|
$
|
194,921
|
|
Amortization
expense was $28,799, $57,884 and $36,616 for the six months ended February
28,
2006, the year ended September 3, 2005 and the period ended August 28, 2004,
respectively. Amortization expense is expected to be $57,884 for years ended
2006, 2007 and 2008 and $21,269 for year end 2009.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
Note
5. LOANS
PAYABLE
Notes
and
loans payable consist of the following:
Due
to:
|
|
February
28, 2006
|
|
September
3, 2005
|
|
|
|
|
|
|
|
Bank
|
|
$
|
1,500,000
|
|
$
|
1,500,000
|
|
Affiliate
|
|
|
6,005,000
|
|
|
4,665,000
|
|
|
|
$
|
7,505,000
|
|
$
|
6,165,000
|
|
Bank.
The
Company has $1,500,000 revolving line of credit from a bank under which the
Company may borrow through December 2009, and loans under the line are due
on
demand and require monthly payments of interest. Interest is charged at one
percentage point above the prime rate per annum, as defined. This credit
facility is collateralized by all of the assets and is guaranteed by the
Company’s chairman and the guaranty is collateralized by a building owned by an
affiliate of the Company. The revolving credit line requires an annual 30-day
cleanup period. The Company was unable to effect a cleanup period in 2005.
The
bank has the option of increasing the interest rate to two percent above
the
prime rate per annum due to this default.
Affiliated
Party.
The
Company has a $10,000,000 revolving credit facility from two affiliates of
its
chairman. Loans under this line bear interest at the rate of 2.5% per annum
and
are payable on demand. The line requires that the Company obtain the lenders’
consent to enter into certain agreements and transactions, including mergers,
declaring distributions on its common membership interests, or make any changes
in accounting principles, except those required under accounting principles,
generally accepted in the United States. Advances under the line of credit
are
made by the lenders in their sole discretion.
On
November 30, 2005, $5,000,000 of the principal amount outstanding under the
line
was converted into term notes maturing on December 31, 2008, and bear interest
at two percent above prime rate, per annum. The loan is due December 31,
2008.
On
November 30, 2005, the same two affiliates entered into a $5,000,000 revolving
line of credit with the Company that replaces the preceding revolving credit
facility. The terms of the credit facility are substantially the same as
those
of the prior revolving credit facility. All borrowings under this revolving
credit agreement become due upon the occurrence of: (1) the issuance of any
debt
or equity securities (in any combination) by the Company in one or more related
transactions in exchange for cash consideration of at least $15,000,000,
(2) a
sale or transfer of all or substantially all of the assets of the Company
to
another person, or (3) a transaction that results in a change in control
of the
Company. Any unpaid principal balance under this revolving credit line as
of
January 1, 2007 will be converted to a term note due on December 31, 2008
and
bear interest at two percent above the prime rate, per annum.
Note
6. MEMBERS’
DEFICIT
Preferred
economic interests
Holders
of the Company’s preferred economic interests are entitled in any liquidation of
the Company to receive, after satisfaction of the claims of the Company’s
creditors and before any distribution is made to the holders of the common
membership interests, an amount equal to the stated value of their interests,
plus accrued distributions. The holders of the first class economic interests
are entitled to receive cash dividends at the rate of eight percent per annum
on
the stated value of their interests, and are senior in right of distribution
to
the holders of the second class economic interests. The holders of the second
class economic interests are entitled to receive cash dividends at the rate
of
six percent per annum on the stated value of their interests, and are senior
in
rights and distributions to the holders of the common membership interests.
The
preferred interests are redeemable by the Company at any time for an amount
equal to their stated value plus unpaid distributions. The preferred economic
interests are not entitled to vote.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
Common
membership interests
The
holders of the Company’s common membership interests are entitled to elect the
operating managers of the Company and to vote on certain other matters, to
receive distributions if and to the extent declared by the operating managers,
and to receive in any liquidation of the Company any assets remaining after
satisfaction of the claims of creditors and payment of any preferential amounts
due to the holders of the preferred economic interests.
Note
7. INCOME
TAXES
As
a
limited liability company, the Company has elected to be treated as a
partnership for Federal and state income tax purposes. Under subchapter K
of the
Internal Revenue Code, the Company is not taxed and members are taxed separately
on their allocated share of income or losses of the Company.
Note
8. COMMITMENTS
AND
CONTINGENCIES
Leases
The
Company is committed under noncancellable lease agreements for office space
and
a facility for assembly operations through December 31, 2008. The lessor
of the
office space is an entity controlled by the Company’s chairman. Future minimum
lease payments under these leases at September 3, 2005 were as
follows:
Fiscal
Year Ended August
|
|
Affiliated
|
|
Unaffiliated
|
|
Total
|
|
2006
|
|
$
|
126,060
|
|
$
|
129,030
|
|
$
|
255,090
|
|
2007
|
|
|
252,125
|
|
|
258,060
|
|
|
510,185
|
|
2008
|
|
|
252,125
|
|
|
258,060
|
|
|
510,185
|
|
2009
|
|
|
84,040
|
|
|
43,010
|
|
|
127,050
|
|
|
|
$
|
714,350
|
|
$
|
688,160
|
|
$
|
1,402,510
|
|
Rent
expense for the fiscal years ended September 3, 2005 and August 28, 2004
was
$226,602 and $98,664, respectively.
In
January 2006, the Company renewed its lease for office space at the expiration
of its prior lease with an affiliate through December 31, 2008 and requires
annual rent of $252,125.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
Letters
of credit
The
Company is contingently liable for letters of credit issued by a bank to
certain
suppliers which are collateralized by cash deposited (restricted) with the
bank,
and can be drawn down by the suppliers when purchase orders are filled.
As
of
September 3, 2005, the Company had $756,445 of letters of credit outstanding
and
expiring through March 2006.
Litigation
In
February 2005, a breach of contract claim was filed against the Company by
a
former marketing consultant. The claim alleges that the Company failed to
pay
consulting fees of approximately $124,000 and further alleges other matters
by
the Company and also seeks punitive damages, attorneys’ fees, interest and
costs. As of September 3, 2005, the Company has accrued $81,000 as an estimate
for this matter. On March 6, 2006, the Company has settled this matter and
agreed to pay approximately $87,500, payable $32,500 on March 10, 2006 and
then
six equal monthly payments of $9,166 through September 2006.
On
November 17, 2005, a claim was filed against the Company by the Company’s former
chief financial officer. The claim alleges that the Company failed to pay
approximately $215,000 in severance payments. In addition, the claim also
seeks
attorneys' fees, interest and costs. The Company believes that it has defenses;
however, it is not possible at this time to express an opinion as to the
likely
outcome of this matter. The Company has accrued $200,000 related to this
matter.
Note
9. RELATED
PARTY TRANSACTIONS
Employment
agreements
On
August
12, 2004 the Company entered into an employment agreement with its chief
executive officer. The
initial term of the agreement is for two years and renews automatically for
successive one year periods unless terminated earlier pursuant to its terms.
The
agreement provides for an annual base salary of $240,000 and a bonus equal
to 4%
of the Company’s earnings before interest, taxes, depreciation and amortization,
as well as a performance bonus payable in equity at the discretion of the
Company’s board of directors.
The
Company entered into a five-year employment agreement with its chairman,
Mr.
Hicks, on March 31, 2006 which provides for an annual salary of $280,000.
The
Company may defer payment of salary until December 31, 2006. The Chairman,
at
his sole discretion, may elect to receive all or any part of his base salary
in
the form of common equity interest of the Company. The value of any common
equity interest to be paid to the chairman shall be determined as follows:
(i)
if there exists a public market for the Company’s common equity, then the price
per share shall be 75% of the average of the closing trading prices for the
ten
trading days ending on the trading day immediately prior to the due date,
or
(ii) if no public market exists for the Company’s common equity, then the board
of directors of the Company, in its reasonable good faith judgment, will
assign
a value. The chairman shall also be granted an annual equity bonus in each
year
during the term of the Agreement equal to two percent of the then outstanding
common equity of the Company in the event that the Company generates annual
earnings before interest, taxes, depreciation and amortization of at least
$2,000,000 during such fiscal year. The common equity interest grant will
be
payable to the chairman within 30 days after the end of each fiscal
year.
PETALS
DECORATIVE ACCENTS LLC
Notes
to financial statements
The
Agreement automatically renews for successive one year periods unless either
party declines to renew this agreement by giving the other party hereto notice
within 90 days of the end of any one-year renewal period.
Information
technology services agreement with an affiliated
entity
On
February 3, 2005, the Company entered into a computer maintenance agreement
with
an entity controlled by the Company’s chairman. Under the agreement, the Company
incurred expenses of $61,103 for the six months ended February 28, 2006
(unaudited), $131,752 in fiscal 2005 and $205,768 in fiscal 2004 .
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PETALS
DECORATIVE ACCENTS, INC.
By:
/s/
Stephen M. Hicks
Name:
Stephen M. Hicks
Title:
President, Chairman and Acting
Principal
Financial Officer
Date: September
28, 2006
POWERS
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each of the undersigned directors of Petals
Decorative Accents, Inc. hereby constitutes and appoints Stephen M. Hicks,
his
true and lawful attorney-in-fact and agent, with full power of substitution,
for
him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute and file any and all amendments to this Form
10-KSB, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
full power and authority to do so and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as full to all intents and purposes as he himself might
or
could do if personally present, thereby ratifying and confirming all that said
attorneys-in-fact and agent, or his substitute or substitutes, may lawfully
do
or cause to be done.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
|
Title
|
Date
|
/s/
Stephen M. Hicks
|
President,
Chairman and Acting Principal Financial Officer
|
September
28, 2006
|
Stephen
M. Hicks
|
|
|
/s/
Henry B. Sargent III
|
Director
|
September
28, 2006
|
Henry
B. Sargent III
|
|
|