UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended November 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from September 1, 2005 to November 30 2005.
Commission File Number: 333-113223
SEW CAL LOGO, INC.
------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 46-0495298
------ ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
207 W. 138th STREET
LOS ANGELES, CALIFORNIA 90061
Address of Principal Executive Offices
(310) 352-3300
(Registrant's Telephone Number, Including Area Code)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and 2) has
been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the Issuer's classes of common
equity as of the latest practicable date: At November 30, 2005, there were
5,176,168 shares of the registrant's Common Stock outstanding.
1
SEW CAL LOGO, INC.
FORM 10-QSB
INDEX
Page No.
PART I - FINANCIAL INFORMATION 3
Item 1. FINANCIAL STATEMENTS 3
Report of Independent Registered Public Accounting Firm 3
Balance Sheets November 30, 2005 and August 31, 2005. 4
Statements of Operations 3 months ended November 30, 2005 and 3 months ended November 30, 2004 6
Statement of Stockholders' equity for the period from August 31, 2002 to November 30, 2005 7
Statement of Cash Flows for 3 months ended November 30, 2005 and 3 months ended November 30, 2004 8
Notes to Financial Statements 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 15
Item 3 CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION.
Item 1. LEGAL PROCEEDINGS 19
Item 2. CHANGES IN SECURITIES 19
Item 3. DEFAULTS UPON SENIOR SECURITIES 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 5. OTHER INFORMATION 19
Item 6. EXHIBITS. 19
SIGNATURES 19
2
PART I
ITEM 1. FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. However, in the opinion of management,
all adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position and results of operations for the periods
presented have been made. The results for interim periods are not necessarily
indicative of trends or of results to be expected for the full year. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's registration statement on form SB-2
as amended.
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
To the Board of Directors and Stockholders
Sew Cal Logo Inc
We have reviewed the accompanying interim balance sheets of Sew Cal Logo Inc as
of November 30, 2005, and August 31, 2005 and the associated statements of
operations, stockholders' equity and cash flows for the three months ended
November 30, 2005. These interim financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
Shelley International, CPA
Mesa, Arizona, U.S.A.
January 12, 2006
3
SEW CAL LOGO, INC.
BALANCE SHEETS
11/30/2005 8/31/2005
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,033 $ 56,865
Accounts Receivable, net 363,452 265,468
Inventory 174,144 188,434
Prepaid Expenses 1,600 2,297
----------- -----------
Total current assets 541,229 513,064
-----------
Equipment and machinery, net 351,130 371,488
Other assets 6,000 6,000
----------- -----------
Total assets $ 898,359 $ 890,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
LIABILITIES AND STOCKHOLDERS' EQUITY
11/30/2005 8/31/2005
Current liabilities:
Accounts payable $ 72,811 $ 56,722
Note Payable-shareholder 355,384 355,384
Other current liabilities 529,136 413,289
Current Poriton of Long Term Debt 71,817 45,987
----------- -----------
Total current liabilities 1,029,148 871,382
Long-term liabilities
Note Payable-related party 91,085 95,570
SBA Loan 287,268 327,884
Equipment Loans 37,299 40,602
----------- -----------
Total liabilities 1,444,800 1,335,438
----------- -----------
Stockholders' equity (deficit)
Preferred stock: 300,000 shares authorized,
par value $0.001, issued and outstanding 234,800
shares 11/30/05 and 8/31/04
235 235
Common stock: 50,000,000 shares authorized, --
$0.001 par value, issued and outstanding, --
5,176,168 shares 11/30/05; 5,020,000 shares 8/31/04 5,176 5,176
Paid in Capital 187,517 187,517
Stock Subscribed 36,000 36,000
Retained Earnings(Deficit) (775,369) (673,814)
----------- -----------
Total stockholders' equity (deficit) (546,441) (444,886)
----------- -----------
Total liabilities and stockholders' equity $ 898,359 $ 890,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
SEW CAL LOGO, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
----------------------------
11/30/2005 11/30/2004
(unaduited) (unaudited)
----------- -----------
Revenue:
Sales of Caps, Embroidery and Other $ 654,657 $ 521,591
----------- -----------
Total Revenue $ 654,657 $ 521,591
Cost of Goods Sold 580,445 373,447
----------- -----------
Gross profit 74,212 148,144
----------- -----------
Expenses:
General and Administrative 48,357 17,936
Officer and Administrative Compensation 55,985 60,622
Consulting, Legal and Accounting 12,713 7,500
Depreciation 20,357 2,380
Rent 15,000 13,500
Interest Expense 23,355 12,843
----------- -----------
Total expenses 175,767 114,781
----------- -----------
Income (loss) before income taxes (101,555) 33,363
----------- -----------
Provision for income taxes -- 5,718
----------- -----------
Net income (loss) $ (101,555) $ 27,645
=========== ===========
Basic and Diluted Earnings (Loss) per Share ($ 0.02) $ 0.01
----------- -----------
Weighted Average Number of Common Shares 5,176,000 5,020,000
----------- -----------
The accompanying notes are an integral part of these financial statements.
6
SEW CAL LOGO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
------------------- --------------------
Retained Total
Outstanding Outstanding Paid in Stock Earnings Stockholders'
Shares Amount Shares Amount Capital Subscribed (Deficit) Equity
---------- ------- ---------- -------- ---------- ---------- ----------- ----------
Balance, August 31, 2002 189,800 190 3,000,000 3,000 1,810 (573,885) (568,885)
Contributed Officer Services 60,000 60,000
Net (Loss) for the year (45,381) (45,381)
---------- ------- ---------- -------- ---------- ----------- ----------
Balance, August 31, 2003 189,800 190 3,000,000 3,000 61,810 (619,266) (554,266)
Recapitalization 2/24/04
Shares issued at par value 520,000 520 (520)
Shares issued for services at par 45,000 45 1,500,000 1,500 1,545
Net Income for the year 50,818 50,818
---------- ------- ---------- -------- ---------- ----------- ----------
Balance, August 31, 2004 234,800 235 5,020,000 5,020 61,290 (568,448) (501,903)
Equipment purchase 33,334 33 114,067 114,100
Restricted Shares issued for
services 122,834 123 12,160 12,283
$0.10 per share
Stock Subscribed 36,000 36,000
Net Income (Loss) for year (105,366) (105,366)
---------- ------- ---------- -------- ---------- ---------- ----------- ----------
Balance, August 31, 2005 234,800 235 5,176,168 5,176 187,517 36,000 (673,814) (444,886)
========== ======= ========== ======== ========== ========== =========== ==========
Net Income (Loss) for quarter (101,555) (101,555)
---------- ------- ---------- -------- ---------- ---------- ----------- ----------
Balance, November 30, 2005 234,800 $ 235 $5,176,168 $ 5,176 $ 187,517 $ 36,000 $ (775,369) $ (546,441)
========== ======= ========== ======== ========== ========== =========== ==========
All above shares have been retroactively adjusted for the recapitalization of
100 shares of common stock on February 26, 2004
The accompanying notes are an integral part of these financial statements.
7
SEW CAL LOGO, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
------------------------------
11/30/2005 11/30/2004
(unaudited) (unaudited)
------------ ------------
Operating Activities:
Net income (loss) $ (101,555) $ 27,645
Depreciation 20,358 12,479
Stock issued for services
Adjustments to reconcile net income (loss)
(Increase) decrease in prepaid Expenses 697 --
(Increase) decrease in inventory 14,290 (47,903)
(Increase) decrease in accounts receivable (97,984) 96,417
(Increase) decrease in prepaid franchise tax
Increase (decrease) in accounts payable 16,089 61,855
Increase (decrease) in other current liabilities 141,677 (113,729)
------------ ------------
Net cash provided by (used in) operating activities (6,428) 36,764
------------ ------------
Investing Activities:
Purchases/disposals of equipment -- (5,408)
------------ ------------
Cash (used) in investing activities -- (5,408)
------------ ------------
Financing Activities:
Decrease in shareholder loan (4,485)
Decrease of SBA Loan (40,616) (15,804)
Repayment of equipment loan (3,303) (2,038)
Increase in equipment loan --
------------ ------------
Net cash provided by (used in) financing activities (48,404) (17,842)
------------ ------------
Net increase (decrease) in cash and cash equivalents (54,832) 13,514
Cash and cash equivalents at beginning of the year 56,865 20,490
------------ ------------
Cash and cash equivalents at end of the year $ 2,033 $ 34,004
============ ============
Supplemental Information
Interest 23,355 12,843
Taxes -- --
The accompanying notes are an integral part of these financial statements.
8
SEW CAL LOGO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
The Company
C J Industries was incorporated in the State of California on August 30, 1985
and changed its name to Southern California Logo, Inc (the Company). The Company
transacts business as Sew Cal Logo. On February 24, 2004 the Company merged with
Calvert Corporation, a Nevada Corporation. This was a recapitalization accounted
for as a stock exchange transaction (reverse merger). Calvert also changed its
name to Sew Cal Logo, Inc. See Note 8 for more details of this merger.
The Company is located in Los Angeles, California. The Company produces and
manufactures custom embroidered caps, sportswear and related corporate
identification apparel. The Company provides an in-house, full-service custom
design center where original artwork and logo reproduction for embroidery are
available. The Company also offers contract embroidery and silk-screening to the
manufacturing and promotional industry. The Company's products are sold,
primarily in the United States, to Fortune 500 companies, major motion picture
and television studios, retailers, and local schools and small businesses.
Use of Estimates
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States, which require management to
make estimates, and assumptions that affect the reported amounts of assets and
liabilities (including 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.
Accounts Receivable
The Company's trade accounts receivable and allowance for doubtful accounts are
shown below.
11/30/05 8/31/05
Gross Trade Accounts Receivable $ 365,857 $ 268,149
Allowance for Doubtful Accounts (2,404) (2,681)
--------- ---------
Accounts Receivable, net $ 363,453 $ 265,468
--------- ---------
Revenue Recognition
The Company recognizes revenue from product sales upon shipment, which is the
point in time when risk of loss is transferred to the customer, net of estimated
returns and allowances.
Cash and Cash equivalents
The Company maintains cash deposits in banks and in financial institutions
located in southern California. Deposits in banks are insured up to $100,000 by
the Federal Deposit Insurance Corporation ("FDIC"). The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash deposits.
9
SEW CAL LOGO, INC.
NOTES TO FINANCIAL STATEMENTS
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists of raw material, work-in-process and finished goods. Normally the
Company ships out to the customer the finished goods as soon as they are
produced and therefore usually does not maintain a finished goods inventory.
Overhead items are applied on a standard cost basis to work in process and
finished goods.
11/30/05 8/31/05
Raw Materials and WIP $174,144 $188,434
Finished Goods 0 0
-------- --------
Total Inventory $174,144 $188,434
-------- --------
Equipment and Machinery
Equipment and machinery are stated at cost. Depreciation is computed using the
straight-line method over their estimated useful lives ranging from five to
seven years. Depreciation and amortization expense for the fiscal years August
31, 2005, and 2004 amounted to $56,847, and $78,330 respectively. Gains from
losses on sales and disposals are included in the statements of operations.
Maintenance and repairs are charged to expense as incurred. As of November 30,
2005 and August 31, 2005 equipment and machinery consisted of the following:
11/30/05 8/31/05
Equipment and Machinery $968,644 $968,644
Less: Accumulated depreciation 617,514 597,156
-------- --------
$351,130 $371,488
-------- --------
Fiscal Year
The Company operates on a fiscal year basis with a year ending August 31.
Earnings and Loss Per Share Information
Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period.
Segment Reporting
Pursuant to Statement of Financial Accounting Standards No. 131 ("SFAS No.
131"), "Disclosure about Segments of an Enterprise and Related Information," the
Company has determined it operated in only one segment.
NOTE 2. Accounts Payable and Other Current Liabilities
As of the period ends shown, accounts payable and accrued liabilities consisted
of the following:
10
11/30/05 8/31/05
Trade accounts payable $ 72,811 $ 56,722
-------- --------
Sales tax payable 7,275 8,520
Short Term Loan - Related Party 99,767
Payroll Liabilities 50,172 52,046
Credit Card Debt 27,376 55,223
Revolving bank line of credit (Prime +
3.8 %, interest only) 98,046 52,000
Revolving bank line of credit (prime +
3.8750 % Interest only, reviewed yearly) 246,500 245,500
-------- --------
$529,136 $413,289
-------- --------
NOTE 3. Note Payable- Related Party
On March 1, 2003, for purposes of working capital, the sole shareholder and
spouse made a $355,384 subordinated loan to the Company. The Company is
obligated to pay monthly interest only on the subordinated loan during its term
at the rate of 10% per annum (fixed-rate calculated as simple interest). The
entire principal amount of the loan was originally due on March 1, 2004, and has
continued from that time on a month to month basis. The subordinated loan, which
was consented to by United Commercial Bank and subsequent banks, is
collateralized by the assets of the Company, including but not limited to any
and all equipment owned by the Company, inventory, and outstanding receivables.
NOTE 4. Commitments and Contingencies
Long-Term Debt
On March 25, 2002 the Company entered into an agreement with United Commercial
Bank for a $515,000 SBA loan. For the years ending August 31, 2003 and 2002, the
unpaid principal balance of the loan was $462,100 and $500,313 respectively. The
monthly required payment varied with an annual interest rate of 6.75% and a
maturity date of March 1, 2012. This loan related to the purchase of equipment.
NOTE 4. Commitments and Contingencies, continued
On August 11, 2004 the Company refinanced this SBA loan with Pacific Liberty
Bank. As of November 30, 2005 the balance was $359,085 with the long-term
portion of $287,268 and short term portion $71,817. As of August 31, 2005 the
balance was $373,871, long term portion $327,884 and the short term portion
$45,987. This loan matures and is due in 69 months. Monthly payments are made
the 15th of each month with interest at prime plus 2.5. Currently the interest
rate is 9.5%. This loan is collateralized by the assets of the corporation and
is in first place before the shareholder loan.
On April 16, 2003 the Company entered an installment sale contract with GMAC for
the purchase of a vehicle. The total amount financed at signing was $40,754 that
represents the total sale price. The agreement requires 60 monthly payments of
approximately $679 beginning on May 16, 2003 and ending on April 16, 2008. The
outstanding balance at November 30, 2005 was $19,698. This vehicle note was
obtained by GMAC under special financing and carries no interest.
11
SEW CAL LOGO, INC.
NOTES TO FINANCIAL STATEMENTS
Lease Commitments
The Company leases warehouse and office facilities under an operating lease
requiring the Company to pay property taxes and utilities. In July 2004 this
building was purchased by a related party (a corporation controlled by the
officers) and the lease was re-written for 5 years. Lease expense is currently
$12,500 per month.
The lease obligation is shown below for the next five years.
Year 1 Year 2 Year 3 Year 4 Year 5
Office /warehouse lease $150,000 $150,000 $150,000 $150,000 $150,000
NOTE 5. Stockholders' Equity
The Company (post merger) is authorized to issue fifty million (50,000,000)
shares of common stock at par value of $0.001 and three hundred thousand
(300,000) shares of series A preferred stock at a par value of $0.001. The
preferred stock is convertible to common stock at one share of preferred for
every 100 shares of common. The preferred shares are only able to be converted
when the Company reaches $10,000,000 in sales for any fiscal year. As of August
31, 2004 there were 234,800 shares of preferred stock. The value was placed at
par. The conversion to common stock would be 23,480,000 shares. Based upon the
actual growth for the last two years, the $10,000,000 in sales will not be
reached within five years. Therefore, these shares are not considered in
calculating the loss per share.
At the time of the merger 45,000 shares of preferred stock and 1,500,000 shares
of common stock were issued at par value of each for services rendered in
connection with the merger for a total value of $1,545.
In May 2005 the Company purchased for a $100,000 note payable and 33,334 shares
of restricted common stock (valued at $12,283) various pieces of sewing
equipment.
As of 31 May 2005 the Company had received from investors $36,000 in investment
funds for which restricted common shares will be issued. The exact number of
shares has not yet been determined.
NOTE 6. Interest Expense
Interest expense for the years ended August 31, 2005, 2004 and 2003 was $77,923,
$78,899 and $106,371, respectively.
NOTE 7. Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of
an asset and liability approach in accounting for income taxes. Deferred tax
assets and liabilities are recorded based on the differences between the
financial statement and tax bases of assets and liabilities and the tax rates in
effect when these differences are expected to reverse.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. In the
Company's opinion, it is uncertain whether they will generate sufficient taxable
income in the future to fully utilize the net deferred tax asset. Accordingly, a
valuation allowance equal to the deferred tax asset has been recorded. The total
deferred tax asset is calculated by multiplying a 15% estimated tax rate by the
items making up the deferred tax account. For the Company only the Net Operating
Loss (NOL) was available for a tax asset.
12
SEW CAL LOGO, INC.
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes is comprised of the net changes in deferred taxes
less the valuation account plus the current taxes payable.
At August 31, 2005, federal income tax net operating loss carry forwards
("NOL's") which were available to the Company were the following with the year
in which they expire.
Year (8/31) Amount Expires
1996 $ 2,104 2011
1997 9,265 2012
1998 26,317 2013
1999 21,074 2019
2000 50,619 2020
2001 21,675 2020
2002 319,424 2022
2003 86,861 2023
2005 102,685 2025
--------
Total $640,024
--------
Were the NOL tax asset to be recorded at 8/31/05 it would be a long-term asset
of $96,004. Continued profitability by the Company will be a major factor in the
valuation account being removed and the recording of this asset.
NOTE 8. Merger with Calvert
On February 24, 2004 the Company merged with Calvert Corporation, an inactive
Nevada Corporation. This was a recapitalization accounted for as a stock
exchange reverse acquisition with Calvert being the surviving legal entity and
Southern California becoming the surviving historical entity. Before the merger
Southern California had 100 shares of common stock issued and outstanding which
were owned by a single shareholder. As part of the merger Calvert issued to this
shareholder 189,800 shares of series A preferred stock and 3,000,000 shares of
common stock in exchange for all the shares (100) of Southern California. These
share totals have been retroactively applied to previous years.
As part of the merger 45,000 shares of preferred stock and 1,500,000 shares of
common stock were issued for services rendered. A value of $1,545 was placed
upon these shares.
Calvert had a zero book value prior to the merger and is shown as the acquired
company on the statement of stockholders' equity with 520,000 shares outstanding
prior to the merger.
After the completion of the merger the Company had 5,020,000 shares of common
stock and 234,800 shares of series A preferred stock.
NOTE 9. THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Below is a listing of the most recent accounting standards and their effect on
the Company.
13
SEW CAL LOGO, INC.
NOTES TO FINANCIAL STATEMENTS
Statement No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (Issued 5/03)
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity.
Statement No. 151 Inventory Costs-an amendment of ARB No. 43, Chapter 4 (Issued
11/04)
This statement 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). Paragraph 5 of ARB 43,
Chapter 4, previously stated that "...under some circumstances, items such as
idle facility expense, excessive spoilage, double freight and re-handling costs
may be so abnormal ass to require treatment as current period charges...." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities.
Statement No. 152 Accounting for Real Estate Time-Sharing Transactions (an
amendment of FASB Statements No. 66 and 67)
This Statement amends FASB Statement No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions.
This Statement also amends FASB Statement No. 67, Accounting for Costs and
Initial Rental Operations of Real Estate Projects, states that the guidance for
(a) incidental operations and (b) costs incurred to sell real estate projects
does not apply to real estate time-sharing transactions. The accounting for
those operations and costs is subject to the guidance in SOP 04-2.
Statement No. 153 Exchanges of Non-monetary Assets (an amendment of APB Opinion
No. 29)
The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is
based on the principle that exchanges of non-monetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, includes certain exceptions to the principle. This Statement amends
Opinion 29 to eliminate the exception for non-monetary exchanges of similar
productive assts and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
Statement No. 154 - Accounting Changes and Error Corrections (a replacement of
APB Opinion No. 20 and FASB Statement No. 3)
This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
The adoption of these new Statements is not expected to have a material effect
on the Company's current financial position,
results or operations, or cash flows.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This analysis should be read in conjunction with the condensed consolidated
financial statements, the notes thereto, and the financial statements and notes
thereto included in the Company's Registration Statement on Form SB-2, as
amended, initially filed on March 20, 2004. All non-historical information
contained in this annual report is a forward-looking statement. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause the actual results to differ materially from
those reflected in the forward-looking statements.
Results of Operations
Total revenue was $654,657 for the quarter ended November 30, 2005 as compared
to $521,591 for the quarter ended November 30, 2004, a net increase of $133,066.
The net increase is primarily due to the addition of new customers. Officer and
Administrative Compensation was $55,985 for the quarter ended November 30, 2005
as compared to $60,622 for the quarter ended November 30, 2004, a net decrease
of $4,664. The net decrease is due to the elimination of one administrative
staff person. Total Assets were $898,359 at November 30, 2005 as compared to
$890,552 at November 30, 2004, a net increase of $7,807. The net increase was
primarily due to the addition of equipment used in our continuing operation
along with increased receivables offsetting a slight reduction of cash and
inventory on hand.
Plan of Operation
Expansion and growth of present operations continues as our primary objective
during the next two quarters of the coming year. In addition, the Company has
acquired rights to PIPELINE POSSE(TM), a recognized brand in the world of surf
and sports wear. We intend to begin manufacturing, selling and distributing our
own line of surf wear under this new logo and to promote this line of goods in
appropriate trade journals.
Private Labeling
Domestic headwear suppliers have been drastically reduced as a result of
increased lower pieced imports. Suppliers remaining in this business each have
their own niche in the market place. Few remain in California and our customer
base is increasing somewhat with this reduced competition. There are U.S.
suppliers located in the Midwest and on the East Coast. They seldom manufacture
for our market and deal mainly in the golf, major league baseball and ad
specialty-type businesses.
Overseas suppliers are a different situation. They can produce a cap at a
fraction of the price we can and we are constantly in competition with them.
They can copy all that we create, but if they are asked to create on their own,
they may fall short, as our industry is constantly changing by way of fabrics,
styles, and method of decorating. Overseas suppliers are in the business of mass
production for export. Our current customers use overseas suppliers for some of
their "bread and butter" styles but tend to use U.S. suppliers for the more
cutting edge products. However, overseas manufacturers require considerably more
time in creating new products because of their inability to provide face-to-face
contact with designers and domestic customers. They also require greater lead
times for shipping and cannot make changes overnight (literally) when required.
The logistics also may not allow them to be immediately aware of developing
trends, forecasting them, and then developing an appropriate finished product
instantly.
15
At present, the youth oriented "action sports" lifestyle-clothing market
(surf/skate/snow) is led by labels such as "Quiksilver" of Huntington Beach,
California, representing in excess of $1 billion in annual sales. Also, "O'Neill
Sportswear", "Rip Curl", "Lost", "Billabong", "Volcom", and numerous other
Orange County, California-based clothing companies service this market and can
be considered competition for our new brands. We believe that teens and young
adults are looking for something new and trendy to identify with, purchase, and
wear.
Although we believe we now have the experience and resources to take advantage
of and fulfill the needs of this market and we have already made significant
steps towards doing so, the youth, active and sports apparel industry is highly
competitive, with many of our competitors having greater name recognition and
resources than we do. Many of our competitors are well established, have
longer-standing relationships with customers and suppliers, greater name
recognition and greater financial, technical and marketing resources. As a
result, these competitors may be able to respond more quickly and effectively
than we can to new or changing opportunities or customer requirements. Existing
or future competitors may develop or offer products that provide price, service,
number or other advantages over those we intend to offer. If we fail to compete
successfully against current or future competitors with respect to these or
other factors, our business, financial condition, and results of operations may
be materially and adversely affected.
We currently have no market share data available for competition in these areas.
We work on each job through personal contacts and are frequently the only
company contacted for the particular project.
We do not depend on any one or a few major customers.
Patents, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor
Contracts
We recently applied to the USTPO for the trademark "Pipeline Posse". We will
continue to assess the need for any copyright, trademark or patent applications
on an ongoing basis.
Film Wardrobe & Entertainment Related Business
To increase our film wardrobe and related entertainment business, we intend to
add two (2) to three (3) sales and customer service representatives (in-house
and outside) to assist us in meeting our current forecasts for the first six (6)
months of fiscal 2006.
We also intend to produce more wardrobe, patches etc. for the major costume
houses (Western Costume Company, MPCC, Motion Picture Costume Co., Eastern
Costume Co.). We will also continue our existing strategy of marketing directly
to movie and television productions before they begin filming locally and send
units out of town on location. We intend to accomplish this with visits to the
studios daily, printed material, and a professionally developed e-mail campaign
to the production offices when they first set-up for a newly approved feature
film or television show.
As the area of entertainment wardrobe is such a specialized and limited field,
management is unaware of any other companies that do exactly what we do in this
area. Small local companies do quick embroidery jobs from time to time when
production companies are on location and need something immediately, and
occasionally a costumer will use a local shop for some patches. Because of our
longtime experience, personal relationships, skill, and success in mastering
this specialized work, significant competition has not developed. Thus, there is
no accurate data currently available to determine our approximate market share.
16
Corporate Sales
Corporate clients currently account for less than ten percent (10%) of our
business. We intend to focus on growing this area of our business over the next
two (2) years by the addition of new in-house salespeople. Also, the addition of
the new silk screening equipment will give us the capability to accept and
produce large orders of promotional t-shirts and related items for corporate
programs that we are currently unable to produce. The new salespeople will
solicit this business to our existing client base via telephone and Internet as
well as to potential new customers through the same means as well as some print
advertising via mailing and placement in trade publications. Additional labor
will be hired to operate the new equipment as needed with second and third
manufacturing shifts added as growth requires. We intend to add two or three
in-house clerical persons to service new inquiries and added accounts, as well
as ordering finished goods for embellishment and shipping. Current production
capacity is adequate to handle the added volume.
Development of the California Driven Product Lines
We have identified and developed an opportunity to export the California life
style to the rest of America and to the worldwide markets in general. Started as
an idea born in San Clemente, California, home of the premier surfing beaches in
the world, we have created a number of California Driven brands of products.
Under the California Driven umbrella, several lines are being developed with
specific target markets in mind. Currently, no California Driven products are
being produced or distributed by us and they do not represent any of our current
overall revenue. The California Driven brand lines are being developed in
anticipation of expansion of Sew Cal into our own line of products to market and
sell.
The first identified brand line is Pipeline Posse(TM). Three trademarks were
applied for on September 15, 2005. We have completed initial design of a line of
surf wear under the Pipeline Posse(TM) logo and have manufactured a limited
amount of goods to begin a sales and marketing campaign. The exclusive rights
and ownership of Pipeline Posse(TM) was acquired on August 15, 2005 from Braden
Dias. Mr. Dias is a world renown surfer and is under agreement with Sew Cal to
represent the Company as a professional athlete in the development of Surf and
Sportswear lines.
Until such time as we acquire additional funds, we will continue to operate our
current business and will not institute use of these product lines. Our
projections for the need for an additional 1 million to 3 million dollars to
open the new market is based on the following factors: a) that we have
successfully raised such funds on terms acceptable to us, b) that we have been
successful in protecting the new brand lines through trademark or other legal
means, and c) that appropriate markets and advertising programs have been
contracted and/or put in place.
17
FORWARD LOOKING STATEMENTS
This Form 10-QSB includes "forward looking statements" concerning the future
operations of the Company. This statement is for the express purpose of availing
the Company of the protections of such safe harbor with respect to all "forward
looking statements" contained in this Form 10-QSB. We have used "forward looking
statements" to discuss future plans and strategies of the Company. Management's
ability to predict results or the effect of future plans is inherently
uncertain. Factors that could affect results include, without limitation,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions, acceptance, technological change, changes in industry practices
and one-time events. These factors should be considered when evaluating the
"forward looking statements" and undue reliance should not be placed on such
statements. Should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein.
ITEM 3. CONTROLS AND PROCEDURES
As the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange
Act")). Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclose controls and procedures
as of the end of the fiscal quarter covered by this Quarterly Report on Form
10-QSB are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Management of the Company
has also evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer of the Company, any change in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the fiscal quarter covered by this
Quarterly Report on Form 10-QSB. There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting. However, due to
the limited number of Company employees engaged in the authorization, recording,
processing and reporting of transactions, there is inherently a lack of
segregation of duties. The Company periodically assesses the cost versus benefit
of adding the resources that would remedy or mitigate this situation and
currently, does not consider the benefits to outweigh the costs of adding
additional staff in light of the limited number of transactions related to the
Company's operations.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit # Description
- --------- -----------
31.1 Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEW CAL LOGO, INC.
Date: January 13, 2006 By: /s/ Richard Songer
------------------------------------
Richard Songer
President, Director and Chief
Executive Officer
By: /s/ Judy Songer
------------------------------------
Judy Songer
Director and Chief
Financial Officer
19