UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended November 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number:
SEW CAL LOGO, INC.
(Exact name of Registrant as specified in charter)
Nevada 46-0495298
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
207 W. 138th Street, Los Angeles, California 90061
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 352-3300
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] 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, 2006, there were
12,074,036 shares of the registrant's Common Stock outstanding and 234,800
shares of Series A Preferred Stock outstanding.
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 most recent registration statement
on Form SB-2 as amended.
MOORE & ASSOCIATES, CHARTERED
ACCOUNTANTS AND ADVISORS
PCAOB REGISTERED
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Sew Cal Logo, Inc.
We have reviewed the accompanying balance sheet of Sew Cal Logo as of November
30, 2006, and the related statements of operations, retained earnings, and cash
flows for the three months then ended, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). All information
included in these financial statements is the representation of the management
of Sew Cal Logo, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, 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 financial statements in order for them to be in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in the notes to the
financial statements, the Company has accumulated a loss during the last five
years of operations. This raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
/s/ Moore & Associates, Chartered
Moore & Associates, Chartered
Las Vegas, Nevada
January 11, 2007
2675 S. JONES BLVD. SUITE 109, LAS VEGAS, NEVADA 89146
(702) 253-7511 Fax: (702)253-7501
F-1
SEW CAL LOGO, INC.
BALANCE SHEETS
--------------
(Unaudited)
August 31,
November 30, 2006
2006 (Audited)
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 656,345 $ 988,251
Accounts Receivable, net 235,405 261,515
Inventory 126,759 124,049
Prepaid Expenses 7,516 4,219
----------- -----------
Total current assets 1,026,025 1,378,034
----------- -----------
Equipment and machinery, net 284,166 290,058
Other assets -- --
----------- -----------
Total assets $ 1,310,191 $ 1,668,092
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 18,606 $ 39,226
Note Payable-shareholder 347,884 347,884
Other current liabilities 47,852 115,463
Current Poriton of Long Term Debt 262,374 285,764
----------- -----------
Total current liabilities 676,716 788,337
Long-term liabilities
Note Payable-related party 62,112 77,298
Convertible Debentures 2,369,362 2,421,969
Discount on Convertible Debentures (474,245) (485,014)
Equipment Loans 25,853 28,070
----------- -----------
Total liabilities 2,659,798 2,830,660
----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, authorized 300,000 shares,
Par value $0.001, issued and outstanding at
30-Nov-06 and 31-Aug-06 is 234,800 shares
respectively 235 235
Common stock, authorized 500,000,000 shares,
$0.001 par value, issued and outstanding at
30-Nov-06 and 31-Aug-06 is 12,074,036 and
5,549,502 shares respectively 12,074 5,549
Paid in Capital 872,925 746,008
Stock Subscribed -- 36,000
Retained Earnings(Deficit) (2,234,841) (1,950,360)
----------- -----------
Total stockholders' equity (deficit) (1,349,607) (1,162,568)
----------- -----------
Total liabilities and stockholders' equity $ 1,310,191 $ 1,668,092
=========== ===========
All assets are pledged as collateral for the SBA and shareholder loans
The accompanying notes are an
integral part of these financial statements.
F-2
SEW CAL LOGO, INC.
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
Three Months Ended
November 30
---------------------------
2006 2005
----------- -----------
Revenue:
Sales of Caps, Embroidery and Other $ 566,033 $ 654,657
----------- -----------
Total Revenue 566,033 654,657
Cost of Goods Sold 455,882 580,445
----------- -----------
Gross profit 110,151 74,212
----------- -----------
Expenses:
General and Administrative 102,446 48,357
Officer and Administrative Compensation 106,843 55,985
Consulting, Legal and Accounting 54,872 12,713
Depreciation 20,892 20,357
Rent 80,000 15,000
Interest Expense 29,580 23,355
----------- -----------
Total expenses 394,633 175,767
----------- -----------
Income (loss) before income taxes (284,482) (101,555)
----------- -----------
Provision for income taxes -- --
----------- -----------
Net income (loss) $ (284,482) $ (101,555)
=========== ===========
Basic and Diluted Earnings (Loss) per Share $ (0.05) $ (0.02)
----------- -----------
Weighted Average Number of Common Shares 5,307,438 5,176,000
----------- -----------
The accompanying notes are an
integral part of these financial statements.
F-3
SEW CAL LOGO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
(Unaudited)
Preferred Stock Common Stock
-------------------------- ------------------------- Paid in
Shares Amount Shares Amount Capital
----------- ----------- ----------- ----------- -----------
Balance, August 31, 2002 189,800 $ 190 3,000,000 $ 3,000 $ 1,810
Contributed Officer Services 60,000
Net (Loss) for the year
----------- ----------- ----------- ----------- -----------
Balance, August 31, 2003 189,800 190 3,000,000 3,000 61,810
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
Net Income for the year
----------- ----------- ----------- ----------- -----------
Balance, August 31, 2004 234,800 235 5,020,000 5,020 61,290
Equipment Purchase 33,334 33 114,067
Shares issued for Services
at $0.10 per share 122,834 123 12,160
Stock Subscribed
Net Income (Loss) for year
----------- ----------- ----------- ----------- -----------
Balance, August 31, 2005 234,800 235 5,176,168 5,176 187,517
Shares issued for Services
at $0.15 per share 50,000 50 7,450
Discount on Convertible Debentures 515,000
Shares issued for Services
at $0.10 per share 33,334 33 3,300
Shares issued for Conversion of Debt 290,000 290 32,741
Net Income (Loss) for period
----------- ----------- ----------- ----------- -----------
Balance, August 31, 2006 234,800 235 5,549,502 5,549 746,008
Common Stock Issued for Cash 61,000 61 60,939
Shares issued for Services 683,534 684 19,151
Shares issued for Conversion of Debt 5,780,000 5,780 46,827
Net Income (Loss) for period
----------- ----------- ----------- ----------- -----------
Balance, November 30, 2006 234,800 $ 235 12,074,036 $ 12,074 $ 872,925
=========== =========== =========== =========== ===========
Retained Total
Stock Earnings Stockholders'
Subscribed (Deficit) Equity
---------- ----------- -----------
Balance, August 31, 2002 $ -- $ (573,885) $ (568,885)
Contributed Officer Services 60,000
Net (Loss) for the year (45,381) (45,381)
------- ----------- -----------
Balance, August 31, 2003 (619,266) (554,266)
Recapitalization 2/24/04
Shares issued at par value
Shares issued for services at par 1,545
Net Income for the year 50,818 50,818
------- ----------- -----------
Balance, August 31, 2004 (568,448) (501,903)
Equipment Purchase 114,100
Shares issued for Services
at $0.10 per share 12,283
Stock Subscribed 36,000 36,000
Net Income (Loss) for year (105,366) (105,366)
------- ----------- -----------
Balance, August 31, 2005 36,000 (673,814) (444,886)
Shares issued for Services
at $0.15 per share 7,500
Discount on Convertible Debentures 515,000
Shares issued for Services
at $0.10 per share 3,333
Shares issued for Conversion of Debt 33,031
Net Income (Loss) for period (1,276,545) (1,276,545)
------- ----------- -----------
Balance, August 31, 2006 36,000 (1,950,359) (1,162,567)
Common Stock Issued for Cash (36,000) 25,000
Shares issued for Services 19,835
Shares issued for Conversion of Debt 52,607
Net Income (Loss) for period (284,482) (284,482)
------- ----------- -----------
Balance, November 30, 2006 $ -- $(2,234,841) $(1,349,607)
======= =========== ===========
The accompanying notes are an
integral part of these financial statements.
F-4
SEW CAL LOGO, INC.
Statements of Cash Flows
------------------------
(Unaudited)
Three Months Ended
November 30,
----------------------------------
2006 2005
--------- ---------
Operating Activities:
Net income (loss) $(284,482) $(101,555)
Depreciation 20,892 20,358
Stock issued for services 19,835 --
Amortization of Discount on Debentures 10,769 --
Stock issued in conversion of debt 52,607 --
Adjustments to reconcile net income (loss)
(Increase) decrease in prepaid Expenses (3,297) 697
(Increase) decrease in inventory (2,710) 14,290
(Increase) decrease in other assets -- --
(Increase) decrease in accounts
receivable 26,110 (97,984)
Increase (decrease) in accounts payable (20,620) 16,089
Increase (decrease) in other current
liabilities (91,001) 141,677
--------- ---------
--
Net cash provided by (used in)
operating activities (271,897) (6,428)
--------- ---------
Investing Activities:
Purchases/disposals of equipment (15,000) --
--------- ---------
Cash (used) in investing activities (15,000) --
--------- ---------
Financing Activities:
Notes Payable (15,186) (40,616)
Debentures Payable (52,607) --
Stock Sales 25,000 --
Increase/(Decrease) in shareholder loan -- (4,485)
Repayment of equipment loan (2,217) (3,303)
--------- ---------
Net cash provided by (used in)
financing activities (45,010) (48,404)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (331,907) (54,832)
Cash and cash equivalents at beginning of the year 988,251 56,865
--------- ---------
Cash and cash equivalents at end of the year $ 656,344 $ 2,033
========= =========
Supplemental Information
Interest $ 29,580 $ 23,355
Taxes $ -- $ --
The accompanying notes are an
integral part of these financial statements.
F-5
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
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.
30-Nov-06 31-Aug-06
Gross Trade Accounts Receivable $236,665 $262,765
Allowance for Doubtful Accounts (1,250) (1,250)
-------- --------
Accounts Receivable, net $235,405 $261,515
======== ========
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.
F-6
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
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.
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.
30-Nov-06 31-Aug-06
--------- ---------
Raw Materials and WIP $126,759 $124,049
Finished Goods 0 0
--------- ---------
Total Inventory $126,759 $124,049
========= =========
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, 2006, and 2005 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 May 31, 2006
and August 31, 2005 equipment and machinery consisted of the following:
30-Nov-06 31-Aug-06
--------- ---------
Equipment and Machinery $983,644 $968,644
Less:
Accumulated depreciation 699,478 678,856
--------- ---------
$284,166 $290,058
========= =========
Fiscal Year
The Company operates on a fiscal year basis with a year ending August 31.
F-7
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
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. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the liquidation of liabilities in the normal course of business.
However, the Company has accumulated a loss during the last five years of
operations. This raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
Managements Plan
Management continues to seek funding from its shareholders and other qualified
investors to pursue its business plan. It is in the process of expanding its
sales and distribution capability.
NOTE 3. Accounts Payable and Other Current Liabilities
As of the period ends shown, accounts payable and accrued liabilities consisted
of the following:
30-Nov-06 31-Aug-06
--------- ---------
Trade accounts payable $18,606 $ 39,266
======= ========
Sales tax payable 4,122 4,896
Short Term Loan - Related Party
Payroll Liabilities 2,801 71,177
Credit Card Debt 15,299 15,299
Revolving bank line of credit (Prime +
3.8 %, interest only) 24,091 24,091
Revolving bank line of credit (prime +
3.8750 % Interest only, reviewed yearly) 0.00
------- --------
$47,852 $115,463
======= ========
F-8
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
NOTE 4. 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.
Balance at November 30, 2006 is $347,884.
NOTE 5. 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.
On August 11, 2004 the Company refinanced this SBA loan with Pacific Liberty
Bank. As of November 30, 2006 the balance was $262,374. 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, 2006, 2006 was $13,266. This vehicle note
was obtained by GMAC under special financing and carries no interest.
The Company has a second installment loan with GMAC on a vehicle with a balance
as of November 30, 2006 of $12,587.
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
F-9
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
Callable Convertible Debentures
On February 16, 2006 the Company executed an equity financing agreement wherein
it will issue an aggregate of $2,000,000 callable convertible debentures in
three segments. The Company has received a net of $1,955,000. The debentures are
convertible to common stock at 45% below the lowest three intra-day trading
price during the 20 trading days immediately preceding conversion. The
Debentures also carry five-year warrants exercisable at $0.50 per share. The
aggregate number of warrants to be issued is 2,142,855.
Because the current stock price is well below the exercisable price of the
warrants, they are considered "out of the money" and no discount has been
recorded.
The Company has recorded a discount on the convertible debentures of $315,000.
During the period ended May 31, 2006 the Company has converted $33,031 debt into
stock and expensed $14,985 of the recorded discount as interest expense. The
company will amortize the remaining discount over the life of the debentures.
On July 31, 2006 the Company executed an equity financing agreement wherein it
has issued $500,000 in callable convertible debentures and 20,000,000 seven year
warrants exercisable at $0.05 per share. The debentures are convertible to
common stock at 40% below the lowest three intra-day trading price during the 20
trading days immediately preceding conversion. The aggregate number of shares to
possibly be issued at 100% conversion is 69,444,444 shares. Calculated using a
current 3 day trading average price per share of $0.012 per share less 40% is
$0.0072 per share divided into $500,000 equals 69,444,444 shares. Because the
current stock price is well below the exercisable price of the warrants, they
are considered "out of the money" and no discount has been recorded. The Company
has recorded a discount on the convertible debentures of $200,000 which
represents the 40% discount and will be amortized to interest expense over the
life of the debentures.
NOTE 6. Stockholders' Equity
Preferred Stock
The Company (post merger) is authorized to issue 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 can only 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.
F-10
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
Common Stock
On August 25, 2006 the Company's authorization to issued common stock was
increased from 50,000,000 shares to 500,000,000 shares at par value of $0.001
As of August 31, 2004 (post merger) the Company had 5,020,000 common shares
issued and outstanding.
In May 2005 the Company purchased equipment valued at $114,100 for 33,334 common
share and issued 122,834 common shares for services valued at $12,283.
On January 6, 2006 the Company issued 50,000 common shares for services valued
at $7,500.
On February 16, 2006 the company entered into a securities purchase agreement
for a total subscription amount of $2,000,000 that includes stock purchase
warrants and callable convertible debentures. A discount on convertible
debentures was recorded against additional paid in capital of $315,000 which
will be amortized over the life of the debentures. The total subscription
includes an aggregate of 2,142,858 five-year warrants exercisable for the same
number of common shares at $0.50 per share. An aggregate of 25,974,026 common
shares have been registered and are available for issue to potentially convert
the full $2,000,000.
On July 31, 2006 the company issued $500,000 in convertible debentures at a 40%
discount. A discount on convertible debentures was recorded against additional
paid in capital of $333,333 which will be amortized over the life of the
debentures. Common stock registered to convert the full $500,000 was calculated
at 69,444,444 shares using the current three day average price per share of
$0.012 less a 40% discount.
On May 31, 2006 the Company issued 290,000 common shares by converting $33,031
of debenture debt and issued 33,334 common shares for consulting services valued
at $3,333.
The Company converted $52,607 debt into 5,780,000 common shares during the
period ended November 30, 2006.
The Company issued 61,000 common shares for cash of $25,000 and the subscription
deposit of $36,000 received in May 2005 in a private placement.
The Company issued 683,534 common shares for services valued at $19,835.
F-11
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
Warrants
With the $1,955,000 worth of convertible debentures described above 2,000,000
five-year warrants for commons stock exercisable at $0.50 per share were issued
and with the $500,000 convertible debentures 20,000,000 seven-year warrants for
common shares exercisable at $0.05 per share were issued. Both exercisable
prices are "out of the money" therefore no discount has been recorded.
NOTE 7. Interest Expense
Interest expense for the years ended August 31, 2006 and 2005 is $126,810 and
$77,923 respectively.
NOTE 8. 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.
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, 2006, 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 45,381 2023
2005 105,366 2025
2006 1,276,546 2026
----------
Total $1,877,771
==========
F-12
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
Were the NOL tax asset to be recorded at August 31, 2006 it would be a long-term
asset of $281,666. Continued profitability by the Company will be a major factor
in the valuation account being removed and the recording of this asset.
NOTE 9. 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 that
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 10. The Effect Of Recently Issued Accounting Standards
Below is a listing of the most recent accounting standards SFAS 150-154 and
their effect on the Company.
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.
F-13
SEW CAL LOGO, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(November 30, 2006 and August 31, 2006)
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.
F-14
MOORE & ASSOCIATES, CHARTERED
ACCOUNTANTS AND ADVISORS
PCAOB REGISTERED
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Sew Cal Logo, Inc.
We have reviewed the accompanying balance sheet of Sew Cal Logo as of November
30, 2006, and the related statements of operations, retained earnings, and cash
flows for the three months then ended, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). All information
included in these financial statements is the representation of the management
of Sew Cal Logo, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, 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 financial statements in order for them to be in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in the notes to the
financial statements, the Company has accumulated a loss during the last five
years of operations. This raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
/s/ Moore & Associates, Chartered
Moore & Associates, Chartered
Las Vegas, Nevada
January 11, 2007
2675 S. JONES BLVD. SUITE 109, LAS VEGAS, NEVADA 89146
(702) 253-7511 Fax: (702)253-7501
F-15
SEW CAL LOGO, INC.
BALANCE SHEETS
Results of Operations
Total revenue was $566,033 for the quarter ended November 30, 2006 as compared
to $654,657for the quarter ended November 30, 2005, a net decrease of $88,624.
The net decrease is primarily due to loss of private label business as the
market for headwear manufacturing continued moving to Chinese imports. Officer
and Administrative Compensation was $106,343 for the quarter ended November 30,
2006 as compared to $55,985 for the quarter ended November 30, 2005, a net
increase of $50,358. The net increase is due to the addition of administrative
staff and scheduled increases in officer compensation. Total Assets were
$1,310,191 at November 30, 2006 as compared to $1,668,092 at August 31, 2006, a
net decrease of $357,901. The net decrease was primarily due increased
investment, legal expenses, and advertising in development of our trademarks and
branding of our own apparel line.
Plan of Operation
In 2005 we acquired the rights to a branded line of Surf and Sports Wear items
named Pipeline Posse. We have developed the necessary relationships, executed
exclusive marketing and advertising programs with some of the top names in the
Surfing World, designed an initial line of related surf and sports clothing,
created and activated an on-line retail store for Pipeline Posse, and are
planning an early 2007 launch of these products into selected retail stores. We
are currently in the process of developing our comprehensive business plan to
include branded equipment, film and television projects, sports equipment and
accessories, as well as brand endorsement for several major categories of
products related to the action sports and youth markets.
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.
F-16
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" in several
categories. Each of our applications is active and currently under review for
approval by the USPTO examiners We will continue to assess the need for any
copyright, trademark or patent applications on an ongoing basis.
Film Wardrobe & Entertainment Related Business
Film wardrobe and related business remains slow as productions continue to be
produced outside the United States. This holds true for nearly all of the major
studios as well as independent filmmakers, causing the majority of the local
costume houses to downsize.
To counter this trend and help regain our lost dollar volume in this area we
will 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. Our strategy of dealing directly with producers, wardrobe
personnel, and talent is beginning to pay off with recent orders from major
films such as "Superman Returns" and the upcoming "American Gangster" starring
Denzel Washington and Russell Crowe.
Corporate Sales
While corporate clients currently account for less than fifteen percent (15%) of
our business, we continue to focus on growing this area of our business over the
next year with the addition of in-house salespeople. Also, the addition of new
silk screening equipment has given us the capability to accept and produce large
orders of promotional t-shirts and related items for corporate programs through
outside sales and advertising organizations. Our salespeople will further
solicit business to our existing client base via telephone and Internet as well
as to potential new customers through the same means as well as through print
advertising via mailing and placement in trade publications. Additional labor
has been hired to operate the new equipment as needed and second and third
manufacturing shifts can be added as growth requires. We have added two in-house
clerical persons to service new inquiries and added accounts, as well as order
finished goods for embellishment and shipping. Current production capacity is
adequate to handle the anticipated increased volume.
Development of new 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, several California Driven products
are being developed by us but they do not represent any significant amount of
our current overall revenue. The California Driven brand lines are being
developed as an expansion into our own line of products to market and sell. To
develop this market, capital of $2,500,000 in the form a convertible debenture
has been secured and is being budgeted to support both current operations and
develop our brands of apparel and related projects.
F-17
The first identified brand line is Pipeline Posse(TM). Three trademarks have
been applied for and are under active review for approval by the USPTO. We have
completed initial design of a line of surf wear under the Pipeline Posse(TM)
logo and have manufactured lifestyle oriented goods to begin a sales and
marketing campaign. The exclusive rights for Pipeline Posse(TM) were acquired on
August 15, 2005 from Braden Dias of Hawaii. Mr. Dias is a world renowned surfer
and is under agreement with us to represent Pipeline Posse as a professional
athlete in the development of Surf and Sportswear lines. In addition to Mr.
Dias, several additional professional Hawaiian surfers are currently under
agreement to represent the project and 3 support people have been hired, both in
Hawaii and California. Clothing design is being aggressively developed by both
in-house personnel and professional independent contractors experienced in
product development for the Action Sports Industry.
Contact with our target market has been initially established in several major
surf publications through personal interviews with our athletes as well as
editorials on The Pipeline Posse itself. Print and on-line advertising campaigns
have commenced in both industry related magazines and websites. We have also
published and activated PIPELINEPOSSE.COM, our website which features up to date
information on the athletes, activities, photo and video galleries, an active
news blog, related action sports links, and a fully developed online store. The
secure site and shopping capability has been recently activated to accept credit
cards and offer shipment of merchandise worldwide. A multi- faceted major
advertising and marketing campaign is being budgeted and developed for launch in
early 2007 and professional sales organizations are being interviewed and
considered for representation and distribution of the brand both domestically
and worldwide.
Additional Action Sport related brands are being considered and are in various
stages of development in regard to trademarks, competition, market potential,
and strategy and cost. Target dates for launch have not been yet established.
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.
Critical Accounting Policies
SewCal's financial statements and related public financial information are based
on the application of accounting principles generally accepted in the United
States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. These estimates can
also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We
believe our use if estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
Our significant accounting policies are summarized in Note 1 of our financial
statements. While all these significant accounting policies impact its financial
condition and results of operations, SewCal's views certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on SewCal's consolidated financial statements and
require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates. Our management believes that given
current facts and circumstances, it is unlikely that applying any other
reasonable judgments or estimate methodologies would cause effect on our
consolidated results of operations, financial position or liquidity for the
periods presented in this report. During the next twelve months, we expect to
take the following steps in connection with the further development of our
business and the implementation of our plan of operations:
Item 3. Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (Exchange Act), as of February 28, 2006. Based
on this evaluation, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and that our disclosure and controls are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls over financial
reporting that occurred during the first quarter of 2006/2007 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
F-18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SEW CAL LOGO, INC. v. BURT MARTIN ARNOLD SECURITIES, INC., ET AL. Superior Court
of California for the County of Los Angeles CASE NO. BC351248
In April, 2006 we filed suit against Burt Martin Arnold Securities ("BMA") for
breach of contract and return of deposit. BMA counter sued for a finder's fee.
The case has settled and is pending dismissal.
GRAPHIC PRINTS, INC. v. SEW CAL LOGO, INC. United States District Court for the
Central District of California CASE NO.: CV06-6427 JFW (PJWx)
In October Plaintiff Graphic Prints Inc. filed suit asserting infringement and
related causes of action with respect to its alleged trademarks. Sew Cal denies
that any such activities have taken place, disputes the validity of plaintiff's
purported trademarks and will vigorously defend the suit.
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
2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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
(b) REPORTS ON FORM 8-K
None
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.
Date: January 12, 2007 By: /s/ Richard Songer
---------------------------------
Richard Songer
President, Director and Chie
Executive Officer
By: /s/ Judy Songer
---------------------------------
Judy Songer
Director and Chief
Financial Officer
3