Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
(Amendment
No. 2)
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report (Date of Earliest Event Reported): December 23,
2009
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PANELTECH
INTERNATIONAL HOLDINGS, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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333-145211
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20-4748555
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(State
or Other Jurisdiction
of
Incorporation)
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(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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2999
John Stevens Way, Hoquiam, WA
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98550
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (360)
538-1480
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CHARLESTON
BASICS, INC.
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(Former
Name or Former Address, If Changed Since Last
Report)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
¨ Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
EXPLANATORY
NOTE
On
December 23, 2009, Paneltech International Holdings, Inc. (formerly known as
Charleston Basics, Inc.) (the “Registrant” or as context
requires the “Company”) and Paneltech
Products, Inc., a wholly owned subsidiary of the Registrant (“Paneltech Products”),
completed their acquisition of Paneltech International, L.L.C. (“Paneltech LLC”). Pursuant to
the terms of the acquisition, Paneltech LLC merged with and into Paneltech
Products, resulting in Paneltech LLC becoming a wholly owned subsidiary of the
Registrant (effective December 23, 2009).
This
Current Report on Form 8-K/A is being filed to (a) supplement information
reported in the Form 8-K previously filed by the Registrant with the Securities
and Exchange Commission on December 30, 2009 (the “Original 8-K”) disclosing the
completion of its acquisition of Paneltech LLC, which was first amended on
January 15, 2010 to include the financial statements required by Item 9.01(a) of
the Original 8-K and (b) to include the pro-forma financial statements required
by Item 9.01(b) of the Original 8-K.
PANELTECH
INTERNATIONAL HOLDINGS, INC.
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IITEM
1.01
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4
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IITEM
2.01
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7
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IITEM
2.03
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42
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IITEM
3.02
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42
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IITEM
3.03
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45
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IITEM
5.01
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46
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IITEM
5.02
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46
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IITEM
5.03
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48
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IITEM
8.01
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49
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IITEM
9.01
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50
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Current Report on Form 8-K/A (this “Current Report”) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). This Current Report includes statements regarding the
Company’s plans, goals, strategies, intent, beliefs or current
expectations. These statements are expressed in good faith and based
upon a reasonable basis when made, but there can be no assurance that these
expectations will be achieved or accomplished. These forward looking
statements can be identified by the use of terms and phrases such as “believe,”
“plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like,
and/or future-tense or conditional constructions (“will,” “may,” “could,”
“should,” etc.). Items contemplating or making assumptions about,
actual or potential future sales, market size, collaborations, and trends or
operating results also constitute such forward-looking statements.
Although
forward-looking statements in this Current Report reflect the good faith
judgment of management, forward-looking statements are inherently subject to
known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed in
these forward-looking statements. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Current Report. We assume no obligation to update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this report, other than as may be required by
applicable law or regulation. Readers are urged to carefully review
and consider the various disclosures made by us in our reports filed with the
Securities and Exchange Commission (the “SEC”) which attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition, results of operation and cash flows. If one or
more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, our actual results may vary materially from those
expected or projected.
In
this Current Report, unless the context otherwise requires:
(a) all
references to the “Company” refers to (i) prior to the consummation of the
transactions contemplated by the Agreement and Plan of Merger referred to below,
Paneltech International, L.L.C. and (ii) on and after the consummation of the
transactions contemplated by the Agreement and Plan of Merger referred to below,
Paneltech International Holdings, Inc.
(c)
all references to “we,” “us,” and “our” refers to the Company.
(b)
all references to “Registrant” refers to (i) prior to the consummation of the
transactions contemplated by the Agreement and Plan of Merger referred to below,
Charleston Basics, Inc. and (ii) on and after the consummation of the
transactions contemplated by the Agreement and Plan of Merger referred to below,
Paneltech International Holdings, Inc.
ITEM 1.01 ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT
Agreement
and Plan of Merger
On
December 23, 2009, Paneltech International Holdings, Inc. (formerly known as
Charleston Basics, Inc.) (the “Registrant” or as context
requires the “Company”) entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with
Paneltech International, L.L.C., a Washington limited liability company (“Paneltech LLC” or as context
requires the “Company”)
and Paneltech Products, Inc., a Delaware corporation and wholly-owned
subsidiary of the Registrant (“Paneltech Products”) pursuant
to which Paneltech LLC merged with and into Paneltech Products (the “Merger”).
Under the terms of
the Merger Agreement, upon consummation of the Merger, each Paneltech LLC
membership interest outstanding immediately prior to the closing was converted
into the right to receive 4,597.53254 shares of the Registrant’s common stock,
and accordingly the Registrant issued an aggregate of 61,759,852 shares of the
Registrant’s common stock, par value $0.0001 (the
“Common Stock”) to the members
of Paneltech LLC. As a result of the transaction, the former members
of Paneltech LLC owned approximately 90.4% of the outstanding Common Stock of
the Registrant (before adjusting for any conversion or exercise of any preferred
stock or warrants into Common Stock of the Registrant or consummation of the
transactions described below in this Item 1.01) under the headings “Securities Purchase
Agreement,” “Stock
Repurchase Agreement - Collins Repurchase,” and “Asset Purchase
Agreement”). Prior to the closing of the Merger, Paragon
Capital LP (“Paragon” or
“Lead Investor”) held
approximately 96.28% of the issued and outstanding Common Stock of the
Registrant.
Each
holder of a share of Common Stock of the Registrant is entitled to one vote per
share. The shares of the Registrant’s Common Stock issued to
Paneltech LLC’s members as part of the Merger were not registered under the
Securities Act. These shares may not be sold or offered for sale
except as permitted under Rule 144 or another exception promulgated under
the Securities Act.
In
connection with the Merger Agreement, the Registrant entered into lock up
agreements with each of the former members of Paneltech LLC, covering 47,987,302
shares of its Common Stock. The lock up agreements did not apply to
shares purchased pursuant to the Collins Repurchase (as described
below).
Prior to
the Merger, the Registrant was engaged in the sale of outdoor camping goods,
survival products and tactical gear. As described below, following
the Merger the Registrant sold all of its pre-Merger assets relating to this
business and accordingly, the Registrant’s business now consists primarily of
the design and manufacture of wood panel overlays and saturated media
solutions. The Registrant is now headquartered in Hoquiam,
Washington.
Immediately
following the Merger, the Company entered into the Securities Purchase
Agreement, Collins Repurchase and Asset Purchase Agreement (each described below
in this Item 1.01), followed by entry into a second Securities Purchase
Agreement with one additional Investor on December 30, 2009, which was on
substantially the same terms as the first Securities Purchase
Agreement. As a result of the Merger and consummation of the
transactions contemplated by the Securities Purchase Agreements, Collins
Repurchase and Asset Purchase Agreement noted above and described in this
Current Report, the former members of Paneltech LLC now own approximately 69% of
the Registrant’s issued and outstanding Common Stock, assuming the conversion of
all 2,999,205 outstanding shares of Series A Preferred Stock into Common Stock,
but without taking into account any exercise of Warrants.
The
foregoing description of the Merger Agreement does not purport to be complete
and is qualified in its entirety by reference to the full text of the Merger
Agreement, which is attached as Exhibit 2.1
hereto.
Securities
Purchase Agreement
On
December 23, 2009, immediately following consummation of the Merger, the
Registrant entered into a Securities Purchase Agreement (the “Securities Purchase
Agreement”) with two investors (the “Investors”) and raised an
aggregate of $1.5 Million in an offering of the Company’s Series A Convertible
Preferred Stock, par value $0.0001 (the “Series A Preferred Stock”) and
warrants to purchase Common Stock (the “Warrants”). Under
the terms of the Securities Purchase Agreement, the Registrant issued an
aggregate of 2,726,550 shares of Series A Preferred Stock and granted an
aggregate of 4,544,250 Warrants for an aggregate purchase price of $1.5
Million. Under the conversion ratio at the closing of the Securities
Purchase Agreement, each share of Series A Preferred Stock is convertible into
five shares of Common Stock. Each Warrant has an exercise price of
$0.12 per share of Common Stock which is subject to adjustment. The
Warrants may be redeemed under certain circumstances. The $1.5
Million raised by the Company, as described above, was part of an offering by
the Registrant pursuant to which it attempted to raise an aggregate of $3.0
Million (the “Offering”)
on or before January 22, 2010.
Of the
$1.5 million of proceeds raised, $375,000 was used to buy back certain shares
held by Collins Timber Company LLC (“Collins”), a former member of
Paneltech LLC. The Company also issued a Promissory Note in the
amount of $375,000, which amount is subject to adjustment, to complete the
purchase of shares from Collins. The repurchase of shares from
Collins is further described below under the heading “Stock Repurchase Agreement - Collins
Repurchase”.
The
securities offered in the Offering will not be or have not been registered under
the Securities Act, as amended and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.” This Current Report is neither an offer to sell nor a
solicitation to buy any of their securities. This Current Report is
being filed pursuant to and in accordance with Rule 135(c) under the Securities
Act.
In order
to evidence the rights of holders of the Series A Preferred Stock,
the Registrant and Investors entered into the Investor Rights Agreement
described below, and the Registrant filed a Certificate Of Designations,
Preferences And Other Rights And Qualifications Of Series A Convertible
Preferred Stock described below in Item 8.01.
As
previously reported on the current report on Form 8-K filed January 6, 2010, the
Company entered into a second Securities Purchase Agreement on December 30, 2009
with one additional Investor, which was in substantially the same form, and
which sale was on the same terms as (including entry into the Investor Rights
Agreement described below), provided for in the Securities Purchase described
above. Under the terms of this December 30, 2009 sale, the Company
issued 272,655 shares of Series A Preferred Stock and granted 454,425 Warrants
for a purchase price of $150,000.
The
foregoing descriptions of the Series A Preferred Stock, Warrants and the
Securities Purchase Agreement do not purport to be complete and are qualified in
its entirety by reference to the full text of the Certificate Of Designations,
Preferences And Other Rights And Qualifications Of Series A Convertible
Preferred Stock, Warrant and the Securities Purchase Agreement, which are
attached as Exhibits
3.1, 4.2
and 10.6,
respectively, hereto.
Investors
Rights Agreement
On
December 23, 2009, immediately following the Merger and in connection with the
Securities Purchase Agreement, the Registrant and the Investors entered into an
investors rights agreement (the “Investor Rights Agreement”). Under
the terms of the Investors Rights Agreement, the Investors were granted certain
demand and piggyback registration rights with respect to the shares of the
Registrant’s Common Stock into which the Series A Preferred Stock is
convertible. The Investor Rights Agreement contains provisions
governing the designation of a director to represent holders of the Series A
Preferred Stock, certain indemnification provisions for the benefit of the
Registrant and the Investors, as well as certain other customary
provisions.
The
foregoing description of the Investor Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Investor Rights Agreement, which is attached as Exhibit 10.1
hereto.
Stock
Repurchase Agreement - Collins Repurchase
On
December 23, 2009, immediately following the Merger and the closing on the
Securities Purchase Agreement, the Registrant entered into a stock repurchase
agreement with Collins (the “Repurchase Agreement”)
pursuant to which the Registrant purchased from Collins 13,772,550 shares of
Common Stock, which reduced Collins’ ownership interest in the Registrant from
approximately 26.79 percent to approximately 12 percent of the total number of
shares of Common Stock outstanding following such repurchase and including the
currently outstanding Series A Preferred Stock on an as converted
basis. Following the repurchase, Collins continued to hold 8,179,657
shares of the Registrant.
In order to effect the repurchase under
the Repurchase Agreement, the Company paid Collins $375,000 out of the proceeds
raised pursuant to the Securities Purchase Agreement and delivered to Collins a
promissory note in the initial principal amount of $375,000, bearing interest at
the prime rate from time to time in effect as published in the Wall Street
Journal (the “Collins
Note”). Under
certain circumstances set forth in the Collins Note, the principal amount of the
Collins Note will be adjusted to equal $625,000, less the aggregate principal
amount previously paid on the Collins Note. Under the terms of the
Repurchase Agreement, Collins is entitled to have a representative selected by
Collins elected to and serving on the Registrant’s Board of Directors until the
Collins Note is paid in full.
The foregoing description of the
Repurchase Agreement and Collins Note does not purport to be complete and is
qualified in its entirety by reference to the full text of the Repurchase
Agreement, which includes a form of Collins Note, which is attached as Exhibit 10.2
hereto.
Asset
Purchase Agreement
On
December 23, 2009, immediately following the Merger, the Registrant entered into
an asset purchase agreement (the “Asset Purchase Agreement”)
with Cambridge Trading Partners, LLC (“Cambridge”) and Michael
Lieber, pursuant to which all of the Registrant’s pre-Merger assets relating to
the Registrant’s outdoor camping goods, survival products and tactical gear
business were sold to Cambridge. In consideration for the purchased
assets, (a) Cambridge agreed to assume all of the Registrant’s liabilities and
obligations related to the Registrant’s pre-Merger outdoor camping goods,
survival products and tactical gear business, and (b) Michael Lieber, a
principal of Cambridge and former Chief Executive Officer and former Chief
Financial Officer of the Registrant, delivered to the Registrant 50,000 shares
of the Registrant’s Common Stock, which were retired as treasury
stock. Mr. Lieber was also a consultant to the Registrant, but this
consulting arrangement was terminated on December 23, 2009.
The
foregoing description of the Asset Purchase Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Asset Purchase Agreement, which is attached as Exhibit 2.2
hereto.
Assumption
Agreement
On
December 23, 2009, in connection with the Merger, Paneltech Products, Paneltech
LLC and ShoreBank Pacific ( “Shorebank”) entered into an
assumption agreement (the “Assumption Agreement”)
pursuant to which Paneltech Products agreed to assume, pay and perform all the
covenants and obligations under the Note and Loan Documents (as defined in the
Assumption Agreement) related to the Shorebank Facility (as described below in
Item 2.01 under the heading “Liquidity and Capital
Resources”) as though the Note and the Loan Documents had originally been
made, executed, and delivered by Paneltech Products. In addition to
the foregoing, the Company will be required to enter into a Commercial Guarantee
and Paneltech Products will be required to enter into a Security Agreement with
Shorebank and each will have certain other obligations in connection with the
Shorebank Facility.
The
foregoing description of the Assumption Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Assumption Agreement, which is attached as Exhibit 10.3
hereto.
Guaranties
by Officers
Leroy D.
Nott (the Company’s President and CEO), Scott D. Olmstead (the Company’s CFO and
Secretary), Ronald H. Iff, SORB Management Corporation (an entity controlled by
Mr. Olmstead), and L.D. Nott Company (an entity controlled by Mr. Nott) have
provided or will provide guaranties in favor of the Bank, the form of which will
be satisfactory to the Bank in its sole discretion.
| ITEM 2.01 |
COMPLETING
OF ACQUISITION OR DISPOSITION OF ASSETS
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The
Merger and Disposition of Certain Assets.
On
December 23, 2009, Paneltech LLC merged with and into Paneltech Products, the
wholly owned subsidiary of the Company, to become the Company’s principal
operating business (the “Paneltech
Business”). In order to better reflect its new principal
business, the Registrant changed its name from Charleston Basics, Inc. to
Paneltech International Holdings, Inc. Prior to the Merger, the
Registrant’s principal operating business was the sale of outdoor camping goods,
survival products and tactical gear (the “Pre-Merger
Business”). Immediately following the Merger, the Company sold
all the assets relating to this Pre-Merger Business to Cambridge, an entity
controlled by Mr. Lieber, a former CEO of the Company. The
terms of the Merger and the sale of the assets relating to the Pre-Merger
Business are described in Item 1.01 under the headings “Agreement and Plan of Merger”
and “Asset Purchase
Agreement” of this Current Report and are hereby incorporated by
reference.
DESCRIPTION
OF THE COMPANY
The Registrant was incorporated under
the laws of the State of Delaware on April 4, 2006 primarily for the purpose of
selling outdoor camping goods, survival products and tactical
gear. With the consummation of the Merger, the business of Paneltech
LLC became the Registrant’s principal operating business, which is now conducted
through its wholly owned subsidiary, Paneltech Products, and consists primarily
of manufacturing of innovative “green” building materials and the development of
economically feasible and environmentally-friendly manufacturing processes that
allow the production of innovative products that are competitively affordable
and globally accessible. The Paneltech Business was started by
Paneltech LLC, a limited liability company founded in 1996 in the State of
Washington, which, as described above, merged with and into Paneltech
Products. The Company can be found on the web at
www.paneltechintl.com and www.paperstoneproducts.com.
Subsidiaries
and Affiliates
The Company has one direct subsidiary
and one indirect subsidiary. Paneltech Products, the Company’s direct
subsidiary, operates the Company’s Paneltech Business and is the parent to the
Company’s only indirect subsidiary, Paneltech Rainscreens LLC (“Paneltech
Rainscreens”). Paneltech Rainscreens was formed to facilitate
the sales of PaperStone products described below because these products
generally carry different and much higher cost insurance. Paneltech
Rainscreens is included in the financial statements attached to this Current
Report.
Description
of Paneltech Business
The
Paneltech Business is comprised of four core business units:
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PaperStone
/ RainStone / Stonkast – The production of PaperStone and RainStone, the
Company’s principal panel products, made from recycled paper and
petroleum-free resin for architectural use and other
applications.
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Fortrex
– The life protection “Prepreg” (pre-impregnated composite fibers)
division of the Company engaged in the production of specialized phenolic
resins for use in “ballistics” webs such as woven Kevlar and fiberglass
mats and other life protection materials used as vehicle armor and
facilities blast protection.
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Overlays
– Production of resin/paper composites that enhance structural plywood
panel surfaces for the end use of concrete forming and miscellaneous other
uses.
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Logistics – Rail car
leasing and transloading.
The
Company’s consulting and import business functions were discontinued in
2007.
PaperStone
/ RainStone
In 2004,
the Company added a “green” product line of solid surface phenolic resin/paper
composite that it branded PaperStoneTM
(“PaperStone”) to its
portfolio of products. The Company uses 100% post-consumer recycled
paper and the Company’s proprietary, petroleum-free PetroFree resin to make the
PaperStone composite. Instead of using petroleum derived resin raw
materials in the manufacturing process, the Company utilizes natural materials
such as cashew nut shell liquid and industrial byproducts like waste bio-diesel
plant glycerol. The resulting, innovative, composite product
(PaperStone) competes against ‘solid surface’ countertops like Corian and
‘engineered quartz’ countertops like Silestone. PaperStone is
certified by the Forest Stewardship Council (FSC), NSF (food contact
certification), and the Rainforest Alliance. PaperStone has also won
numerous architectural, design and environmental awards and is the Company’s
‘flagship’ green composite.
The
transition to PaperStone design and production was a natural step in the
evolution of the Company’s business as (i) the technology and equipment
requirements were more sophisticated versions of those required to
make overlays (the predominant product line before PaperStone), (ii)
the Company designed all of its new “PetroFree” branded resins to be as “green”
as possible and (iii) the demand for new, “green” building products like
PaperStone is growing.
When UV
protectant coatings (either plain or decorative) are added to PaperStone panels,
the panels can be utilized for exterior claddings. This enhanced
product has been branded by the Company as RainStone TM
(“RainStone”). The
most common uses for these panels is as “rainscreen” cladding panels, which are
a key component of engineered cladding system that help improve indoor air
quality, prevent building moisture intrusion and provide superior building
insulation.
In
contrast to PaperStone and RainStone, which are sold in panel form, the
Company’s newest product, Stonkast, is a molded product that is expected to
expand the versatility of the Company’s green composite product
portfolio. Molded predominantly from recycled PaperStone and
RainStone, Stonkast should permit the Company, its distributors and fabricators
to recycle PaperStone and RainStone process and product waste. In
addition to adding to the Company’s cast polymers product portfolio, this
product is designed to give the Company superior life cycle analysis (LCA)
results.
Demand
Factors:
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Market
Driven
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·
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Subject
to Building Cycles
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·
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Changes
in Culture/Buying Habits
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Development
of new, value added uses
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·
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Used
for countertops, cutting boards, knife handles, bookstore and cosmetic
display cases, building design, USGBC LEED
considerations
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Fortrex
In 2007,
the Company began treating “ballistics” webs (woven Kevlar and fiberglass mats)
provided by customers with the Company’s proprietary resins and other phenolic
resins. The industry parlance for the provider of such services is
“prepregger.” Once these webs have been treated by the Company, the
treated webs are returned to the customer where they are finished into
ballistics panels for hard armor and facilities blast protection uses such as
mine resistant and armor protected military vehicles. The Company
differentiates itself in this industry by producing and utilizing its own
PetroFree ballistics resins. One of these ‘green’ resins has
demonstrated ballistics properties we believe are superior to open market resins
which are available to our competitors.
Demand
Factors:
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·
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Derived
from the military and homeland security
demand
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·
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Driven
by domestic policy and domestic and global political
events
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·
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Premium
on supply chain integration and demand responsiveness
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Overlays
At the
inception of Paneltech LLC, the Company’s strategy was to leverage the
veneer/sawmill business of one of Paneltech LLC’s original founders to establish
a new medium density overlay (“MDO”) business. MDO
is a phenolic resin/paper composite that enhances structural plywood panel
surface properties.
A one or
two-sided “overlay”, MDO masks knots and other plywood panel
imperfections. With the rapid decline in old growth timber in the
Pacific Northwest (and the fine‐grained, clear
veneers that had long been sourced from this type of timber), Paneltech believed
MDO to be a promising, growth, niche business with primarily technical rather
than capital barriers to entry.
Logistics
Also at
Paneltech LLC’s inception, Paneltech LLC acquired a small fleet of 150 rail cars
suitable for transporting wood logs. Over time, the fleet grew and
additional cars were acquired both through purchases and
leases.
- 9
-
More
recently, the business has contracted and in most cases, the Company’s customers
are paying lease payments to use the cars.
Market
Overview
“Green”
Countertop Market (PaperStone / RainStone / Stonkast)
Green
countertops like PaperStone are currently distributed in one of three
ways. Some traditional solid surface and engineered quartz
distributors have added green countertops to their existing product lines and
they distribute the panels through well-established kitchen and bath dealer and
fabricator channels. A few green building stores (e.g. Ecohaus)
inventory full size (typically 5’ x 12’) panels purchased directly from the
Company’s Hoquiam plant, exhibit PaperStone in their stores and connect store
customers with store-affiliated fabricators. PaperStone is a
structural material easily ‘worked’ with carbide-tipped woodworking tools so
Company, Company-affiliated fabricators and some distributors also cut down full
size panels to dimensions that are more easily handled by do-it-yourself
customers. In some cases, the final panel dimensions are sent to a
fabricator located near the Company’s plant and completed products are shipped
directly to the customer. PaperStone is also distributed by
green building material distributor specialists (e.g.
Evostone). These distributors buy and warehouse full size PaperStone
panels and distribute them to green retailers, kitchen and bath dealers,
fabricators and OEMs that are very distant from Paneltech’s plant in areas like
England and Italy.
With
additional investment, the Company believes that it could potentially produce
$75 million or more worth of PaperStone (and/or RainStone). Marketing
PaperStone through the current established green countertop distribution
channels results in installed costs that are generally too high to accommodate
this potential increased level of sales. While economies of scale
will reduce PaperStone production costs, these reductions will not be enough to
offset the large distribution costs disadvantages. The Company is in
the process of developing more efficient, more direct distribution
channels.
“Prepreg”
/ Ballistics (Fortrex)
The
Company had limited ballistics ‘prepregging’ experience prior to 2008 when the
Company’s first ballistics customer grew rapidly to serve the surge in Iraq hard
armor requirements and the Company’s ballistics sales volumes grew
accordingly. In late 2008, the Company hired a Senior VP of Strategic
Development and attempt to capitalize on the superior ballistics performance
attributes of the Company’s ballistics resin and to diversify its ballistics
customer and product base. In 2008, even support vehicles that were
never designed to carry the added payload of ballistic protection kits became
candidates for up-armoring and added to demand. Pound-for-pound,
steel, aluminum, and other metallic solutions cannot match the performance of
modern composite armor.
The hard
armor industry had a very difficult year in 2009, which was marked by delays in
armor orders as the administration and the military shifted their focus away
from Iraq and attempted to set new defense policies and defense spending
priorities. Although the Company’s ballistics business suffered in
2009, the Company forged new partnerships with the key ballistics fiber
suppliers, which the Company believes will eventually help it to capitalize on
its resin performance advantages and to enhance the Company’s prepreg value
proposition. The Company also courted prospective customers in both
the hard armor and blast resistant panels market. The Company
believes these efforts should begin to produce results in 2010.
Overlays
The current construction market and, by
extension, the demand for construction materials such as overlaid plywood, is
the worst that many construction products manufacturers have seen in many
years. Growth in demand is dependent on recovery of the building
sectors of the economy. While the Company has a portfolio of high
quality overlay products and customer support, the market is dominated by a much
larger competitor, limiting the Company’s pricing leverage.
Environmental
Our
operations are subject to and affected by a variety of federal, state, local and
non-U.S. environmental laws and regulations relating to the discharge,
treatment, storage, disposal, investigation and remediation of certain
materials, substances and wastes. We continually assess our
compliance status and management of environmental matters to ensure our
operations are in substantial compliance with all applicable environmental laws
and regulations. The Company employs a Regulatory Technical Resources Manager
whose responsibilities and experience include environmental
compliance.
Operating
and maintenance costs associated with environmental compliance and management of
our production facilities are a normal, recurring part of our
operations. It is reasonably possible that continued environmental
compliance could have a material impact on our results of operations, financial
condition or cash flows if more stringent standards are imposed, contamination
is discovered and/or clean-up or compliance costs are higher than
estimated.
Governmental
Regulations
We are
subject to federal, state and local laws and regulations in the areas of safety,
health and environmental protection. Compliance with these laws and regulations
has not in the past had any material effect on our earnings, capital
expenditures or competitive position. However, the effect of such compliance in
the future cannot be predicted. We believe that we are in material compliance
with applicable federal, state and local safety, health and environmental
regulations.
Raw
Materials
The
primary raw materials the Company uses to manufacture its products include
various types of recyclable paper products, manmade fibers, resins and resin
components. Most of these are purchased and are available from a
variety of sources. The Company experienced price volatility in fiscal year
2009, although the volatility was not as severe as fiscal year 2008. During
fiscal 2009, many raw material prices were lower than in fiscal 2008, but raw
material prices increased beginning in the third and fourth quarter of fiscal
year 2009. The Company was able to procure adequate supplies of raw materials
throughout fiscal year 2009 and does not anticipate procurement problems in
2010.
Competition
As
mentioned above, the Company believes that it now has only one remaining broadly
capable overlay competitor and, while the Company possesses distinctive
operational and financial competence in the overlay business, the Company’s
competitor is much larger and has a larger product offering. The
Company’s PaperStone and RainStone products compete against stone and
petroleum-derived (acrylic and polyester) solid surfaces like DuPont’s Corian
and stone/resin composites like Silestone.
We
believe that as a vertically-integrated green composites producer, the Company
is in a unique position of not having many direct competitors producing
comparable products at this time. There are two reasons for
this. First, the commercial applications and opportunities for green
phenolic/cellulose are still being developed. Unlike the
acrylic-based composite solid surfaces (e.g. Corian) and engineered quartz
surfaces (e.g. Cambria) that preceded them, PaperStone and RainStone are not
only more environmentally-friendly, these products are also similar to very
dense wood. PaperStone and RainStone are very strong, easily machined
products with tremendous application versatility. Second, there are
interrelated technical difficulties that must be overcome to produce products
that are competitive to ours, which use natural and recycled raw
materials.
Unlike
the green composites value chain, ballistics prepreg value chains have multiple
competitors. Paneltech is unique, however, in its ability to produce
and incorporate into its ballistics production process its own, green, specialty
phenolic ballistics resins.
Growth
Strategy
As mentioned earlier, in 2009, military
spending for most hard armor was interrupted by the change in administration and
its efforts to review and reach agreement on new defense policies and defense
spending priorities There has been a marked increase in requests for quotes
(RFQ) activity since late 2009. The Company believes (although there
can be no assurance), based on this increase in RFQs and conversations with
potential customers, that it will have several Fortrex contracts, including at
least two facilities protection contracts, by the second quarter of
2010. This business seems likely to exceed the Company’s ballistics
capacity by mid-2010 so the Company has committed additional resources to
accelerate permitting and construction of the Company’s new treater
line.
The Company added a European Marketing
Manager in late 2009 and will seek to increase revenue from its
PaperStone/RainStone products in fiscal 2010 by committing more resources to
marketing efforts. These efforts will include new advertising and
promotion efforts, increased trade show attendance, website improvements, and
new marketing manager hires. There are also plans to improve the
Company’s PaperStone/RainStone production processes and to commercialize the
Company’s new moldable Stonkast product line.
In the second quarter of 2010, the
Company may seek to raise additional capital to complete the construction of a
new $7.5 million consolidation press, but there are currently no agreements or
understandings with regard to such financing efforts. The Company’s
planned new press will help accommodate domestic sales growth in the Company’s
PaperStone and RainStone product lines, help the Company to capitalize on new
PaperStone sales opportunities in China and Europe, and allow the Company to
acquire the additional skills and technology required to develop and manufacture
new products. The Company also plans to invest in a new R&D lab, which
would augment the $1.5 million in public economic development funds that have
already been approved for the project. It is anticipated that in 2010 the
Company’s efforts to displace all purchased ballistics resins with the Company’s
resins will be completed. This will further differentiate the Company
from its competitors because of the performance strength, cost advantages, and
environmental attributes of our internal resins. In late 2009, a key
ballistics fiber supplier began promoting the environmental advantages of the
Company’s ballistics resin directly to the military. The Company
believes that there is increasing interest by the military in the Company’s
green processes and products.
The Company’s longer term plan is to
add a manufacturing facility in the Eastern U.S. The new facility is
intended to accelerate the Company’s growth by increasing capacity, improving
logistics to East Coast markets, and adding a proximity advantage, in that more
PaperStone and RainStone will be produced within 500 miles of where it will be
consumed. This proximity advantage adds to the USGBC LEED (U.S. Green
Building Council Leadership in Energy and Environmental Design) points that
eastern architects and designers often need to certify the environmental
attributes of their projects.
Properties
The
Company’s headquarters is located at a leased facility in Port of Grays Harbor
located in Hoquiam, Washington. The lease for this facility ends
August 31, 2011. Two of the Company’s three production departments
are located at the same facility in Grays Harbor. The three
production departments include:
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1.
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A
Resin plant to manufacture resins for PaperStone, Fortrex and
Overlays. The Company initially purchased the phenolic resins
that it required, but the Company has since built a resin development lab
and a versatile phenolic resin manufacturing
plant.
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2.
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A
Treater to saturate webs for PaperStone, Fortrex and
Overlays. A second treater has been purchased, which the
Company plans to install in 2010.
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3.
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A
Press and saw to manufacture
PaperStone.
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The
Company leases a separate facility for the press and saw from the Port of Grays
Harbor. That lease expires March 31, 2010. Three separate
storage facilities in Grays Harbor are also leased. The lease for one
of these facilities ended October 1, 2009 and is currently continuing on a
month-to-month basis. The leases for the remaining two facilities end
March 5, 2010 and June 30, 2010. The Company believes that its
current facilities are adequate for its immediate and near-term needs and that
the leases for these facilities will be renewed. Additional space,
such as the planned addition of an Eastern U.S. facility, will be required as
the Company expands its activities. The Company does not foresee any
significant difficulties in obtaining any required additional
facilities.
Employees
As of
February 8, 2010, the Company had 44 employees, including 12
executives/managers, 4 research and development managers and 28 manufacturing
employees. With only two marketing exceptions, all employment is
currently at the Company facilities in Hoquiam, Washington. The
Company is dependent on the services of certain key personnel, each of whom have
signed a Non-Competition and Non-Disclosure Agreement (the “Non-Compete
Agreement”). Under the terms of such Non-Compete Agreements,
the employee party to the agreement is subject to certain restrictive covenants
regarding confidentiality and non-competition, and is prohibited from (a)
divulging the Company’s confidential business information in any way to persons
outside of the Company’s employ during or after such employee’s employment with
the Company and (b) for a period of three years from the termination of such
employee’s employment with the Company, from engaging in direct competition with
the Company which relies solely on training received or information learned
while at the Company that could not be obtained elsewhere.
Legal
Proceedings
A lawsuit was filed February 6, 2009 at
Superior Court of California, County of Siskiyou on behalf of Eddie
Horner. The claim alleges that, on February 12, 2007, Eddie Horner
was injured while working with a Paneltech leased railcar due to defective
equipment. The venue was later moved to the United States District
Court for the Eastern District of California. The total of the claim
is $1,756,338.20. The defense is by Liberty Mutual, Paneltech’s
liability carrier at the time of the incident. The general liability
policy coverage is $2,000,000. Excess coverage of $5,000,000 was also
provided by Liberty Mutual at that time. A jury trial for this matter
is set for January 24, 2012.
The Company has also settled various
environmental claims with the U.S. Environmental Protection Agency (the “EPA”) and other governmental
agencies. The most significant environmental matter involved the
accidental release of phenol into the ground in 2005. The cleanup of
this spill was completed in 2006 and all test wells except one have been closed
as of February 8, 2010.
The
Company is a defendant in various contract disputes and legal actions arising
out of the normal course of business.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information and Holders
The
Company’s Registration Statement, as filed with the SEC on Form S-1 on April
3rd, 2008, was declared effective by the SEC on April 16th, 2008. On
May 8th 2008 Financial Industry Regulatory Authority (“FINRA”) cleared our
Common Stock for an unpriced quotation on the Pink Sheets under the symbol
“CHBS”. On February 8, 2010 the symbol for our Common stock was
changed from “CHBS” to “PNLT.” On May 23rd, 2008 FINRA cleared
a request by our market maker to submit a quote of $0.35 bid, $0.50 ask on the
Pink Sheets. As of February 8, 2010, there has been no active trading
market established.
As of
February 8, 2010, we have 54,481,022 shares of Common Stock issued and
outstanding held by 50 stockholders of record; 2,999,205 shares
of Series A Preferred Stock issued and outstanding, held by 3
stockholders of record; and 7,777,757 Warrants with an exercise price of $0.12
per share, are issued and outstanding and held by 5 warrant holders of
record. Each share of Series A Preferred Stock is convertible into
Common Stock pursuant to a conversion ratio that is subject to adjustment, which
as of February 8, 2010 provides that each share of Series A Preferred Stock is
convertible into 5 shares of Common Stock.
Under the
terms of the Investors Rights Agreement, the Series A Investors were granted
certain demand and piggyback registration rights with respect to the shares of
the Common Stock into which the Series A Preferred Stock is
convertible.
As
of February 8, 2010, approximately 54,328,022 of the 54,481,022 issued and
outstanding shares of the Company's common stock are restricted securities as
defined under Rule 144 of the Securities Act and under certain circumstances may
be resold without registration pursuant to Rule 144.
As of
February 8, 2010, approximately 821,884 shares of our restricted shares of
Common Stock are held by non-affiliates who may avail themselves of the public
information requirements and sell their shares in accordance with Rule
144. As a result, some or all of these shares may be sold in
accordance with Rule 144 potentially causing the price of the Company's shares
to decline.
In
general, under Rule 144, a person (or persons whose shares are aggregated) who
has satisfied a six month holding period may, under certain circumstances, sell
within any three-month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not an Affiliate, as such
term is defined in Rule 144(a)(1), of the Company and who has satisfied a one
year holding period.
Notwithstanding
the foregoing restrictions and exemptions to restrictions provided above, each
of the former members of Paneltech LLC entered into lock up agreements, covering
47,987,302 shares of Common Stock, which will prevent the sale of such
securities until January 1, 2011.
Dividend
Policy
The
Registrant has never paid cash dividends on any of its
securities. Other than dividends payable to holders of Series A
Preferred Stock, we intend to retain any future earnings to finance the
development and expansion of our business. Furthermore, our ability
to pay dividends is restricted by our Certificate of Designations, Preferences
and Other Rights and Qualifications of Series A Convertible Preferred
Stock. We do not anticipate paying any cash dividends on our Common
Stock in the foreseeable future.
RISK
FACTORS
Investing
in the Company's common stock involves a high degree of risk. Investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this Current Report before purchasing
shares of the Company's common stock. There are numerous and varied risks, known
and unknown, that may prevent the Company from achieving its goals. The risks
described below are not the only ones the Company will face. If any of these
risks actually occur, the Company's business, financial condition or results of
operation may be materially adversely affected. In such case, the trading price
of the Company's common stock could decline and investors in the Company's
common stock could lose all or part of their investment.
Risks Relating to the
Company and Ownership of its Common Stock
The
Company’s business has been adversely affected by the delay in hard armor and
blast resistant panel awards and by the deteriorated economic condition of the
housing, construction and home improvement market.
In 2008
and 2009, the housing, residential construction and home improvement markets
deteriorated dramatically and more severely than was previously
anticipated. In addition, the award for the M-ATV vehicle (for
Afghanistan) was delayed until mid-year 2009 and the award for the M-ATV EFP
kits for exterior protection, which kits Paneltech planned to help
produce, was repeatedly delayed until the end
of 2009. When the first small award for the EFP kits was
made near the end of 2009, it specified a thermoplastic solution that the
Company does not help provide. The Company has developed new products
(in addition to components it produces for Stryker vehicles) for new prospective
ballistics customers and it is no longer so dependent upon the final outcome of
any one major hard armor program. The Company cannot predict when or
if these hard armor and blast resistant panel awards will be made, the size or
such awards, or if the Company will be a beneficiary of such
awards.
As a
result of the delay in hard armor awards and the general deterioration of
housing and construction markets, our sales and results of operations were
adversely affected during fiscal 2009 as the Company’s nets sales declined
significantly compared to the comparable period for the prior year, resulting in
an operating loss during this period. For the period ended September
30, 2009, our net sales were $6,979,912 compared to $13,911,586 for the
comparable period in 2008.
These
operating losses violated the Cash Flow Coverage Covenant under the Company’s
Business Loan Agreement with Shorebank, which is discussed in more detail in
Item 2.01 under the heading “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” which the Company
addressed by entering into a "change in terms" and forbearance agreement with
Shorebank.
The
Company cannot predict the duration nor the ultimate severity of the current
challenging conditions in the building materials market, nor can the Company
predict the government’s future hard armor and blast resistant panel procurement
behaviors. The Company cannot provide assurance that its recent
ballistics customer and product diversification will be successful nor can it
predict that its responses to the current economic downturn nor the government’s
attempts to address the troubles in the economy will be
successful. If these conditions persist or continue to worsen, they
will further adversely affect the Company’s operating results and financial
condition.
The
Company’s working capital needs are financed in part by credit facilities
between various lenders and Paneltech Products, the Company’s wholly owned
subsidiary. The Company has needed to obtain waivers from its lenders
for covenant violations, or otherwise change the terms governing such credit
facilities due to less than anticipated operating results.
On October 22, 2009, the Company
received Notice of Default from Shorebank, which provides a line of credit to
the Company, referred to in this Current Report as the “Shorebank
Facility.” The default was caused by the Cash Flow Coverage Covenant
not being met. Shorebank and the Company have since entered into a
Forbearance Agreement dated December 17, 2009, pursuant to which Shorebank will
waive the covenant violations and forbear and reset certain other covenants
pursuant to a Change in Terms Agreement, which will remain in effect until the
credit facility’s maturity date, February 28, 2010. As of February 8,
2010, the Company the outstanding principal balance on the Shorebank Facility
was $493,953. The Company is currently negotiating with Shorebank to
renew, replace or extend the Shorebank Facility upon its expiration on February
28, 2010, although there can be no assurances that these efforts will be
successful. The failure to renew, replace or extend the Shorebank Facility would
have a material adverse effect on the Company’s financial position.
On January 5, 2010,
the Company and Anchor Mutual Savings Bank (“Anchor Bank”) entered into a
Change in Terms Agreement relating to the Promissory Note (the “Anchor Note”) issued by
Paneltech LLC to Anchor Bank dated November 18, 2008, in the approved principal
amount of $1,819,000.00, and a Change in Terms dated September 16, 2009
evidencing a loan referred to in this Current Report as the “Anchor
Loan”. As of February 8, 2010, the outstanding principal balance on
the Anchor Note was $470,462.
If the
Company is not able to be in compliance with the amended covenants of its
Shorebank Facility or the terms of the Anchor Loan, and if it is unable to cure
violations by signing a waiver agreement, or through other means, the Company
could be in default under the terms of the respective loan agreements and the
respective lender would have the ability to stop or otherwise limit credit
borrowings under the applicable loan facility or accelerate the maturity of any
outstanding balances. If additional sources of debt or equity capital
were not available at that point, such acceleration could have a material
adverse impact on the Company’s financial position.
The
Company has significant short-term debt obligations that mature in less than one
year. Our inability to extend the maturities of, or to refinance,
this debt could result in defaults, and in certain instances, foreclosures on
our assets. Moreover, we may be unable to obtain financing to fund
ongoing operations and future growth.
We
currently depend on short-term bank loans and net revenues to meet our
short-term cash requirements. As of February 8, 2010, our total bank
debt outstanding was $2,712,248, which carries maturity periods ranging from 1
month to 6 years. Our Shorebank Facility is guaranteed by Messrs.
Nott, Olmstead and Iff. Some of the loan guarantees by Mr. Iff are
limited to his percentage ownership in the Company, while the guarantees by Mr.
Nott and Mr. Olmstead are not subject to such a limitation. Pursuant
to the Assumption Agreement, the Company will be required to enter into a
guarantee in connection with the Shorebank Facility and Paneltech Products will
be required to enter into a Security Agreement. Although we have
renewed our short-term borrowings in the past, we cannot assure you that we will
be able to renew these loans in the future as they mature. If we are
unable to obtain renewals of these loans or sufficient alternative funding on
reasonable terms from banks or other parties, we will have to repay these
borrowings with the cash on our balance sheet or cash generated by our future
operations, if any.
Moreover,
we cannot assure you that our business will generate sufficient cash flow from
operations to repay these borrowings. Failure to obtain extensions of
the maturity dates of, or to refinance, these obligations or to obtain
additional equity financing to meet these debt obligations would result in an
event of default with respect to such obligations and could result in the
foreclosure on the collateral. The sale of such collateral at foreclosure would
significantly disrupt our ability to produce products for our customers in the
quantities required by customer orders or deliver products in a timely fashion,
which could significantly lower our revenues and profitability.
The
Company recently incurred a net loss and there can be no assurance that we will
be profitable in the future.
The
Company incurred a net loss of $783,062 for the nine months ended September 30,
2009. We cannot assure you that our current level of operating results
will improve. Our activities could require additional debt or equity
financing. Our future operating results may fluctuate significantly
depending upon a number of factors, including industry conditions, customer
preferences, product development and economic conditions. These variables
could have a material adverse effect on our business, financial condition,
results of operations and the market value of our common stock.
The
Company has significant short-term debt obligations owed to former Paneltech LLC
members.
As a
result of the Merger, the Company has significant liabilities in the form of
promissory notes evidencing tax distributions owed to former members of
Paneltech LLC, which are referred to in this Current Report as the “Member
Notes”. The Member Notes are payable in 12 monthly installments
commencing March 23, 2010, and will bear interest at 12% per annum commencing on
that date. If the Company pays the amounts owed under Member Notes,
such payments may constrain our liquidity, reduce financing needed for
investment in our operations, and result in not having enough capital to
undertake our business plans. Further, we cannot provide assurance
that the Company will have sufficient cash flow to meet these
liabilities. See Item 2.03 “Paneltech LLC Member Notes”
of this Current Report for information concerning the amounts and terms
of these promissory notes.
Your
ability to influence corporate decisions may be limited because the Lead
Investor has certain approval rights and the Company’s two largest stockholders
own a large percentage of the Company’s common stock.
The Lead
Investor has the right to approve all material actions (e.g. incurrence of debt;
expenditures out of the ordinary course of business; mergers and acquisitions;
liquidation or dissolution; issuance of additional securities, etc.) and the
right to appoint one member to the Company’s board of directors. As
the interests of the Lead Investor may not always be the same as those of our
other stockholders, this appraisal right may lead to corporate action or
inaction that is inconsistent with your best interests or the best interest of
the Company as a whole.
Furthermore,
the Company’s significant stockholders own a substantial portion of its common
stock and have the right to control certain important Company
decisions. As a result of their ownership and rights, if these
stockholders were to choose to act together, they may be able to effectively
control all matters submitted to the Company’s stockholders for approval,
including the election of the directors and approval of any merger,
consolidation or sale of all or substantially all of the Company’s
assets. In addition, as the interests of the Company’s majority and
minority stockholders may not always be the same, this large concentration of
voting power may lead to stockholder votes that are inconsistent with your best
interests or the best interest of the Company as a whole.
The
Company did not close on the full amount of the Offering.
As the
Company did not close on the full amount of the Offering ($3,000,000), the
Company may be unable to (a) timely repay the full outstanding amount on a
promissory note issued in connection with the Collins Repurchase and will be
forced to pay related penalties, (b) repay the Member Notes and (c) fully
implement its business plans. Additionally, as the Company did not
close on the full amount of the Offering, the Company will likely engage in
additional financings in the future. Our ability to engage in
additional financings in the future will be subject to the approval of the
holders of a majority of the Series A Preferred Stock, which approval must
include the Lead Investor.
Additional
equity offerings may dilute current stockholders.
As a result of acquisitions or
additional capital raisings, the Company may issue additional securities or
instruments that may be convertible into or exercisable or exchangeable for, or
otherwise entitle the holder thereof to receive Common Stock. The
issuance of such additional securities will dilute the ownership of the
Company’s then current stockholders. Our ability to engage in
additional financings in the future will be subject to the approval of the
holders of a majority of the Series A Preferred Stock, which approval must
include the Lead Investor.
Sale
of a substantial number of shares of the Common Stock may cause the price of the
Company’s Common Stock to decline.
If any of the Company’s stockholders
sell substantial amounts of the Common Stock in the public market, the market
price of the Company’s Common Stock could fall. These sales also may
make it more difficult for the Company to sell equity or equity-related
securities in the future at a time and price that it deems reasonable or
appropriate.
The
Company’s directors, executive officers and entities affiliated with them
beneficially own a substantial number of shares of the Company’s Common Stock,
which gives them significant control over certain major decisions on which its
stockholders may vote and may discourage an acquisition of the
Company.
The Company’s executive officers,
directors and affiliated persons beneficially own a substantial number of shares
of the Company’s Common Stock and as a result they have significant influence
over all corporate actions requiring stockholder approval, irrespective of how
the Company’s other stockholders may vote, including the following
actions:
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elect
or defeat the election of the Company’s
directors;
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amend
or prevent amendment of the Company’s articles of incorporation or
bylaws;
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effect
or prevent a merger, sale of assets or other corporate transaction;
and
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control
the outcome of any other matter submitted to the stockholders for
vote.
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The
interests of the Company’s officers and directors may differ from the interests
of other stockholders. Moreover, management’s ownership of the
Company’s securities may discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company, which in turn
could reduce its stock price or prevent the Company’s stockholders from
realizing a premium over its stock price.
As
a result of the merger of Paneltech LLC with and into Paneltech Products, the
Company’s wholly owned subsidiary, and the need to comply with Company’s
reporting requirements under federal securities laws,
which compliance can be expensive, resources and management attention
may be diverted away from the Paneltech Business and other projects, thus
impairing the ability of the Company to grow the Paneltech
Business.
As
a result of Paneltech LLC merging with and into our wholly owned subsidiary,
Paneltech Products, it is necessary to integrate the Paneltech Business with and
into the Company’s compliance and information reporting requirements under the
Exchange Act and other federal securities laws, including the Sarbanes-Oxley Act
of 2002 (the “Sarbanes-Oxley
Act”). The costs of preparing and filing annual and quarterly
reports, proxy statements and other information with the SEC (including
reporting of the Merger) and furnishing audited reports to stockholders will
cause our expenses to be higher than they would have been if Paneltech LLC had
remained privately held and did not consummate the Merger. In
addition, we will incur substantial expenses in connection with the preparation
of the registration statement and related documents required under the terms of
the Offering that require us to register the shares of Common Stock included in
the units and the Warrant Shares.
It may be time consuming, difficult and
costly for us to develop and implement the internal controls and reporting
procedures required by the Sarbanes-Oxley Act. The Company will need
to hire additional financial reporting, internal controls and other finance
personnel in order to develop and implement appropriate internal controls and
reporting procedures. If we are unable to comply with the internal
controls requirements of the Sarbanes-Oxley Act, then we may not be able to
obtain the independent accountant certifications required by such act, which may
preclude us from keeping our filings with the SEC current and interfere with the
ability of investors to trade our securities and for our shares to continue to
be quoted on the Pink Sheets or to list on any national securities
exchange.
If
the Company does not implement necessary internal control over financial
reporting in an efficient and timely manner, or if it discovers deficiencies and
weaknesses in existing systems and controls, the Company could be subject to
regulatory enforcement and investors may lose confidence in the Company’s
ability to operate in compliance with existing internal control rules and
regulations, either of which could result in a decline in Company’s stock
price.
It
may be difficult to design and implement effective internal control over
financial reporting for combined operations as the Company integrates the
Paneltech Business it acquired as a result of the Merger, and perhaps other
acquired businesses in the future. In addition, differences in
existing controls of acquired businesses may result in weaknesses that require
remediation when internal controls over financial reporting are
combined.
If
the Company fails to maintain an effective system of internal control, the
Company may be unable to produce reliable financial reports or prevent
fraud. If the Company is unable to assert that its internal control
over financial reporting is effective at any time in the future, or if the
Company’s independent registered public accounting firm is unable to attest to
the effectiveness of internal controls, is unable to deliver a report at all or
can deliver only a qualified report, the Company could be subject to regulatory
enforcement and investors may lose confidence in the Company’s ability to
operate in compliance with existing internal control rules and regulations,
either of which could result in a decline in the Company’s stock
price.
The
Company may not be able to attract the attention of major brokerage
firms.
Securities
analysts of major brokerage firms may not provide coverage of the Company
because they may believe there is a lack of public information about the Company
and because there is no incentive to brokerage firms to recommend the purchase
of our Common Stock. Without brokerage firm and analyst coverage,
there may be fewer people aware of us and our business, resulting in fewer
potential buyers of our securities, less liquidity and depressed stock prices
for our investors. No assurance can be given that brokerage firms
will, in the future, want to provide coverage of the Company or conduct any
secondary offerings on behalf of the Company.
The
Company’s stock price may be volatile.
The
market price of the Company’s Common Stock, once it develops, is likely to be
highly volatile and could fluctuate widely in price in response to various
factors, many of which are beyond the Company’s control, including the
following:
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technological
innovations or new products and services by the Company or its
competitors;
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intellectual
property disputes;
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additions
or departures of key personnel;
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sales
of the Company’s Common Stock (particularly following effectiveness of the
resale registration statement required to be filed in connection with the
Offering);
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·
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the
Company’s ability to execute its business
plan;
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·
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operating
results that fall below
expectations;
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·
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loss
of any strategic relationship;
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·
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industry
developments;
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·
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economic
and other external factors; and
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period-to-period
fluctuations in the Company’s financial
results.
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In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially
and adversely affect the market price of the Common Stock.
The
Company’s Common Stock may be deemed a “penny stock”, which would make it more
difficult for the Company’s investors to sell their shares.
The
Company’s Common stock is subject to the “penny stock” rules adopted under
section 15(g) of the Securities Exchange Act of 1934. The penny stock
rules apply to non-Nasdaq companies whose common stock trades at less than $5.00
per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if
the company has been operating for three or more years). These rules
require, among other things, that brokers who trade penny stock to persons other
than “established customers” complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided
not to trade penny stocks because of the requirements of the penny stock rules
and, as a result, the number of broker-dealers willing to act as market makers
in such securities is limited. If the Company remains subject to the
penny stock rules for any significant period, that could have an adverse effect
on the market, if any, for its securities. If the Company’s
securities are subject to the penny stock rules, investors will find it more
difficult to dispose of its securities.
Furthermore,
for companies whose securities are quoted OTC Bulletin Board or Pink Sheets, it
is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for
significant news events because major wire services generally do not publish
press releases about such companies, and (3) to obtain needed
capital.
The
Company has not paid dividends on its Common Stock in the past and does not
expect to pay dividends in the Common Stock in the future, and any return on
investment may be limited to the value of our stock.
The
Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future and any return on investment may be limited to the value of our
stock. Furthermore, our ability to pay dividends is restricted by our
Certificate of Designations, Preferences and Other Rights and Qualifications of
Series A Convertible Preferred Stock. Other than with respect to
dividends to be paid on the Company’s Series A Preferred Stock, the Company
plans to retain any future earnings to finance growth.
The
outstanding convertible securities may adversely affect us in the future and
cause dilution to existing stockholders.
As of
February 8, 2010, the Company had 2,999,205 shares of Series A Preferred Stock
outstanding, each of which is convertible pursuant to a conversion ratio, which
is subject to adjustment, that currently provides for the conversion of each
share of Series A Preferred Stock into five shares of Common
Stock. In addition, the Company also has outstanding 7-year
Warrants to purchase 7,777,757 shares of Common Stock at an exercise price of
$0.12 per share (subject to adjustment).
The
conversion of the Series A Preferred Stock and the exercise of the Warrants will
cause dilution in the interests of other stockholders as a result of the
additional Common Stock that would be issued upon conversion and/or
exercise. Moreover, subject to any applicable lock-up restrictions,
sales of the shares of our outstanding Common Stock, shares issuable upon
conversion of the Series A Preferred Stock, and shares issuable upon exercise of
the Warrants could have a depressive effect on the price of our stock,
particularly if there is not a coinciding increase in demand by purchasers of
our Common Stock. Further, the terms on which we may obtain
additional financing during the period any of such securities remain outstanding
may be adversely affected by the existence of these securities as
well.
Trading
in the Company’s Common Stock over the last 12 months has been non-existent,
which may prevent stockholders from being able to sell as many of their shares
as they want at prevailing prices.
The Company’s Common Stock is quoted on
the Pink Sheets under the symbol “PNLT”. There has been no trading in
the Company’s Common Stock shares since July 7, 2008. If limited
trading in the Common Stock continues, it may be difficult for investors to sell
such shares, including those underlying the Series A Preferred Stock and the
Warrants once eligible to be sold, in the public market at any given time at
prevailing prices. Also, the sale of a large block of Common Stock
could depress the market price of the Common Stock to a greater degree than a
company that typically has a higher volume of trading of its
securities.
The
limited public trading market may cause volatility in the Company’s stock
price.
The
quotation of the Company’s Common Stock on the Pink Sheets does not assure that
a meaningful, consistent and liquid trading market currently exists, and in
recent years such market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many smaller companies like
us. Our Common Stock is thus expected to be subject to significant
volatility. Sales of substantial amounts of our Common Stock, or the
perception that such sales might occur, could adversely affect prevailing market
prices of our Common Stock.
An
active and visible trading market for the Company’s Common Stock may not
develop.
We cannot
predict whether an active market for the Company’s Common Stock will develop in
the future. In the absence of an active trading market:
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Investors
may have difficulty buying and selling or obtaining market
quotations;
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·
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Market
visibility for the Company’s Common Stock may be limited;
and
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·
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A
lack of visibility for the Company’s Common Stock may have a depressive
effect on the market price for the Company’s Common
Stock.
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Risks Relating to the
Paneltech Business
The
Company will need to modify its sales channels, better capitalize on
PaperStone’s structural advantages and reduce installed costs to substantially
improve its value propositions if it is to achieve the PaperStone market
penetration contemplated in the Company’s strategic plan.
The
Company needs to challenge current PaperStone distributors to improve their
channels to market. However, current PaperStone distributors may lack
the liquidity and/or skills to meet this challenge or may otherwise be unwilling
or unable to do so. New, better suited distributors have not yet been
identified and there can be no guarantee that such distributors will be
identified in the future. The Company has little previous experience
in direct sales or in aggressive sales channel management. If the
Company is unable to modify its sales channels to meet the needs of its
strategic plan, the Company’s strategic plan may not succeed.
To
achieve the RainStone market penetration contemplated by the Company’s strategic
plan, the Company will need to develop new rainscreen product/market skills and
forge new strategic relationships.
The
Company will need to substantially add to its rainscreen systems technical
competence and market understanding in order for its strategic plan to be
successful. In addition, the Company will need RainStone strategic
channel “partners” that have rainscreen engineering and rainscreen attachment
design and manufacturing competencies. To date, only one such
strategic “partner” has been identified. The Company also needs to
build new strategic relationships with other rainscreen system
vendors. If the Company is unable to add to its rainscreen systems
technical competence and market understanding and forge new strategic
relationships, the Company’s strategic plan may not succeed.
Growth
of operations may strain resources and if the Company fails to manage growth
successfully, its business could be adversely affected.
Increased
orders for environmentally safe “green composites” as well as the introduction
of new products, have placed, and may continue to place, a strain on the
Company’s operational, financial and managerial resources and
personnel. Any failure to manage growth effectively could have a
material adverse effect on its business, operating results, financial condition
and liquidity.
The
state of the housing, construction and home improvement markets, rising costs, a
reduction in the availability of financing, weather and other conditions in
North America could further adversely affect the Company’s costs of doing
business, demand for its products and services and its financial
performance.
In 2008
and 2009, the housing, residential construction and home improvement markets
deteriorated dramatically and more severely than was previously
anticipated. The Company cannot predict the duration or ultimate
severity of the current challenging conditions. Other factors —
including increasing unemployment and foreclosures, interest rate fluctuations,
fuel and other energy costs, labor and healthcare costs, the availability of
financing, the state of the credit markets, including mortgages, home equity
loans and consumer credit, consumer confidence, weather, natural disasters and
other factors beyond the Company’s control — could further adversely affect
demand for its products and services and its financial
performance. These and other similar factors could increase the
Company’s costs and cause its customers to delay purchasing or determine not to
purchase home improvement products and services.
Increases
in the prices paid for raw materials or labor costs may adversely affect profit
margins.
If the
Company experiences significant increases in the prices paid for raw materials
or labor costs, it may not be able to pass through to its customers such
increases in those costs. Even if the Company is able to pass through
all or a portion of such cost increases to its customers, profit margins on such
products may be reduced. Fixed price contracts are especially
susceptible to such profit margin reductions.
The
Company is engaged in a highly competitive marketplace, which demands that
producers continue to develop new products. Its business will be
adversely affected if it is not able to continue to develop new and competitive
products.
The
Company’s customers continually seek improvements in certain products that it
manufactures and markets. As a result, in order to meet its
customers’ needs, the Company must continue to develop new products and
innovations and enhancements to existing products. Many of the
Company’s competitors have significantly more capital than the Company and as a
result the Company’s competitors may have the ability to devote more resources
to research and development and to marketing of their products. In
order to remain competitive, the Company must continue to devote a material
portion of its financial resources to research and development and there is no
assurance that it will be successful in its product improvement efforts in its
competitive marketplace.
The
Company faces continuous pricing pressure from its customers and its
competitors. This will affect the Company’s margins and therefore its
profitability and cash flow unless it can efficiently manage its manufacturing
costs and market its products based on superior quality.
The
Company’s customers make purchase decisions at least in part based upon
installed pricing, and the Company has not received some awards due to
uncompetitive installed pricing. The Company’s competitors have much
better established distribution networks and significantly greater financial
resources and, as a result, the Company may not be able to withstand the adverse
effect of discounted pricing and reduced margins in order to build or protect
market share. The Company seeks to compete based on product quality
and the authenticity of its green products, rather than just price, but it may
not be successful in these efforts. This could adversely affect the
Company’s profitability, its liquidity and its market share.
The
Company’s business is dependent upon the economic condition of the housing,
construction and home improvement market.
In 2008
and 2009, the housing, residential construction and home improvement markets
deteriorated dramatically and more severely than was previously
anticipated. The Company cannot predict the duration or ultimate
severity of the current challenging conditions. As the Company’s
customers operate within this industry, the economic state of this industry and
the North American economy directly impacts the Company’s business and increases
the likelihood of uncollectible accounts receivable and lengthens the cash
collection cycle. Moreover, deteriorated market conditions could
contribute to order cancellations, delays in scheduled shipments, delays in
customer acceptances or delays in collection of accounts receivable, which could
materially adversely affect the Company’s operating results and cause such
results to fall below its expectations and the expectations of its
investors. Delays in collection of accounts receivable could require the
Company to increase its accounts receivable reserve, which would increase its
operating expenses. If the Company is unable to collect a receivable from
a large customer or a large number of customers, its financial results will be
negatively impacted.
If
the Company fails to accurately project market demand for its products, its
business expansion plans could be jeopardized and its financial condition and
results of operations will suffer.
The
Company plans to increase its annual manufacturing capacity of its products to
meet an expected future increase in demand for its products. The Company’s
decision to increase its production capacity is based primarily on its projected
increases in its sales volume and growth in the size of the sustainable
composites and ballistics product markets. If actual customer orders are
less than the its projected market demand, the Company will likely suffer
overcapacity problems, may have to leave capacity idle which may reduce its
overall profitability and hurt its financial condition.
The
Company maintains inventories of raw materials and components and its
inventories may become obsolete.
The
Company’s limited forecasting experience and processes and the nature of its
target markets make forecasting its future sales and operating results
difficult. The Company’s expense levels are based, in part, on its
expectations regarding future sales. In addition, to enable it to
promptly fill orders, the Company maintains inventories of raw materials,
components and finished goods. As a result, it has to commit to
considerable costs in advance of anticipated sales. Any significant
shortfall of sales may result in the Company maintaining higher levels of
inventories of raw materials, components and finished goods than it requires,
thereby increasing its risk of inventory obsolescence and corresponding
inventory write-downs and write-offs. The Company cannot guarantee
that such write-downs will be adequate to cover all losses resulting from
inventory obsolescence.
Some of the raw materials used to
manufacture the Company’s products are specialized products.
The
Company does not have contracts with its suppliers and cannot be certain it will
be able to obtain the materials needed for existing or increasing
production. In most cases there are alternative sources of suitable
materials but using them may require additional product development,
modification of the Company’s product line, and/or different costs.
The
Company may have difficulty protecting its proprietary technology.
Intellectual
property and proprietary technology are important to the success of the
Company’s business. The Company relies primarily on trade secrets to
protect its intellectual property and proprietary technology. While
it actively protects and monitors for possible misappropriations and
unauthorized access to its intellectual property and proprietary technology, it
is difficult to protect against or monitor all possible misappropriations and
unauthorized access to the Company’s intellectual property and
technology. To date, the Company has applied for only one patent and
currently does not plan to patent further product and/or process innovations
unless a truly unique and very valuable discovery is
made. Significant challenges in protecting its intellectual property
and technology are posed by (a) funding limitations (b) past difficulties with
the phenolic resin patenting efforts (industry competitors have tended to
reverse engineer and legally challenge any new resin development) and (c) the
Company’s adaptation to new and rapidly evolving product/market/technology
challenges. Further, litigation involving these matters can be
costly, with no guarantee of success. Dissemination or dilution of
the aforementioned intellectual property and technology could have an adverse
effect on the Company’s business, financial condition, results of operations and
liquidity.
If
the Company is unable to successfully retain executive leadership and other key
personnel, its ability to successfully develop and market its products and
operate its business may be harmed.
The
Company is substantially dependent on the personal efforts and abilities of its
key personnel. Changes to its executive officers or the inability to
retain its key personnel could delay the development and introduction of new
products, harm its ability to sell its products and damage the image of its
brands and negatively impact its credibility with key customers. The
Company believes that retention of its key personnel is critical to executing
its business strategy and its operations going forward and the failure to retain
its key personnel may impact its financial condition and results of
operations.
Recent
turmoil in the credit markets and the financial services industry may negatively
impact the Company’s business, results of operations, financial condition or
liquidity.
Recently,
the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented
level of intervention from the United States federal
government. While the ultimate outcome of these events cannot be
predicted, they may have a material adverse effect on the Company’s liquidity
and financial condition if its ability to obtain credit from trade creditors
were to be impaired. In addition, the recent economic crisis could
also adversely impact some of its customers’ ability to finance their purchases
from the Company or its suppliers’ ability to provide the Company with product,
either of which may negatively impact its business and results of
operations.
Environmental
issues could adversely affect the Company’s business.
The
Company is subject to various federal, state and local laws and regulations
governing the use, discharge and disposal of hazardous
material. Compliance with current laws and regulations has not had
and is not expected to have a material adverse effect on its financial
condition. It is possible, however, that environmental issues may
arise in the future that the Company cannot currently predict and which may have
a material adverse effect on its business, financial condition, results of
operations and liquidity.
If
the Company’s access to opportunities in the Defense/Homeland Security sector is
cut off or restricted, its business will be adversely affected.
The
Company’s access to opportunities in the Defense/Homeland Security sector, on
which a significant portion of its projected revenue is based, has depended upon
a relationship with a single Fortrex trading partner. Such trading
partner accounted for 21% of the Company’s revenue as of September 30, 2008 and
33% of the Company’s revenue as of September 30, 2009. Although the
Company has developed relationships with prospective new customers, it has not
received orders from them. If the Company loses its principal trading
partner, its access to the Defense/Homeland Security sector will be affected and
this could have material adverse effect on its business (particularly the
Fortrex division), financial condition, results of operations and
liquidity.
Hard-armor
manufacturers who use the Company’s Fortrex product are dependent on U.S.
military business, and a decrease or delay in contract awards to such businesses
or manufactures by the U.S. military could have a material adverse effect on the
Company.
The U.S.
military funds its contracts in increments based on annual authorization and
appropriation, as well as supplemental bills passed by Congress and approved by
the President, which may not be enacted or may provide funding that is greater
than or less than the amount of the contract. Changes in the U.S.
military’s budget, spending allocations or the timing of such spending could
adversely affect the Company’s ability to receive business from companies or
manufacturers who are dependent on U.S. military contracts. U.S.
military contracts do not have a minimum purchase commitment, and the U.S.
military generally has the right to cancel contracts unilaterally with limited
notice. A significant reduction or delay in U.S. military
expenditures for ballistic-resistant products would have a material adverse
effect on the Company’s business, financial condition, results of operations and
liquidity.
The
Company’s ballistic materials products (Fortrex) are used in situations that are
inherently risky. Accordingly, the Company may face product liability
and exposure to other claims for which it may not be able to obtain adequate
insurance.
The
Company is a key supply chain partner to a leading manufacturer of composite
ballistic armor who manufactures products typically used in applications and
situations that involve high levels of risk of personal
injury. Failure to use these products for their intended purposes,
failure to use these products properly, malfunction of these products and, in
some circumstances, even correct use of these products could result in serious
bodily injury or death. The Company cannot guarantee that its
insurance coverage would be sufficient to cover the payment of any potential
claim arising out of the use of its products. Any substantial
uninsured loss thus would have to be paid out of the Company’s assets as
applicable and may have a material adverse effect on its business, financial
condition, results of operations and liquidity. In addition, the
Company cannot guarantee that its current insurance or any other insurance
coverage will continue to be available or, if available, that it will be
obtainable at a reasonable cost. Any material uninsured loss could
have a material adverse effect on the Company’s business, financial condition,
results of operations and liquidity. Any inability to participate in
bids for government contracts as a result of insufficient insurance coverage
would have a material adverse effect on the Company’s business, financial
condition, results of operations and liquidity.
The
Company relies on certain vendors to supply it with materials and products that
if it were unable to obtain could adversely affect its business.
The
Company has relationships with key materials vendors, and relies on suppliers
for vendor trade creditor financing for its purchases of products from
them. Any inability to obtain materials or services in the volumes
required and at competitive prices from the Company’s major trading partners,
the loss of any major trading partner, or the discontinuation of vendor
financing may seriously harm its business because it may not be able to
manufacture and sell its customers’ products on a timely basis in sufficient
quantities or at all. Other factors, including reduced access to
credit by the Company’s vendors resulting from economic conditions, may impair
its vendors’ ability to provide products in a timely manner or at competitive
prices. The Company also relies on other vendors for critical
services such as transportation, supply chain and professional
services. Any negative impacts to the Company’s business or liquidity
could adversely impact its ability to establish or maintain these
relationships.
The
Company has lost the services of its key technical director, Krishan Sudan, who
unexpectedly passed away in January 2010.
Krishan
Sudan, the Company’s technical director since 2002 and architect of our unique
resins, passed away in January 2010. Although the Company has
retained a qualified replacement for Mr. Sudan and continues to be able to
produce the Company’s proprietary resins, solving technical problems in the
future may be more difficult and may lead to production delays or product
quality problems. If such production delays or quality problems arise
in the future, they could jeopardize customer relations and the Company’s growth
plans.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
discussion is intended to further the reader’s understanding of the consolidated
financial statements, financial condition, and results of operations of
Paneltech International Holdings, Inc. This discussion should be read
in conjunction with the consolidated financial statements, notes and tables
which are included elsewhere in this Current Report on form 8-K. This
discussion includes forward-looking statements that involve risk and
uncertainties. As a result of many factors, such as those set forth
under “Risk Factors,” actual results may differ materially from those
anticipated in these forward-looking statements.
Subsequent
Events
Merger
On
December 23, 2009, Paneltech LLC merged with and into Paneltech Products, a
wholly owned subsidiary of the Company, to become the Company’s principal
operating business, referred to in this Current report as the “Paneltech
Business.” In order to better reflect the Company’s new principal
business, the Company changed its name from Charleston Basics, Inc. to Paneltech
International Holdings, Inc. Prior to the Merger, the Company’s
principal operating business was the sale of outdoor camping goods, survival
products and tactical gear, referred to in this Current Report as the
“Pre-Merger Business.” Immediately following the Merger, the Company
sold all of its assets relating to this Pre-Merger Business to Cambridge, an
entity controlled by Mr. Lieber, a former CEO of the Company. The
terms of the Merger and the sale of the Pre-Merger Business assets are described
in Item 1.01 under the headings “Agreement and Plan of Merger”
and “Asset Purchase
Agreement” of this Current Report and are hereby incorporated by
reference.
In
connection with the Merger, the former members of Paneltech LLC exchanged their
Paneltech LLC membership interests for Common Stock of the
Registrant. As a result of this exchange the former Paneltech LLC
members currently own approximately 88% of the Registrant’s outstanding Common
Stock, before adjusting for any conversion or exercise of any Series A Preferred
Stock or the Warrants into Common Stock of the
Registrant.
Following
consummation of the Merger, the Company entered into Securities Purchase
Agreements with three investors and raised an aggregate of $1.65 Million in an
offering of the Company’s Series A Preferred Stock and Warrants, referred to
throughout this Current Report as the “Offering”. Of the $1.65
million of proceeds raised, $375,000 was used to buy back certain shares of
Common Stock held by a former member of Paneltech LLC. The Company
also issued a Promissory Note in the amount of $375,000 to complete the purchase
of shares of Common Stock from the former Paneltech LLC member.
Company
Overview
The
Registrant was incorporated under the laws of the State of Delaware on April 4,
2006 primarily for the purpose of engaging in the Pre-Merger
Business. Upon consummation of the Merger between the Registrant’s
Paneltech Products subsidiary and Paneltech LLC, an emerging “green” composite
producer and ballistic fabric toll coater founded in 1996, the Paneltech
Business became the Company’s principal operating business. As a
vertically-integrated manufacturer of innovative “green” building materials, the
Company now aims to develop economically feasible and environmentally-friendly
manufacturing processes that allow the production of innovative products that
are competitively affordable and globally accessible. The Paneltech
Business is comprised of four core business units:
PaperStone – Includes the
Company’s principal hard surface products, made from recycled paper and
petroleum-free resin for architectural use and other applications.
Fortrex – The life protection
“Prepreg” (pre-impregnated composite fibers) division of the Company engages in
the production of specialized phenolic resins for use in “ballistics” webs such
as woven Kevlar and fiberglass mats and other life protection materials used as
vehicle armor.
Overlays – Production of
resin/paper composites that enhance structural plywood panel surfaces for the
end use of concrete forming and miscellaneous other uses.
Logistics – Rail car leasing
and transloading.
These core business units are described
in greater detail in Item 2.01 of this Current Report under the heading “COMPLETING OF ACQUISITION OR
DISPOSITION OF ASSETS - Description of Business.”
Results of Operations for the year
ended December 31, 2008
compared to the year ended December 31, 2007
Revenues
for the year ended December 31, 2008 were $17,405,486 compared to $12,101,497
for the year ended December 31, 2007. In 2008, the Company received
several large contracts for the production of Fortrex products resulting in
revenue during the year of $6.4 million compared to no Fortrex sales in
2007. Despite overall contraction in building construction in 2008,
Paperstone revenue grew to $4.4 million in 2008 from over $2.8 million in 2007
due to market development and expansion. As the construction industry
contracted in 2008 due to the recession, revenue from the Overlays unit declined
from $6.1 million to $3.6 million.
Gross
profit grew to $3,992,602 for the year ended December 31, 2008 from $2,153,819
for the year ended December 31, 2007. Gross profit percentage grew to
22.9% in 2008 from 17.8% in 2007. The percentage improvement was due
to the increase in Fortrex contracts in 2008 for which the gross margin
percentage was 41%. Raw material costs for PaperStone rose in 2008 as
the Company sought higher grade pigments for its various colors. The
Company was also affected by higher commodity prices in 2008 which lowered the
gross margin percentage for both PaperStone and Overlays.
Operating
expenses grew to $2,049,992 in 2008 from $1,822,446 in 2007 due to the hiring of
a Controller mid-year in 2008 and the hiring of a Brand Manager, a Senior VP of
Product Development, and a Sales and Operations Planning Manager in the fourth
quarter of 2008. The Controller was hired in response to increases in
the Company’s revenue and associated increases in accounting
workload. The Brand Manager position was added to develop and improve
the recognition, presence and value of the Company’s brands. The
Senior VP of Product Development and the Sales and Operations Planning Manager
were hired to develop the Company’s Fortrex capabilities and
products.
As of
December 31, 2007, Paneltech LLC’s line of credit maximum limit Shorebank
Facility was $1,700,000 and further limited to the eligible accounts receivable
and inventory. The amount available to Paneltech LLC, over the amount
borrowed, was $386,863.
The
accounts receivable balance was $1,542,634 on December 31, 2008 and $506,497 on
December 31, 2007.
During
the year ended December 31, 2008, Paneltech LLC had sales to one customer in the
amount of $6,433,320 at 36.4% of total sales. As of December 31,
2008, accounts receivable from the customer was $920,807. This
concentration was due to several large Fortrex contracts with one
customer.
During
the year ended December 31, 2007, Paneltech LLC had sales to two customers in
the amount of $1,444,789 and $1,307,812 at 12.3% and 10.7%,
respectively. As of December 31, 2007, accounts receivable from these
customers were $0 and $68,000, respectively.
The
inventory balance was $2,277,592 on December 31, 2008 and $1,786,068 on December
31, 2009.
Results of Operations for the nine
months ended September
30, 2009 compared to the nine months ended September 30,
2008
Revenues
for the nine months ended September 30, 2009 were $6,979,912 compared to
$13,911,586 for the nine months ended September 30, 2008. In 2009,
the PaperStone, Overlays, and Logistics business unit volumes were adversely
impacted by the economic recession compared to the comparable period in
2008. PaperStone revenue declined 24%, Overlays declined 47% and
Logistics declined 57%. In 2009, the Company’s unfinished 2008
carryover Fortrex contracts were completed but no new, comparably sized
contracts were received or started by the Company. Sales of Fortrex
products fell to $1,500,000 for the nine months ended September 30, 2009,
compared to $4,600,000 for same period the prior year.
Gross
profit for the nine months ended September 30, 2009 was $1,562,949 compared to
$3,569,032 for the same period the prior year. Gross profit percentage fell to
22.4% for the nine months ended September 30, 2009 from 25.7% for the nine
months ended September 30, 2008. The decline in the gross profit
percentage was due to a general decline in demand for prepregging services,
resulting in fewer high margin Fortrex contracts being awarded to the
Company.
Operating
expenses grew to $2,203,584 for the nine months ended September 30, 2009 from
$1,492,007 for the nine months ended September 30, 2008. This
increase in operating expenses was principally due to expenses associated with
the Merger, increases in legal and accounting fees, and additional salaries
associated with hiring new employees. Legal and accounting fees
increased by $189,000 in 2009 compared to the comparable period the prior
year. Additionally, during the first nine months of 2009, the Company
incurred expenses relating to the Merger, including the need to audit Paneltech
LLC’s 2007 and 2008 financial results. In 2009, salaries and
associated travel and increased marketing expenses increased by $449,000 due to
hiring three new managers including Brand Manager, Senior VP of Product
Development, and Sales and Operations Planning Manager. Product
development increased by $88,000 as the Company developed and qualified
additional Fortrex products and sought to improve the surface treatments for
RainStone, the outdoor siding version of PaperStone products.
The
accounts receivable balance was $1,118,494 on September 30, 2009 and $2,082,018
on September 30, 2008.
During
the nine months ended September 30, 2009, the Company had sales to one customer
in the amount of $1,495,225, which constituted 20.4% of total
sales. As of September 30, 2009, accounts receivable from the
customer was $328,009.
Current
Operating Plans and Trends
The
Company is seeking to increase revenue from its PaperStone/RainStone and Fortrex
products in fiscal 2010 by increasing its marketing, advertising and promotion
efforts, as well as increased trade show attendance and other activities,
including website improvements. More specifically, the Company plans
to hire new marketing managers, expand product promotion efforts, improve
PaperStone/RainStone production processes, and commercialize the Company’s new
moldable Stonkast product line. The Company has also added a new
European sales director.
In 2009,
the continuity of military spending was interrupted by the change in
Administration and its efforts to reduce operations in Iraq, which contributed
to the slow year for the hard armor supply chain participants, including the
Company. As a result of increased military activity in Afghanistan
and increasing acceptance of composite armor solutions worldwide, request for
quotes (RFQ) activity has increased. The Company believes, although
there can be no assurance, that it will be awarded one or more Fortrex contracts
by the second quarter of 2010.
The
Company believes that demand for its products will exceed its current capacity
by late spring or summer of 2010. In anticipation of this increased
demand, the Company has acquired a second saturator/coater and term financing
has been arranged for its installation, which is expected to be completed by
mid-year in 2010.
Liquidity
and Capital Resources
The
Company has traditionally financed its working capital needs with earnings and a
line of credit. The line of credit advance rates have been 75% of
eligible accounts receivable and 50% of eligible inventory. Capital
project needs have been traditionally financed with bank term loans and
earnings.
Pursuant
to an Assumption Agreement dated December 23, 2009 (referred to in this Current
Report as the Assumption Agreement) with Paneltech Products and Shorebank
Pacific (“Shorebank”),
entered into in connection with the Merger, Paneltech Products assumed and
agreed to pay and perform all covenants and obligations of Paneltech LLC set
forth the loan documents between Shorebank and Paneltech LLC, as if the such
loan documents had originally been made, executed and delivered by Paneltech
Products. By operation of law as a result of the Merger, and by
virtue of the Assumption
Agreement
and consents delivered by Shorebank, the Company’s wholly owned and principal
operating subsidiary, Paneltech Products, has a $1,500,000 line of credit with
Shorebank, with an interest rate at 3.75 points over the Shorebank’s index rate
(3.75% at February 9, 2010) (the “Shorebank
Facility”). The Shorebank Facility is currently set expire on
February 28, 2010, and is secured by accounts receivable, inventory, equipment
and the personal guarantees from members of Paneltech LLC. Pursuant
to the Assumption Agreement, the Registrant will be required to enter into a
guarantee in connection with the Shorebank Facility and Paneltech Products will
be required to enter into a Security Agreement. The balance
outstanding on the Shorebank Facility at December 31, 2008 and December 31, 2007
was $1,359,188 and $864,223, respectively.
The
Shorebank Facility was originally in the amount of $1,700,000 and was set to
expire on September 30, 2009, but on November 30, 2009, the Shorebank Facility
was extended to February 28, 2010, the amount of the facility was reduced to
$1,500,000, and the line interest rate was increased from 1.5 points over the
bank's index rate (3.25% at December 31, 2008) to 3.75 points over Shorebank’s
index rate (3.75% at February 9, 2010). The interest rate increase and the
reduction in the amount available under the Shorebank was in part due to the
covenant violations described below.
The
Company's Shorebank Facility is governed by a credit agreement containing
certain restrictions and covenants. Under these restrictions, the Company must
maintain certain levels of working capital and net worth and maintain certain
financial ratios (current ratio, cash flow coverage, and debt to net
worth). On October 22, 2009, the Paneltech LLC received Notice of
Default from Shorebank, stating that Paneltech LLC did not satisfy the
requirements of the Cash Flow Coverage covenant under the Shorebank Business
Loan Agreement. Paneltech LLC and Shorebank entered into a
Forbearance Agreement dated as of December 17, 2009, pursuant to which Shorebank
waived the debt service coverage covenant violation until February 28, 2010 and
forbear and reset certain other covenants pursuant to a Change in Terms
Agreement, which will remain in effect until the credit facility’s maturity
date, February 28, 2010. As of February 4 2010, the Company the
outstanding principal balance on the Shorebank Facility was
$517,284. The Company is currently negotiating with Shorebank to
renew, replace or extend the Shorebank Facility upon its expiration on February
28, 2010, although there can be no assurances that these efforts will be
successful.
On
November 18, 2008, Anchor Mutual Savings Bank (“Anchor Bank”) granted a
construction loan for $1,819,000, to Paneltech LLC for the purpose of plant
expansion by installing a second saturator/coater (the “Anchor Loan”), which has been
assumed by Paneltech Products by operation of law under the terms of the
Merger. The Anchor Loan is evidenced by a promissory note dated
November 18, 2008 and Change in Terms dated September 16, 2009 (the “Anchor Note”). The
Anchor Loan is funded as expenditures are made for the expansion and at project
completion the loan will be converted to a normal term loan. On
January 5, 2010, the Company and Anchor Bank entered into a Change in Terms
Agreement relating to the Anchor Note. The January 5, 2010 Change in
Terms Agreement provides for the maturity date for the instruments evidencing
the existing debt under the Anchor Note to be extended to July 1, 2017, and an
extension of interest only payments beginning January 1, 2010 to continue on the
same day of each month thereafter until July 1, 2010; followed by 83 consecutive
payments of principal and interest in the amount of $27,231.82 beginning August
1, 2010, and continuing on the same day of each month thereafter. This is to be
followed by one payment of principal and interest on July 1, 2017; the unpaid
principal balance on the note, together with all accrued interest and charges
owing in connection therewith, being due and payable on the maturity date unless
demanded earlier. As of February 3 2010, the outstanding principal
balance on the Anchor Note was $470,462.30.
Liquidity
and Capital Resource Plan for the year ended December 31, 2010
The
Company received $1,650,000 in connection with the Offering, and may seek to
sell additional securities in 2010. There are currently no
commitments or understandings with regard to such possible future offerings of
securities by the Company. The Company’s ability to engage in
additional financings in the future are subject to the approval of the holders
of a majority of the Series A Preferred Stock, which approval must include the
Lead Investor.
The
Company has continued access to the previously established construction loan,
the Anchor Loan, for the planned completion of the second saturator/coater
line. The Anchor Loan will finance approximately 80% of the project
costs. The remainder of the cost of the project is anticipated to be
no more than $450,000 and will be financed internally or through the sale of
securities mentioned above.
Uncertainties
While the
Company is anticipating increases in PaperStone and Fortrex revenue in 2010,
there are no existing purchase commitments or other assurances that give
certainty that this increase will occur. The Company recently
submitted a quote and sample materials for several large projects but cannot be
assured of being successful obtaining the corresponding purchase
orders. If revenue does not increase over 2009 levels, the Company
will continue to operate with a net loss and will need to acquire additional
funding or significantly reduce costs.
The
Company is uncertain about the general direction of economic or political trends
that may affect the Company’s growth plans. The Overlays and
Logistics business units are heavily dependent on construction trends which the
Company anticipates will remain weak during 2010. The PaperStone unit
is a specialty product which has many applications outside of
construction. As PaperStone has a very small market share of the
solid surfaces market, we believe a successful marketing effort could lead to
increased sales even in a depressed economy. Fortrex revenue can be
impacted by military purchasing trends, which could be directed towards other
armor solutions that the Company does not currently participate in or could be
impacted by political trends, which are beyond the control of the
Company.
While the
Company anticipates that demand for its products will exceed its current
production capacity by the second and third quarters of fiscal 2010, the Company
cannot be certain that it will have the additional funds, over the previously
established loan, available to complete the planned installation of second
saturator/coater by mid-2010.
Due to
losses in 2009, the amount available under the Company’s Shorebank Facility was
reduced to $1,500,000 and the interest rate was increased. The
Company cannot be certain it will be able to remain in compliance with the
covenants applicable to it under the credit facility or that Shorebank will
renew or extend the line of credit. The increasing activity for
PaperStone and Fortrex may require a larger line of credit than is currently
available and the Company cannot be certain that Shorebank will increase the
amount of the Shorebank Facility or extend it beyond its current expiration date
of February 28, 2010.
The
Company cannot be sure that it will collect all of its accounts
receivable. While most of the accounts are current, one customer,
while believed to be sound from an asset standpoint, is liquidity challenged and
has thus entered into a payment plan for $183,950 of past due
invoices. The Company cannot be certain that the customer will be
able to make the required payments.
Off-Balance
Sheet Arrangements.
With the
exception of operating leases, the Company is not a party to any off-balance
sheet arrangements that have, or are reasonably likely to have, a current or
future material effect on the Company’s financial condition, results of
operations or cash flows. The Company enters into operating leases
for both equipment and property. See the notes to the consolidated financial
statements for additional information on the Company’s operating
leases.
Critical
Accounting Policies and Estimates
Basis of
presentation
The
Company’s financial statements have been prepared in accordance with accounting
principles generally accepted in the Unites States of America (“U.S. GAAP”).
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company’s wholly owned subsidiary, Paneltech Rainscreens. All significant
intercompany balances and transactions have been eliminated.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount, net of an allowance for doubtful
accounts. The Company performs ongoing credit evaluations of its
customers' financial conditions but does not require collateral to support
customer receivables. Foreign accounts receivable are insured in most
cases. The allowance for doubtful accounts is the Company’s best
estimate of the amount of
probable
credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on historical write-off experience,
customer specific facts and economic conditions. Bad debt expense is
included in general and administrative expenses, if any.
Outstanding
account balances are reviewed individually for collectability. The
Company has a policy of turning accounts over to collection that have past a
certain age and little or no progress has been achieved. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered
remote.
Inventories
Inventories,
which consist of raw materials and finished goods, are stated at the lower of
cost (first-in, first-out method) or market.
The
Company produces some products which are unique to particular
customers. Inventory items are written off to expense if the customer
to which they were dedicated discontinues purchasing the corresponding
products.
The
inventory cost of slow moving items that are offered at discounted prices are
adjusted to reflect the lower value of cost or market.
Property and
Equipment
Property
and equipment are stated at cost. The costs of additions and
betterments are capitalized and expenditures for repairs and maintenance are
expensed in the period incurred. When items of property and equipment
are sold or retired, the related costs and accumulated depreciation are removed
from the accounts and any gain or loss is included in income.
Depreciation
of property equipment is provided utilizing the straight-line method over the
estimated useful lives of the respective assets as follows:
|
Manufacturing
equipment
|
5
to 10 years
|
|
Furniture
and fixtures
|
3
to 5 years
|
|
Mobile
equipment
|
5
to 10 years
|
Deferred Loan
Costs
Deferred
loan costs are stated at cost and are amortized using the straight-line method
by systematic charges to operations over the life of the related financing
agreement. Amortization expense totaled $7,702 and $7,180 for the years ended
December 31, 2008 and 2007, respectively.
Income
Taxes
As
Paneltech LLC was a limited liability company, Paneltech LLC and its members
were taxed on their proportionate share of Paneltech LLC’s taxable income.
Accordingly, no provision for federal or state income tax has been provided for
in the consolidated financial statements included in this Current Report as
Exhibits 99.1 and 99.2. On December 23, 2009, Paneltech LLC merged
with and into Paneltech Products, a Delaware corporation and wholly owned
subsidiary of the Registrant, with Paneltech Products surviving the Merger and
all former members of Paneltech LLC exchanging their membership interests for
Common Stock of the Registrant.
State
income taxes are computed based on the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the estimated future tax effects attributed
to temporary differences between the book and tax bases of assets and
liabilities and for carry-forward items. The measurement of current and deferred
tax assets and liabilities is based on enacted law. Deferred tax assets are
reduced, if necessary, by a valuation allowance for the amount of tax benefits
that may not be realized.
Effective
January 1, 2007, Paneltech LLC adopted the Financial Accounting Standards Board
(“FASB”) released FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 clarifies the accounting and reporting for uncertainties
in income tax law. FIN 48 prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. The adoption of
this pronouncement did not have a material impact on Paneltech LLC's financial
position or results of operations.
Paneltech LLC Members’
Equity
In
accordance with Paneltech LLC’s operating agreement, net profits or losses of
Paneltech LLC were allocated to its members in proportion to their ownership in
Paneltech LLC at any particular time. The Company’s operating
agreement also specified, based on available cash, as determined by Paneltech
LLC’s Board of Management in its sole discretion, that Paneltech LLC distribute
funds to its members. Upon the merger of Paneltech LLC with and into
Paneltech Products on December 23, 2009, all membership interests in Paneltech
LLC were exchanged for Common Stock of the Registrant.
Revenue
Recognition
Sales are
recognized when products are shipped to customers. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period that the related sales are
recognized.
Advertising
The
Company expenses all advertising costs as incurred. Advertising
expense amounted to $5,095 and $30,265 for the years ended December 31, 2008 and
2007, respectively.
Shipping and
Handling
The
Company classifies revenue from customers related to shipping and handling
charges as a component of net sales and the corresponding freight charges
classified in cost of sales.
Intangible
Assets
The
Company’s amortizable intangible assets include trade name and
patents. These assets are being amortized using the straight-line
method over their estimated useful lives of ten years.
In the
event that facts and circumstances indicate that the cost of an asset may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset’s carrying amount to be determined if a
write-down to fair value is required.
Impairment of Long-Lived
Assets
In the
event that facts and circumstances indicate that the cost of an asset may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to fair value is required.
Use of Estimates in the
Financial Statements
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Estimates that are particularly susceptible to
change relate to the determination of the allowance for loan
losses.
Fair Value of Financial
Instruments
The
carrying amounts reported in the balance sheet for cash, lines of credit and
other liabilities approximate fair value based on the short-term maturity of
these instruments. The carrying amounts reported in the balance sheet
for long-term obligations approximate fair value as such instruments feature
contractual interest rates that are consistent with current market rates of
interest or have effective yields that are consistent with instruments of
similar risk.
Effective
January 1, 2008, Paneltech LLC adopted
Statement of Financial Accounting Standard
(“SFAS”)
No. 157, “Fair Value Measurements,”
(“SFAS 157”) and effective October 10, 2008, Paneltech LLC adopted FASB Staff
Position (“FSP”) No. SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” except as
it applies to the nonfinancial assets and nonfinancial liabilities subject to
FSP 157-2.
SFAS
157 clarifies that fair value is an exit
price, representing the amount that would be received from the sale of an asset
or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability. As a basis for considering such assumptions,
SFAS
157 establishes a three-tier value hierarchy,
which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
Level
1: Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level
2: Other
inputs that are directly or indirectly observable in the
marketplace.
Level
3: Unobservable
inputs supported by little or no market activity.
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. The adoption of this pronouncement did not have any material
impact on Paneltech LLC’s financial position or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities -- Including an Amendment of FASB Statement No.
115” (“SFAS 159”), which is effective for fiscal years beginning after
November 15, 2007. SFAS 159 permits an entity to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Subsequent unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings.
Recent Accounting
Pronouncements
In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160
requires all entities to report minority interests in subsidiaries as equity in
the consolidated financial statements, and requires that transactions between
entities and non-controlling interests be treated as equity. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 with earlier adoption
prohibited. The adoption of this pronouncement is not expected to
have a material impact on Paneltech LLC’s financial position, results of
operations and cash flows. However, SFAS 160 may affect future
periods.
In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets (“SFAS 142”). The objective of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under FASB Statement No. 141R, Business
Combinations, and other U.S. GAAP principles. This FSP is effective
for fiscal years beginning after December 15, 2008. The Company is in
the process of evaluating the impact of this provision on its consolidated
financial position and results of operations.
In May
2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the accounting
principles used in preparing financial statements of nongovernmental entities
that are presented in conformity with US GAAP. Currently, US GAAP
hierarchy is provided in the American Institute of Certified Public Accountants
U.S. Auditing Standards (“AU”) Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles” (“AU Section
411”). SFAS No. 162 is effective for periods after September 15,
2009. The Company does not expect the adoption of SFAS 162 to have an
impact on its financial statements.
In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP 157-3”), which
clarifies the application of SFAS 157 when the market for a financial asset is
inactive. Specially, FSP 157-3 clarifies how (1) management’s internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. The guidance in FSP 157-3 was effective
immediately including prior periods for which financial statements had not been
issued. The implementation of this standard did not have a material impact on
the Paneltech LLC’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”), which replaces SFAS 141, “Business Combinations.” SFAS
141R establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R will have an
impact on accounting for any businesses acquired after the effective date of
this pronouncement.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140,” to improve
the reporting for the transfer of financial assets resulting from 1) practices
that have developed since the issuance of SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” that
are not consistent with the original intent and key requirements of that
Statement and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. SFAS 166
must be applied as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. Paneltech LLC did not, and the
Company does not currently engage in the transfer of financial assets and
therefore, does not expect that the adoption of SFAS 166 will have a material
impact on the Company’s consolidated financial statements. SFAS 166 has been
included in the Transfers and Servicing Topic of the FASB ASC (Topic
860).
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” which
establishes general standards of and accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 was effective for interim and
annual periods ending after June 15, 2009. As required by SFAS 165, the Company
has evaluated subsequent events through January 11, 2010 which is the date of
its condensed consolidated financial statements as of and for the nine months
ended September 30, 2009 were issued. SFAS 165 has been included in the
Subsequent Events.
In
June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation
No. 46(R)” to amend certain requirements of FASB Interpretation
No. 46 (revised December 2003), “Consolidation of Variable Interest
Entities” to improve financial reporting by enterprises involved with
variable interest entities and to provide more relevant and reliable information
to users of financial statements. The Statement is effective as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company will review the requirements of FASB
No. 167 and comply with its requirements. The Company does not expect that
the adoption of this Statement will have a material impact on the Company’s
consolidated financial statements. This standard has not yet been integrated
into the Accounting Standards Codification.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of
February 8, 2010, we had a total of 54,481,022 shares of Common Stock issued and
outstanding and 2,999,205 shares of Series A Preferred Stock issued and
outstanding. Together, our Common Stock and Series A Preferred Stock
constitute our voting securities (the “Voting Stock”).
The
following table sets forth, as of February 8, 2010, taking into account the
Merger, the Collins Repurchase and the Offering: (i) the names and addresses of
each beneficial owner of more than five percent (5%) of any class of our Voting
Stock known to us, the number of shares of any class of our Voting Stock
beneficially owned by each such person, and the percent of any class of our
Voting Stock so owned; (ii) each of the Company’s executive officers and
directors; and (iii) the Company’s directors and executive officers as a group.
Except as otherwise indicated, each of the stockholders listed below has sole
voting and investment power over the shares beneficially owned. The
table includes individual beneficial ownership of common stock that a person has
the right to acquire within 60 days from February 8, 2010. The
principal address of each of the directors and officers listed below is c/o
Paneltech International Holdings, Inc. 2999 John Stevens Way, Hoquiam, WA
98550.
|
Title
of Class
|
Name
And Address of
Beneficial
Owner
|
Amount
of
Beneficial
Ownership
|
Percent
of Class
|
|
Common
|
L.D.
Nott Company
114
First Avenue
Aberdeen,
WA 98520 (1)
|
28,259,608
|
51.87
%
|
|
Common
|
SORB
Management Corporation
3873
Wishkah Road
Aberdeen,
WA 98520 (2)
|
6,178,624
|
11.34
%
|
|
Common
|
Ronald
H. Iff
921
Lake Hill Road
Montesano,
WA 98563
|
4,697,529
|
8.62
%
|
|
Common
|
Collins
Timber Company LLC
1618
S.W. First Ave. Suite 500
Portland,
OR 97201.
|
8,179,657
|
15.01
%
|
|
Common
|
Paragon
Capital LP
110
East 59th
St. 29th
fl.
New
York, NY 10022
|
6,300,000
|
11.56%
|
|
Series
A Convertible Preferred Stock
|
Paragon
Capital LP
110
East 59th
St. 29th
fl.
New
York, NY 10022
|
908,850
(3)
|
30.30
%
|
|
Series
A Convertible Preferred Stock
|
Cornelius
B. Prior, Jr.
Box
12030
St.
Thomas V.I. 00801
|
1,817,700
(4)
|
60.60
%
|
|
Series
A Convertible Preferred Stock
|
Sustainability
Investment Fund 2009 LP
12909
SW 68th
Parkway, Suite 430
Portland,
OR 97223
|
272,655(5)
|
9.09
%
|
|
Directors
and Named Executive Officers
|
|||
|
Common
|
Leroy
D. Nott
|
28,259,608
(6)
|
51.87
%
|
|
Common
|
Scott
Olmstead
|
6,178,624
(7)
|
11.34
%
|
|
Common
|
Trent
Gunter
|
0
(8)
|
*
|
|
Common
|
Sidney
Staunton
|
0
(9)
|
*
|
|
Common
|
R.
Wade Mosby
|
0
(10)
|
*
|
|
Common
|
All
Directors and Named Executive Officers as a group (5
persons)
|
34,438,232
|
63.21
%
|
______________________
* Less
than one percent
|
1.
|
President
of the L.D. Nott Company is Leroy Nott, Paneltech's Director, President
and CEO. The address for L.D. Nott Company is 114 First Avenue,
Aberdeen, WA 98520.
|
|
2.
|
President
of SORB Management Corporation is Scott Olmstead, Paneltech's Director,
CFO and Secretary. The address for SORB Management Corporation
is 3873 Wishkah Road, Aberdeen,
WA 98520.
|
|
3.
|
Based
on the current conversion ratio, the 908,850 shares of Series A Preferred
Stock held by Paragon Capital LP are currently convertible into 4,544,250
shares of the Company’s Common Stock. Each share of Series A
Preferred Stock is convertible into five shares of the Company’s Common
Stock. The conversion and voting of the Series A Preferred
Stock is subject to beneficial ownership limitations set forth in Item
3.02 under the heading “Preferred
Stock”. Does not include 1,514,750 Warrants that are not
exercisable within 60 days of February 8, 2010. As noted
elsewhere in this table, Paragon also holds 6,300,000 shares of restricted
Common Stock.
|
|
4.
|
Based
on the current conversion ratio, the 1,817,700 shares of Series A
Preferred Stock held by Cornelius B. Prior, Jr. are currently convertible
into 9,088,500 shares of the Company’s Common Stock. Each share
of Series A Preferred Stock is currently convertible into five shares of
the Company’s Common Stock. The conversion and voting of the
Series A Preferred Stock is subject to beneficial ownership limitations
set forth in Item 3.02 under the heading “Preferred
Stock”. Does not include 3,029,500 Warrants that are not
exercisable within 60 days of February 8,
2010.
|
|
5.
|
Based
on the current conversion ratio, the 272,655 shares of Series A Preferred
Stock held by the Sustainability Investment Fund 2009 LP are currently
convertible into 1,363,275 shares of Common Stock. Each share
of Series A Preferred Stock is currently convertible into five shares of
the Company’s Common Stock. The conversion and voting of the
Series A Preferred Stock is subject to beneficial ownership limitations
set forth in Item 3.02 under the heading “Preferred
Stock”. Does not include 454,425 Warrants that are not
exercisable within 60 days of February 8,
2010.
|
|
6.
|
Includes
28,259,608 shares that Mr. Nott has the power to vote and dispose, by
virtue of his position as President of the L.D. Nott
Company
|
|
7.
|
Includes
6,178,624 shares that Mr. Olmstead has the power to vote and dispose,
by virtue of his position as President of the SORB Management
Corporation.
|
|
8.
|
Does
not include 1,042,156 Warrants that are not exercisable within 60
days of February 8, 2010.
|
|
9.
|
Does
not include 1,042,156 Warrants that are not exercisable within 60 days of
February 8, 2010.
|
10. Mr.
Mosby does not exercise any voting or dispositive power over the shares owned by
Collins Timber Company LLC. Mr. Mosby is a Senior Vice President of Collins Pine
Company, which owns approximately 64% of the Collins Timber Company
LLC.
EXECUTIVE
OFFICERS AND DIRECTORS
The
information set forth in Item 5.02 of this Current Report under the heading
“Current Executive Officers
and Directors” is hereby incorporated by reference.
Significant
Employees
The
following are employees who are not executive officers, but who are expected to
make significant contributions to our business:
Joseph Kawaky, Senior VP Strategic
Development
Mr.
Kawaky joined Paneltech LLC in October, 2008 as the Company’s Senior VP
Strategic Development. From September 2007 to September 2008 Mr. Kawaky
served as VP Strategic Business Development at ArmorStruxx — a manufacturer of
composite ballistic and blast protection materials for military and homeland
security applications. In addition to managing relationships with key
ArmorStruxx suppliers and customers such as DuPont, Owens Corning, and BAE
Systems, Mr. Kawaky was also responsible for growth initiatives at NovaStruxx —
an ArmorStruxx-owned thermoplastic ballistic prepreg company. He helped
create and also served as the interim President of ArmorStruxx from September
2006 to August 2007. Prior to September 2006 and following the sale of
Tactronics’ marine and aviation navigation business units to defense contractor
SAIC, Mr. Kawaky served during the post-sale transition period as Director of
Commercial Business Development for SAIC’s Geospatial and Imagery Solutions
division. From May 1999 through June 2005, Mr. Kawaky served as the
President of Tactronics’ Retail Division (software products). Mr. Kawaky’s
maritime navigation software and digital cartography business was acquired by
Tactronics in 1999.
Mr.
Kawaky studied biology at Harvard University Extension and later wildlife
management and natural resource economics at the University of Alaska
Fairbanks.
Ron Iff, General Manager
Mr. Iff
is currently the Company’s General Manager, having managed and built the plywood
overlays business. Mr. Iff joined Paneltech LLC in November, 1998 as
Manufacturing Manager. From October 1995 to November 1998, Mr. Iff
had been Program Manager at Weyerhauser. Mr. Iff received his Master
of Forestry degree from Oregon State University in 1977. He also
holds a Bachelor of Science degree in Forest Engineering at Oregon State
University and a Bachelor of Science in Forest Management.
Indemnification
of Directors and Officers
Our
officers and directors are indemnified as provided by the General Corporation
Law of the State of Delaware (the “DGCL”) and our Certificate of
Incorporation.
Our
Certificate of Incorporation provides the personal liability of the Company’s
directors is eliminated to the fullest extent permitted by the provisions of
Section 102 of the DGCL. Notwithstanding the forgoing, directors of
the company remain liable (i) for breach of the director’s duty of loyalty to
the Company, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL, which provides for liability of directors for unlawful payments
of dividends of unlawful stock purchase or redemptions or (iv) for any
transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision in the Company’s
Certificate of Incorporation will apply to or have any effect on the liability
or alleged liability of any director of the Company for or with respect to any
acts or omissions of such director occurring prior to such
amendment.
Our
Certificate of Incorporation further provides that the Company will, to the
fullest extent permitted by the provisions of Section 145 of the DGCL, indemnify
any and all persons (including officers and directors) whom it has power to
indemnify under Section 145 from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by Section 145, and the
indemnification provided for in the Company’s Certificate of Incorporation is
not exclusive of any other rights to which those indemnified may be entitled
under any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such
person. Our bylaws do not place any limitations on the
indemnification of our Officers or Directors.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain
Relationships and Related Transactions
Prior to
the Merger, Paneltech LLC paid $60,787.42 to Laird Capital LLC (“Laird”) pursuant to a six
month Business Advisory & Financial Consulting Agreement under which Laird
provided certain strategic advice to the Company. The Laird
engagement ended in accordance with its terms on October 2,
2009. Sidney Staunton and Trent Gunter are Managing Members of Laird
and performed the consultant services on behalf of Laird, but are no longer
providing services to the Company on behalf of Laird. On December 23,
2009, Messrs. Staunton and Gunter were appointed directors of the
Company.
Michael
Lieber and Alan Donenfeld
On
September 30, 2009, the Registrant entered into that certain Stock Purchase
Agreement (the “September
Purchase Agreement”) with Paragon pursuant to which the Registrant sold
500,000 shares of the Common Stock of the Registrant to Paragon for an aggregate
purchase price of $250,000 (the “Purchase
Price”). The Registrant used up to $225,000 of the Purchase
Price to satisfy debts and liabilities disclosed in the September Purchase
Agreement, including certain liabilities of the Registrant to Michael Lieber,
the Registrant’s President, Chief Executive Officer, Chief Financial Officer,
Secretary and Director at the time the Registrant entered into the September Purchase
Agreement. The remaining $25,000 of the Purchase Price was held by an
Escrow Agent to offset any liabilities, whether disclosed or not disclosed, up
until January 15, 2010.
On
September 30, 2009, pursuant to that certain Selling Stockholder Purchase
Agreement, Michael Lieber t/a Tradewise Associates LLC, a New York limited
liability company wholly owned by Michael Lieber, sold an aggregate of 5,800,000
shares of common stock of the Registrant to Paragon in consideration for
$10,000. The shares represented approximately 96% of the issued and
outstanding shares of common stock of the Registrant at the time of the
sale. Upon the consummation of the transactions contemplated by the
Purchase Agreement and the Selling Stockholder Purchase Agreement, on
September 30, 2009, Michael Lieber resigned as the President, Chief
Executive Officer, Chief Financial Officer, Secretary and Director of the
Registrant. Simultaneously, the Board of Directors of the Company
appointed Alan P. Donenfeld, the general partner of Paragon, as the Registrant’s
President, Chief Executive Officer, Chief Financial Officer and Director of the
Company. Mr. Lieber continued to act as a consultant to the
Registrant in the operation of its Pre-Merger Business until his resignation on
December 23, 2009. As further described in Item 5.02 under the
heading “Donenfeld
Resignation,” which is incorporated herein by reference, on December 23,
2009, Mr. Donenfeld resigned from all positions that he held with the
Company. Prior to consummation of the transactions contemplated by
the Purchase Agreement and the Selling Stockholder Purchase Agreement, the
Company leased, on a month-to-month basis, office space in Mr. Lieber’s home for
$1,500 per month. Following consummation of the transactions
contemplated by the Purchase Agreement and the Selling Stockholder Purchase
Agreement, but prior to the Merger, the Company’s office was located in
Paragon’s corporate offices, for which the Company did not pay
rent.
Mosby
The
information set forth in Item 1.01 of this Current Report under the heading
“Stock Repurchase Agreement -
Collins Repurchase” is hereby incorporated by reference. Mr.
Mosby was, pursuant to the terms of the Repurchase Agreement, selected by
Collins to serve on the Company’s Board of Directors. Mr. Mosby is a
Senior Vice President of Collins Pine Company, which owns approximately 64% of
Collins.
The
information set forth in Item 1.01 of this Current Report under the heading
“Guaranties by
Officers” and in Item 2.03 under the heading “Paneltech LLC Member Notes”
is hereby incorporated by reference.
Director
Independence
Presently,
we are not required to comply with the director independence requirements of any
securities exchange, but two of our directors, Messrs. Gunter and Staunton, do
comply with the independence requirements of Rule 10A-3 of the Exchange
Act. The Company’s Board of Directors also will consult with counsel
to ensure that the board of directors’ determinations is consistent with those
rules and all relevant securities and other laws and regulations regarding the
independence of directors, including those adopted under the Sarbanes-Oxley Act
with respect to the independence of future audit committee
members.
In order
to be considered independent for the purpose of Rule 10A-3 of the Exchange Act,
a director may not, other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee: (a)
accept directly or indirectly any
consulting, advisory, or other compensatory fee from the issuer or any
subsidiary thereof, provided that, unless the rules of the national securities
exchange or national securities association provide otherwise, compensatory fees
do not include the receipt of fixed amounts of compensation under a retirement
plan (including deferred compensation) for prior service with the listed issuer
(provided that such compensation is not contingent in any way on continued
service); or (b)
be an affiliated
person of the issuer or any subsidiary thereof.
Board
Committees
Audit Committee. The Company
has established an audit committee consisting of Messrs. Gunter and Staunton,
the Board’s two independent directors, which has the duty of recommending to the
Board the engagement of independent auditors to audit the Company's financial
statements and to review its accounting and auditing principles. The
Board has not adopted an Audit Committee Charter, but plans to do so in the
future at which time such charter will set forth additional duties for the Audit
Committee. The Audit Committee is at all times composed exclusively
of directors who are, in the opinion of the Board, free from any relationship
which would interfere with the exercise of independent judgment as a committee
member and who possess an understanding of financial statements and generally
accepted accounting principles.
Compensation Committee. The
Board has established a standing compensation committee responsible for
determining executive and director compensation. The Board has not
adopted a Compensation Committee Charter, but plans to do so in the
future. The Compensation Committee consists of Messrs. Mosby and
Staunton.
Strategic Planning Committee.
The Board has established a standing strategic planning committee responsible
for formulating, coordinating and planning the strategic direction of the
Company. The Strategic Planning Committee consists of Messrs. Nott,
Olmstead and Staunton.
Code
of Ethics
As of the
date of this Current Report, the Company has not adopted a Code of Ethics
applicable to all of our employees, officers and directors, wherever they are
located and whether they work for the Company on a full or part-time
basis. The Company intends to adopt a Code of Ethics in the future so
that it complies with the exchange rules and regulations. The Code
will provide rules and procedures to help the Company’s employees, officers and
directors recognize and respond to situations that present ethical
issues. Compliance with this code will be mandatory and those who
violate the standards in this Code will be subject to disciplinary
action.
EXECUTIVE
COMPENSATION AND RELATED INFORMATION
The
following table sets forth all compensation awarded to, paid to or earned by the
following executive officers for the fiscal year ended December 31, 2009 and
2008: (i) individuals who served as, or acted in the capacity of, the Company’s principal
executive officer for the fiscal year ended December 31, 2009 (of which there
were three); (ii) the Company’s two most highly compensated executive officers,
other than the principal executive officer, who were serving as executive
officers at the end of the fiscal year ended December 31, 2009 (of which there
was one); and (iv) up to two additional
- 39
-
individuals,
other than former principal executive officers, for whom disclosure would have
been provided but for the fact that the individual was not serving as an
executive officer of the Company at the end of the fiscal year ended December
31, 2009 (of which there were none). We refer to these individuals
collectively as our “Named Executive Officers”.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
Non-qualified
Deferred Compensation Earnings
|
All
Other Compensation
|
Total
|
||||||||||||||||||||||||
|
Leroy
D. Nott
Chief
Executive Officer and President (1)
|
2009
|
$ | 6,923 | (5) | 0 | 0 | 0 | 0 | 0 | 0 | $ | 6,923 | |||||||||||||||||||||
|
Scott
Olmstead Chief Financial Officer and Secretary (2)
|
2009
|
$ | 5,385 | (6) | 0 | 0 | 0 | 0 | 0 | 0 | $ | 5,385 | |||||||||||||||||||||
|
Michael
Lieber (3)
Former
Chief Executive Officer, and Chief Financial Officer
|
2009
|
0 | (7) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
|
2008
|
$ | 27,400 | (8) | 0 | 0 | 0 | 0 | 0 | 0 | 27,400 | |||||||||||||||||||||||
|
Alan
P. Donenfeld (4)
Former
Chief Executive Officer, and Chief Financial Officer
|
2009
|
0( 9) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
|
1.
|
Mr.
Nott was appointed the Company’s Chief Executive Officer and President on
December 23, 2009.
|
|
2.
|
Mr.
Olmstead was appointed the Company’s Chief Financial Officer and Secretary
on December 23, 2009.
|
|
3.
|
Mr.
Donenfeld served as the Company’s President, Chief Executive Officer,
Chief Financial Officer and sole Director from September 30, 2009, until
December 23, 2009.
|
|
4.
|
Mr.
Lieber served as the Company’s Chief Executive Officer, and Chief
Financial Officer from April 4, 2006 until September 30,
2009. From September 30, 2009 until December 23, 2009, Mr.
Lieber worked as a consultant for the Company, but did not receive any
compensation for his services as a consultant. On December 23,
2009, Mr. Lieber acquired certain of the Company’s assets that the Company
used in previous operations. See Item 1.01 under the heading
“Asset Purchase
Agreement” of this Current Report on Form
8-K.
|
|
5.
|
Mr.
Nott did not receive any compensation from the Registrant in fiscal 2008,
but received $6,923 for service to the Company from December 23,
2009. In fiscal 2009, Mr. Nott received a salary of $173,077 in
connection with employment with Paneltech LLC, which merged with and into
the Company’s wholly owned subsidiary, Paneltech Products to become the
principal operating business of the Company. For fiscal years
2008 and 2009, prior to the Merger, Mr. Nott served as the Director,
President, CEO of Paneltech LLC. As a member of Paneltech LLC.
Mr. Nott was also entitled to certain member
distributions.
|
|
6.
|
Mr.
Olmstead did not receive any compensation from the Registrant in fiscal
2008, but received $5,385 for service to the Company from December 23,
2009. In fiscal 2009, Mr. Olmstead received a salary of
$134,615 in connection with employment with Paneltech LLC, which merged
with and into the Company’s wholly owned subsidiary, Paneltech Products to
become the principal operating business of the Company. For
fiscal years 2008 and 2009, prior to the Merger, Mr. Olmstead served as
the Director, Business Manager, CFO of Paneltech LLC. As a
member of Paneltech LLC. Mr. Olmstead was also entitled to certain member
distributions.
|
|
7.
|
Mr.
Lieber did not receive any salary from the Company during the 2009 fiscal
year.
|
|
8.
|
Although
the Company did not have a formal employment agreement with Mr. Lieber,
the Board agreed to compensate Mr. Lieber with an annual base salary equal
to $106,600, as of October 2006; and commissions equal to 11.5% of the
Company’s gross revenues. Notwithstanding this Agreement, Mr.
Lieber’s total compensation for fiscal 2008 was $27,400. Though
Mr. Lieber was due additional salary plus commissions for the
Company’s 2008 fiscal year (ending March 31, 2009), Mr. Lieber agreed to
waive this additional compensation. Mr. Lieber did not receive
any compensation from the Company in fiscal
2009.
|
|
9.
|
Mr.
Donenfeld did not receive any compensation in connection with his service
to the Company.
|
Narrative
Disclosure to Summary Compensation Table
The
Company does not have any employment agreements with any of its Named Executive
Officers. The Company does not have any pension, annuity, bonus,
stock options, profit sharing or similar benefit plans. Since our
incorporation on April 4, 2006, no stock options or stock appreciation rights
were granted to any of our Named Executive Officers.
Outstanding Equity Awards at Fiscal
Year End
During
the fiscal year ended December 31, 2009, none of our directors or executive
officers held unexercised options, stock that had not vested, or equity
incentive plan awards.
Director
Compensation
During
the fiscal year ended December 31, 2009, none of our directors received any
compensation for the services rendered to our Company in their capacity as
such.
In
January 2010, the Company granted 1,042,156 Warrants to each of Messrs.
Gunter and Staunton. The decision to grant Warrants to Messrs. Gunter
and Staunton was based on the fact that each of the other Directors of the
Company already held a significant equity interest in the Company or was
affiliated with an entity that had a significant equity interest in the
Company. The Board believes that having Directors with equity
incentives would better align the Directors with the best interests of the
Company’s stockholders.
The
Compensation Committee of the Board of Directors has not yet determined the
amount of cash compensation to be paid to the Company’s directors receive in
connection with their service to the Company.
Recent
Sales of Unregistered Securities
The
information set forth in Item 3.02 of this Current Report under the heading
“Sale of Securities” is
hereby incorporated by reference.
Financial
Statements and Supplementary Data
The
disclosure set forth under Item 9.01(a) and (b) to this Current Report
is incorporated into this item by reference.
| ITEM 2.03 |
CREATION
OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE
SHEET ARRANGEMENT OF A REGISTRANT
|
The
information set forth in Item 1.01 of this Current Report under the headings
“Collins Repurchase,”
“Assumption Agreement,”
is hereby incorporated by reference.
Paneltech
LLC Member Notes
In
connection with certain tax distributions owed to Paneltech LLC members, certain
promissory notes were issued to those members that as a result of the Merger
have become obligations of Paneltech Products (the “Member Notes”). The
Member Notes are in the following amounts:
|
L.D.
Nott Company
|
$ | 206,347.20 | ||
|
Collins
Timber Company LLC
|
$ | 160,291.70 | ||
|
SORB
Management Corporation
|
$ | 45,115.47 | ||
|
Ron
Iff
|
$ | 34,300.70 | ||
|
Andrew
R.G. Wilson
|
$ | 4,028.45 | ||
|
Chris
Wentworth
|
$ | 877.62 |
The L.D.
Nott Company is an entity controlled by Leroy Nott, the Company’s President and
CEO. The SORB Management Corporation is an entity controlled by Scott
Olmstead, the Company’s CFO and Secretary. Ron Iff and Chris
Wentworth are employees of the Company. Andrew R.G. Wilson is
currently engaged as a consultant for Paneltech Products. Such
promissory notes are payable in 12 monthly installments commencing March 23,
2010 and bear interest at twelve percent commencing March 23, 2010.
| ITEM 3.02 |
UNREGISTERED
SALES OF EQUITY SECURITIES
|
Sale
of Securities
December
23, 2009
On
December 23, 2009, the Company entered into each of the Merger Agreement and the
Securities Purchase Agreement, as described under the headings “Entry into Agreement and Plan of
Merger” and “Securities
Purchase Agreement”, respectively, in Item 1.01 above, the disclosures
under which are incorporated herein by this reference. All of the
securities offered and sold in such transactions were offered and sold in
reliance on the private placement exemption from registration under Section 4(2)
of the Securities Act, including Rule 506 promulgated under Section
4(2). The Company relied on this exemption based on the fact that (i)
there were a limited number of recipients of such securities, (ii) all such
investors were accredited investors or otherwise, either alone or through
- 42
-
a
purchaser representative, had knowledge and experience in financial and business
matters such that each was capable of evaluating the risks of the investment,
and (iii) the Company had obtained representations from the investors indicating
that they were purchasing for investment only. The securities offered
and sold in the reported transactions are not registered under the Securities
Act, and therefore may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements. The disclosure about the reported transactions
contained herein does not constitute an offer to sell or a solicitation of an
offer to buy any securities of the Company, and is made only as required under
applicable rules for filing current reports with the SEC, and as permitted under
Rule 135(c) of the Securities Act.
December
30, 2009
As part
of the Offering, and as previously reported on the Current Report filed January
6, 2010, the Company entered into a Securities Purchase Agreement on December
30, 2009, which was in substantially the same form, and which sale
was on the same terms, as described Securities Purchase in Item 1.01
above. As previously reported, in connection with the December 30,
2009 sale, the Company issued 272,655 shares of Series A Preferred Stock and
granted 454,425 Warrants for a purchase price of $150,000.
Issuance
of Warrants
In connection with their appointment
and in consideration of future service as Directors of the Registrant, Messrs.
Gunter and Staunton, each received Warrants to acquire 1,042,156 shares of Common Stock. The information set forth
in Item 2.01 under the heading “EXECUTIVE COMPENSATION AND RELATED
INFORMATION - Director Compensation” is incorporated herein by
reference.
On
January 23, 2010, the Registrant issued Warrants to purchase 694,770 shares
Common Stock to Robert Frome for nominal cash consideration and in consideration
for future services. The Warrants issued to Mr. Frome have
substantially the same terms as those issued to the Investors and Messrs. Gunter
and Staunton.
Description
of Registrant’s Securities
Common
Stock
We are
authorized to issue 700,000,000 shares of common stock, par value $0.0001, of
which 54,481,022 shares are issued and outstanding as of the date of this
Current Report. Each holder of shares of our common stock is entitled
to one vote for each share held of record on all matters submitted to the vote
of stockholders, including the election of directors. The holders of
shares of common stock have no preemptive, conversion, subscription or
cumulative voting rights.
Preferred
Stock
We are
authorized to issue 20,000,000 shares of preferred stock, par value $0.0001 per
share, of which 5,453,100 shares have been designated Series A Convertible
Preferred Stock, which are referred to in this Current Report as “Series A
Preferred Stock”. As of February 8, 2010, there were 2,999,205 shares
of Series A Preferred Stock issued and outstanding.
As the
Company did not have any preferred stock issued and outstanding prior to closing
on the Securities Purchase Agreement, the Series A Preferred Stock is the
Company’s most senior equity security. The Series A Preferred Stock
is convertible into shares of the Company’s Common Stock at a conversion rate
that is subject to adjustment, which initially provides for each share of Series
A Preferred Stock being convertible into 5 shares of Common Stock.
Each
share of Series A Preferred Stock accrues dividends at the rate of 12% per annum
of the original issue price of $0.55 per share, subject to
adjustment. Each share of Series A Preferred Stock receives treatment
preferential to the common stock in the case of dividends or any liquidation
event, which includes any voluntary or involuntary liquidation, dissolution or
winding up of the Company or any significant subsidiary of the Company that
results in the termination of the Company’s business. Certain other
transactions are also deemed to be liquidation event. The holders of
the Series A
- 43
-
Preferred
Stock also have the right to elect one director, which right is further governed
by the Investor Rights Agreement. The Series A Preferred Stock is
also subject to certain anti-dilution adjustments and carries first refusal
rights. The conversion price of the Series A Preferred Stock is
adjustable under certain circumstances and the Series A Preferred Stock can be
redeemed under certain circumstances.
If the
Company’s combined earnings for fiscal years 2010 and 2011 equals $19,000,000 or
greater and the Common Stock into which the Series A Preferred Stock is
converted is then traded on a U.S. national securities exchange, Nasdaq or the
OTC Bulletin Board, the Series A Preferred Stock will, subject to a formula set
forth in the Certificate of Designations, be converted automatically into fully
paid and non-assessable shares of Common Stock.
The
holders of the Series A Preferred stock are (i) entitled to vote, separately as
a class (with no other stockholders voting) to approve all matters that affect
the rights, value, or ranking of the Series A Preferred Stock, and, (ii) subject
to the limitations set forth in the Certificate of Designations (including a
4.99% and 9.99% beneficial ownership limitation that limits
conversion and voting rights), cast such number of votes in respect of such
shares of Series A Preferred Stock as will equal the largest whole number of
shares of Common Stock into which such shares of Series A Preferred Stock are
then convertible pursuant to the Certificate of Designations, all matters on
which holders of Common Stock are entitled to vote, voting together as one class
with, and in the same manner and with the same effect as, such holders of Common
Stock.
Furthermore,
except as otherwise permitted by the Certificate of Designations, the Company
will not, so long as any shares of Series A Preferred Stock remain outstanding,
without the affirmative consent or approval of the holders of at least a
majority of the shares of the Series A Preferred Stock then outstanding (which
must include the consent of the Lead Investor, in the event that the Lead
Investor then holds any shares of Series A Preferred Stock), voting separately
as a class:
(i) alter
or change the designations, powers, preferences or rights, or the
qualifications, limitations or restrictions of the Series A Preferred Stock or
increase the authorized number of shares of Series A Preferred
Stock;
(ii)
reclassify the shares of Common Stock or any other shares or any class or series
of capital stock hereafter created junior to the Series A Preferred Stock into
shares of any class or series of capital stock (A) ranking, either as to payment
of dividends, distribution of assets or redemptions, senior to or pari passu
with the Series A Preferred Stock, or (B) which in any manner adversely affects
the holders of Series A Preferred Stock;
(iii) in
any manner authorize, create or issue any class or series of capital stock (A)
ranking, in any respect including, without limitation, as to payment of
dividends, or distribution of assets, senior to or pari passu with the Series A
Preferred Stock or (B) which in any manner adversely affects the holders of
Series A Preferred Stock; or authorize, create or issue any shares of any class
or series of any bonds, debentures, notes or other obligations convertible into
or exchangeable for, or having optional rights to purchase, or any options,
warrants or other rights to acquire, any shares having any such preference or
priority or so adversely affecting the holders of Series A Preferred
Stock;
(iv) make
or declare, directly or indirectly, any dividend (in cash, return of capital, or
any other form of assets) on, or make any other payment or distribution on
account of, or set aside assets for a sinking or other similar fund for the
purchase, redemption, or retirement of, or redeem, purchase, retire, or
otherwise acquire any shares of its Common Stock, or of any other capital stock
of the Corporation ranking junior to the Series A Preferred Stock as to the
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, whether now or hereafter outstanding;
(v) enter
into any material transaction or agreement, including but not limited to any
indenture, loan or credit agreement, note, deed of trust, mortgage, security
agreement or other material agreement, lease, license or other instrument,
commitment, obligation or arrangement which is not in the ordinary course of
business and by which any of its properties, assets or rights are bound or
affected;
(vi)
liquidate, dissolve or wind up its affairs;
(vii)
effect or permit, or offer or agree to effect or permit, an Intervening
Transaction; and
(viii)
amend or modify any of the provisions of this Certificate of
Designations.
Subject
to the rights of, and the approval of, the holders of Series A Preferred Stock,
our Board of Directors has the right, without stockholder approval, to issue
preferred shares with rights superior to the rights of the holders of shares of
common stock. As a result, preferred shares could be issued quickly
and easily, negatively affecting the rights of holders of common shares and
could be issued with terms calculated to delay or prevent a change in control or
make removal of management more difficult. Because we may issue up to
20,000,000 shares of preferred stock in order to raise capital for our
operations, your ownership interest may be diluted which results in your
percentage of ownership in us decreasing.
The
foregoing description of the Series A Preferred Stock does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Certificate of Designations, which is attached as Exhibit 3.1
hereto.
Warrants
As of
February 8, 2010, the Company has granted an aggregate of 7,777,757 seven year
warrants with an initial exercise price of $0.12 per share of Common Stock,
referred to in this Current Report as the “Warrants”. The Warrants
may be redeemed under certain circumstances and are subject to a 4.99% and 9.99%
beneficial ownership limitation.
We are
prohibited from effecting the exercise of the Warrants to the extent that as a
result of such exercise the holder of the exercised warrants beneficially owns
more than 4.99% in the aggregate (or 9.99 % if the holder of the
Warrant then existing beneficial ownership is equal to or greater than 5% but
less than 10%) of the issued and outstanding shares of our Common Stock
calculated immediately after giving effect to the issuance of shares of common
stock upon the exercise or conversion of securities of the Company, including
the Series A Preferred Stock and the Warrants. This prohibition may
be waived in certain circumstances.
If at any
date commencing thirty (30) days after the initial exercise date, the VWAP for
each of the immediately preceding sixty (60) consecutive trading days (the
“Measurement Period”)
exceeds $0.192 (subject to adjustment for forward and reverse stock splits,
recapitalizations, stock dividends and the like after the Issue Date) and (ii)
the average daily volume for such Measurement Period exceeds $150,000 aggregate
value of shares of Common Stock per trading day, then the Company may, within
one (1) trading day of the end of such Measurement Period, call for cancellation
of all or any portion of this Warrant for which a notice of exercise has not yet
been delivered for consideration equal to $.0001 per Warrant Share (as defined
in the Warrant attached as Exhibit 4.2
hereto).
The
warrants contain provisions that protect the holders against dilution by
adjustment of the purchase price in certain events such as stock dividends,
stock splits and other similar events. In addition, the warrants have
anti-dilution protection in the event we issue securities at a value less than
the exercise price of the warrants.
The
foregoing description of the Warrants does not purport to be complete and is
qualified in its entirety by reference to the full text of the Warrant, which is
attached as Exhibit
4.2 hereto.
Dividend
Policy
The
Information set forth in Item 3.02 under the heading “MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Dividend
Policy” is incorporated herein by reference.
| ITEM 3.03 |
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS
|
The
information set forth in Item 8.01 of this Current Report under the headings
“Certificate of
Designations” and “Investors Rights Agreement”
is hereby incorporated by reference.
| ITEM 5.01 |
CHANGES
IN CONTROL OF THE REGISTRANT
|
The
information set forth in Item 1.01 of this Current Report is hereby incorporated
by reference.
| ITEM 5.02 |
DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
CERTAIN OFFICERS, COMPENSATORY ARRANGEMENTS OF CERTAIN
OFFICERS
|
Donenfeld
Resignation
On
December 23, 2009, upon the closing of the Merger, Mr. Alan P. Donenfeld, the
Registrant’s sole officer and director prior to the Merger, and also a principal
of Paragon, resigned from each of his positions effective
immediately. Following Mr. Donenfeld’s resignation and pursuant to
the Merger Agreement, Leroy Nott was appointed President, Chief Executive
Officer and Director of the Registrant and Scott Olmstead was appointed
Secretary, Chief Financial Officer and Director of the
Registrant. Upon the closing of the Merger, five directors were
appointed to the Registrant’s Board of Directors. The Board of
Directors consists of Mr. Nott, Mr. Olmstead, R. Wade Mosby, Sidney
Staunton and Trent Gunter. The Audit Committee to the Board of
Directors currently consists of Mr. Gunter and Mr. Staunton, both of whom are
independent Directors.
Current
Executive Officers and Directors Following the Merger
|
Name
|
Age
|
Position
|
|
Leroy
D. Nott
|
60
|
Director,
President, CEO
|
|
Scott
Olmstead
|
56
|
Director,
Secretary, CFO
|
|
Trent
Gunter
|
53
|
Director
|
|
Sidney
Staunton
|
79
|
Director
|
|
R.
Wade Mosby
|
62
|
Director
|
Leroy Nott, President, CEO,
Director
Mr. Nott,
the President, CEO and Director of the Registrant, founded Paneltech LLC in
February 1996 and had been a Director of Paneltech LLC since that
time. From February 1993 to February 1996, Mr. Nott was the General
Manager, Oregon Overlay Division, for Simpson Timber Company where his
responsibilities included management of a business unit that developed and
produced treated webs for domestic and international wood-based panel
manufacturers. Mr. Nott received a Master of Forestry degree from
Yale University in 1978 and his Bachelor of Science degree in forest engineering
from Oregon State University in 1973.
The
information set forth in Item 1.01 of this Current Report regarding the
guaranties by Mr. Nott and the L.D. Nott Company, and the information set forth
in Item 2.03 of this Current Report regarding the Promissory Note held by the
L.D. Nott Company are hereby incorporated by reference.
Scott Olmstead, Secretary, CFO,
Director
Mr.
Olmstead, Secretary, CFO and Director of the Registrant, was a Director of
Paneltech LLC since February 2006. In February 1996, Mr. Olmstead
joined Mr. Nott in founding Paneltech LLC. From December 1989 to
March 1995, Mr. Olmstead was partner in Snow Mountain Pine, Ltd., a $30 million
company in Hines, Oregon. At Snow Mountain Pine, Mr. Olmstead set up
all financial systems, IT and the personnel department. Mr. Olmstead
has been a Certified Management Accountant since 1995. He received
his Bachelor of Science degree in accounting from Northern Arizona
University.
The
information set forth in Item 1.01 of this Current Report regarding the
guaranties by Mr. Olmstead and the SORB Management Corporation, and the
information set forth in Item 2.03 of this Current Report regarding the
Promissory Note held by the SORB Management Corporation are hereby incorporated
by reference.
Trent Gunter, Director
Mr.
Gunter has served as Director of the Company since December 23, 2009. Mr.
Gunter is currently a managing member of Laird Capital LLC, a merchant banking
firm headquartered in New York which he co-founded in 2008. From 2003 to
2008, Mr. Gunter was President of Chadbourn Securities, Inc., an investment
banking firm and registered broker/dealer. From 1998 to 2002, Mr. Gunter
was a founding partner of the merchant banking firm Laird & Co. LLC.
From 1995 to 1998, Mr. Gunter was a consultant specializing in sourcing foreign
private capital for small-cap U.S. companies. From 1992 to 1994, Mr.
Gunter was a Senior Vice President and Manager of the Intelligence Unit at
Credit Lyonnais Securities (USA), Inc. (CLS). From 1988 to 1992, Mr.
Gunter was a Vice President at Daiwa Securities America, responsible for sales
and trading of Japanese equity derivatives. From 1985 to 1988, Mr. Gunter
worked at Morgan Stanley in the sales and trading of Japanese equity warrants
and convertible bonds. From 1982 to 1983, Mr. Gunter was a Second Vice
President in the treasury department of Chase Manhattan Bank N.A. From
1981 to 1982, Mr. Gunter worked in the foreign exchange department of the
Continental Grain Company. Mr. Gunter began his career in the treasury
division of Citibank, N.A. in 1978 where he was employed until 1981. Mr.
Gunter is a member of the Board of Directors and Audit Committee of Quark
Pharmaceuticals, Inc. Mr. Gunter received his Bachelor of Science in
Finance and The Management of Entrepreneurship from the Wharton School at the
University of Pennsylvania and received his Master of Business Administration
from the Anderson School of Management at the University of California, Los
Angeles.
The
information set forth in Item 3.02 of this Current Report regarding the Warrants
to be granted to Mr. Gunter is hereby incorporated by reference.
Sidney Staunton, Director
Mr.
Staunton has served as a Director of the Company since December 23, 2009.
Mr. Staunton is currently a managing member of Laird Capital LLC, a merchant
banking firm headquartered in New York which he co-founded in 2008. Mr.
Staunton is also a founding principal of Staunton McLane, a financial and
operational advisor firm, formed in 2002. From 1998 to 2002, Mr. Staunton
was a founding partner of the merchant banking firm Laird & Co. LLC.
From 1973 to 1998, Mr. Staunton operated Sidney Staunton Inc., a merchant
banking firm he founded. From 1981to 1991, Mr. Staunton served as Chairman
of the Board of Directors of Bailey Corporation, an automotive components
company. From 1961 to 1972, Mr. Staunton was a principal of Laird, Inc., a
New York Stock Exchange member firm engaged in investment banking. He was Chief
Executive of Laird from 1968 to 1972. From 1957 to 1961, Mr. Staunton
gained experience in commercial banking, as a lending officer at Citicorp.
Mr. Staunton is a Trustee Emeritus of the Lawrenceville School where he served
on the Board of Directors as a member of the Finance and Executive
Committee. Mr. Staunton also served on the Board of Directors of The
Strang Cancer Prevention Center in New York. Mr. Staunton received his
Bachelor of Arts in Economics from Princeton University.
The
information set forth in Item 3.02 of this Current Report regarding the Warrants
to be granted to Mr. Staunton is hereby incorporated by reference.
R. Wade Mosby, Director
Mr. Mosby
has served as one of our directors since December 23, 2009. Wade
Mosby is Senior Vice President of the Collins Companies a Portland, Oregon,
based integrated forest products firm. The Collins Companies is a 155
year old, family owned firm with timberland and manufacturing operations in
Oregon, California, Pennsylvania and West Virginia. Mosby has worked
in senior executive positions with the Collins Companies for the past twenty
years and is a leading advocate of FSC third party forest
certification.
Prior to
his employment with the Collins Companies, Mr. Mosby held sales and marketing
positions with Roseburg Forest Products, Bohemia and
Kimberly-Clark. Mr. Mosby is the past chairman of the Oregon Business
Association and the Composite Panel Association and currently serves on the
boards of Sustainable Northwest, Biomass Power Association, Oregon BEST and Mull
Drilling Company. Mr. Mosby received his Bachelors degree in Business
Administration from Fort Lewis College in 1969.
The
information set forth in Item 1.01 of this Current Report under the heading
“Stock Repurchase Agreement -
Collins Repurchase” is hereby incorporated by reference. Mr.
Mosby was, pursuant to the terms of the Repurchase Agreement, selected by
Collins to serve on the Registrant’s Board of Directors.
Right
to Appoint Additional Director
Under the
provisions of the Investor Rights Agreement, Paragon has the right to appoint a
sixth director to the Registrant’s Board of Directors which the Registrant
expects to occur within 30 days after the date hereof. Upon the
appointment of such additional director, the Registrant will file a Current
Report on Form 8-K providing all applicable information relating to the
appointment of such additional director.
Family
Relationships amongst Directors and Officers
There are
no family relationships between any director or executive officer of the
Company.
Related
Party Transactions
The
information with respect to related party transactions between the Company and
any of the Company’s directors and/or officers is provided elsewhere in this
Item 5.02.
Involvement
in Certain Legal Proceedings
None of
the appointed directors has (i) been involved as a general partner or executive
officer of any business which has filed a bankruptcy petition; (ii) been
convicted in any criminal proceeding nor is subject to any pending criminal
proceeding; (iii) been subjected to any order, judgment or decree of any court
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activity; and
(iv) been found by a court, the Securities Exchange Commission or the
Commodities Future Trading Commission to have violated a federal or state
securities or commodities law.
Compensatory
Arrangements
The
information set forth in Item 2.01 of this Current Report under the heading
“Executive
Compensation” with respect Director Compensation for each of Messrs.
Nott, Olmstead, Gunter, Staunton and Mosby is hereby incorporated by
reference.
Compensatory
arrangements for Messrs. Nott and Olmstead for fiscal 2010 have not yet been
determined by the Compensation Committee of the Company’s Board of
Directors.
| ITEM 5.03 |
AMENDMENTS
TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR
|
The
information set forth in Item 8.01 of this Current Report under the heading
“Certificate of
Designations” is hereby incorporated
by reference.
The
information set forth in Item 8.01 of this Current Report under the heading
“Name Change
Merger” is
hereby incorporated by reference.
Fiscal
Year-End Change
In
connection with the Merger, the Registrant’s Board of Directors agreed by
written consent to change the fiscal year to end on December
31. Previously, the Registrant’s fiscal year had a fiscal year ending
on March 31.
| ITEM 8.01 |
OTHER
EVENTS
|
Press
Release
On
December 28, 2009, the Registrant issued a press release in connection with the
Merger of its wholly-owned subsidiary with Paneltech LLC.
A copy of
the press release is furnished as Exhibit 99.1 to this Report.
Certificate
of Designations
On
December 21, 2009, the Registrant filed a Certificate of Designations,
Preferences and Other Rights and Qualifications of Series A Convertible
Preferred Stock (the “Certificate of Designations”)
with the Secretary of State of the State of Delaware that provides for 5,453,100
shares of preferred stock, $0.0001 par value per share, to be designated as
Series A Convertible Preferred Stock, referred to in this Current Report as the
“Series A Preferred Stock”. As the Registrant did not have any
preferred stock issued and outstanding prior to closing on the Securities
Purchase Agreement, the Series A Preferred Stock will be the Registrant’s most
senior equity security. The Series A Preferred Stock will be
convertible into shares of the Registrant’s Common Stock at a conversion rate
that is subject to adjustment, which initially provides for each share of Series
A Preferred Stock being convertible into 5 shares of Common Stock.
Each
share of Series A Preferred Stock accrues dividends at the rate of 12% per annum
of the original issue price of $0.55 per share, subject to
adjustment. Each share of Series A Preferred Stock receives treatment
preferential to the common stock in the case of dividends or any liquidation
event, which includes any voluntary or involuntary liquidation, dissolution or
winding up of the Registrant or any significant subsidiary of the Registrant
that results in the termination of the Registrant’s business. Certain
other transactions are also deemed to be liquidation event. The
holders of the Series A Preferred Stock also have the right to elect one
director, which right is further governed by the Investor Rights
Agreement. The Series A Preferred Stock is also subject to certain
anti-dilution adjustments and carries first refusal rights. The
conversion price of the Series A Preferred Stock is adjustable under certain
circumstances and the Series A Preferred Stock can be redeemed under certain
circumstances.
The
foregoing description of the Certificate of Designations does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Certificate of Designations, which is attached as Exhibit 3.1
hereto.
Name
Change Merger
Effective
December 29, 2009, the Registrant changed its corporate name from Charleston
Basics, Inc. to Paneltech International Holdings, Inc.
The
Registrant effected the corporate name change by filing a Certificate of
Ownership and Merger with the Secretary of State of the State of Delaware,
pursuant to which a wholly-owned subsidiary of the Registrant merged with and
into the Registrant (the “Name
Change Merger”). A copy of the Certificate of Ownership and
Merger is filed herewith as Exhibit 3.2. The
Registrant is the surviving corporation in the Name Change
Merger. The Certificate of Ownership and Merger amended the
Registrant’s Amended and Restated Certificate of Incorporation to reflect the
change in corporate name. In connection with the Name Change Merger,
FINRA has issued the Registrant a new symbol “PNLT” and the Registrant has
revised its specimen common stock certificate, a copy of which is filed herewith
as Exhibit 4.2.
| ITEM 9.01 |
FINANCIAL
STATEMENTS AND EXHIBITS
|
(a) Financial
Statements of Businesses Acquired. The audited consolidated financial
statements of Paneltech International, L.L.C. and subsidiary for the fiscal
years ended December 31, 2007 and December 31, 2008 and the unaudited condensed
consolidated financial statements of Paneltech International, L.L.C. and
subsidiary for the nine months ended September 30, 2009 and September 30,
2008.
(b) Pro
Forma Financial Information. In accordance with Item 9.01(b), our pro
forma financial statements are filed in this Current Report on Form 8-K as
Exhibit 99.3.
(d) Exhibits
|
Exhibit No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger, dated December 23, 2009, between Registrant, Paneltech
Products and Paneltech LLC. Incorporated herein by reference to
Exhibit 2.1 of Current Report on Form 8-K, filed December 30,
2009.
|
|
2.2
|
Asset
Purchase Agreement, dated December 23, 2009, between Registrant and
Cambridge and Michael Lieber. Incorporated herein by reference
to Exhibit 2.2 of Current Report on Form 8-K, filed December 30,
2009.
|
|
3.1
|
Certificate
of Designations of Registrant dated December 21,
2009. Incorporated herein by reference to Exhibit 3.1 of
Current Report on Form 8-K, filed December 30, 2009.
|
|
3.2
|
Certificate
of Ownership and Merger of Registrant relating to name
change. Incorporated herein by reference to Exhibit 3.2 of
Current Report on Form 8-K, filed December 30, 2009.
|
|
4.1*
|
Specimen
Common Stock Certificate of Registrant.
|
|
4.2
|
Form
of Warrant issued in connection with the Offering. Incorporated
herein by reference to Exhibit 4.2 of Current Report on Form 8-K, filed
December 30, 2009.
|
|
10.1
|
Investors
Rights Agreement dated December 23, 2009, among the Registrant and
Investors signatory thereto. Incorporated herein by reference
to Exhibit 10.1 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.2
|
Collins
Repurchase Agreement, dated December 23, 2009, between Registrant and
Collins Timber Company LLC. Incorporated herein by reference to
Exhibit 10.2 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.3
|
Assumption
Agreement, dated December 23, 2009, between Paneltech LLC, Paneltech
Products and Shorebank Pacific. Incorporated herein by
reference to Exhibit 10.3 of Current Report on Form 8-K, filed December
30, 2009.
|
|
10.4
|
Promissory
Note, dated December 18, 2009, issued by Paneltech LLC in favor of the
L.D. Nott Company. Incorporated herein by reference to Exhibit
10.4 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.5
|
Promissory
Note, dated December 18, 2009, issued by Paneltech LLC in favor of SORB
Management Corporation. Incorporated herein by reference to
Exhibit 10.5 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.6*
|
Form
of Securities Purchase Agreement issued in connection with the
Offering.
|
|
17.1
|
Resignation
of Alan P. Donenfeld, dated December 23, 2009. Incorporated
herein by reference to Exhibit 17.1 of Current Report on Form 8-K, filed
December 30, 2009.
|
|
99.1
|
Audited
consolidated financial statements of Paneltech International, L.L.C. and
subsidiary for the fiscal years ended December 31, 2007 and December 31,
2008. Incorporated herein by reference to Exhibit 99.1 of
Current Report on Form 8-K, filed January 15, 2010.
|
|
99.2
|
Unaudited
condensed consolidated financial statements of Paneltech International,
L.L.C. and subsidiary for the nine months ended September 30, 2009 and
September 30, 2008. Incorporated herein by reference to Exhibit
99.2 of Current Report on Form 8-K, filed January 15,
2010.
|
|
99.3*
|
Unaudited
pro forma condensed combined financial statements relating to the merger
between Paneltech International, L.L.C. and Paneltech Products, Inc., a
wholly owned subsidiary of the
Registrant.
|
|
|
* Filed
herewith.
|
SIGNATURES
Pursuant
to the requirements 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:
February 11, 2010
|
PANELTECH
INTERNATIONAL HOLDINGS, INC.
|
|
|
By:
|
/s/ Scott Olmstead | |
|
Scott
Olmstead
|
||
|
Chief
Financial Officer and Secretary
|
||
EXHIBIT
INDEX
|
Exhibit No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger, dated December 23, 2009, between Registrant, Paneltech
Products and Paneltech LLC. Incorporated herein by reference to
Exhibit 2.1 of Current Report on Form 8-K, filed December 30,
2009.
|
|
2.2
|
Asset
Purchase Agreement, dated December 23, 2009, between Registrant and
Cambridge and Michael Lieber. Incorporated herein by reference
to Exhibit 2.2 of Current Report on Form 8-K, filed December 30,
2009.
|
|
3.1
|
Certificate
of Designations of Registrant dated December 21,
2009. Incorporated herein by reference to Exhibit 3.1 of
Current Report on Form 8-K, filed December 30, 2009.
|
|
3.2
|
Certificate
of Ownership and Merger of Registrant relating to name
change. Incorporated herein by reference to Exhibit 3.2 of
Current Report on Form 8-K, filed December 30, 2009.
|
|
4.1*
|
Specimen
Common Stock Certificate of Registrant.
|
|
4.2
|
Form
of Warrant issued in connection with the Offering. Incorporated
herein by reference to Exhibit 4.2 of Current Report on Form 8-K, filed
December 30, 2009.
|
|
10.1
|
Investors
Rights Agreement dated December 23, 2009, among the Registrant and
Investors signatory thereto. Incorporated herein by reference
to Exhibit 10.1 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.2
|
Collins
Repurchase Agreement, dated December 23, 2009, between Registrant and
Collins Timber Company LLC. Incorporated herein by reference to
Exhibit 10.2 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.3
|
Assumption
Agreement, dated December 23, 2009, between Paneltech LLC, Paneltech
Products and Shorebank Pacific. Incorporated herein by
reference to Exhibit 10.3 of Current Report on Form 8-K, filed December
30, 2009.
|
|
10.4
|
Promissory
Note, dated December 18, 2009, issued by Paneltech LLC in favor of the
L.D. Nott Company. Incorporated herein by reference to Exhibit
10.4 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.5
|
Promissory
Note, dated December 18, 2009, issued by Paneltech LLC in favor of SORB
Management Corporation. Incorporated herein by reference to
Exhibit 10.5 of Current Report on Form 8-K, filed December 30,
2009.
|
|
10.6*
|
Form
of Securities Purchase Agreement issued in connection with the
Offering.
|
|
17.1
|
Resignation
of Alan P. Donenfeld, dated December 23, 2009. Incorporated
herein by reference to Exhibit 17.1 of Current Report on Form 8-K, filed
December 30, 2009.
|
|
99.1
|
Audited
consolidated financial statements of Paneltech International, L.L.C. and
subsidiary for the fiscal years ended December 31, 2007 and December 31,
2008. Incorporated herein by reference to Exhibit 99.1 of
Current Report on Form 8-K, filed January 15, 2010.
|
|
99.2
|
Unaudited
condensed consolidated financial statements of Paneltech International,
L.L.C. and subsidiary for the nine months ended September 30, 2009 and
September 30, 2008. Incorporated herein by reference to Exhibit
99.2 of Current Report on Form 8-K, filed January 15,
2010.
|
|
99.3*
|
Unaudited
pro forma condensed combined financial statements relating to the merger
between Paneltech International, L.L.C. and Paneltech Products, Inc., a
wholly owned subsidiary of the
Registrant.
|
|
|
* Filed
herewith.
|
-
52 -