UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2008
Or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: _____________ to _____________
Commission File Number: 0-20317
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PSI CORPORATION
(Exact name of registrant as specified in its charter)
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| Nevada | 88-0270266 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7222 Commerce Center Drive, Suite 230, Colorado Springs, CO 80919
(Address of Principal Executive Office) (Zip Code)
(719) 359-5533
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¨Yes þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | ||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of September 22, 2008, there were 81,784,989 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding.
2
For The Quarterly Period Ended January 31, 2008
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | 4 | |
| Item 2. | 15 | |
| Item 3. | 16 | |
| Item 4T | 16 | |
| 16 | ||
| PART II – OTHER INFORMATION | ||
| 16 | ||
| Item 1 | 16 | |
| Item 1A | 16 | |
| Item 2 | 16 | |
| Item 3 | 16 | |
| Item 4 | 16 | |
| Item 5 | 16 | |
| Item 6. | 16 | |
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND ITS INDUSTRY. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND PROSPECTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
PART I
FINANCIAL INFORMATION
Financial Statements
PSI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2008 (Unaudited) | OCTOBER 31, 2007 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 42,462 | $ | 407,201 | ||||
| Accounts receivable, net | 71,932 | 45,723 | ||||||
| Inventory | 225,000 | 283,677 | ||||||
| Other current assets | 159,487 | 157,063 | ||||||
| Total current assets | 498,881 | 893,664 | ||||||
| Furniture and equipment, net | 9,309 | 8,973 | ||||||
| Other Assets | ||||||||
| Loans to formerly affiliated companies | 16,911 | 3,155 | ||||||
| Debt financing costs, net | 189,405 | 150,091 | ||||||
| Total Assets | 714,506 | 1,055,883 | ||||||
The accompanying notes are an integral part of these consolidated financial statement
PSI CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
JANUARY 31, 2008 (Unaudited) | OCTOBER 31, 2007 | |||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,122,235 | $ | 1,098,422 | ||||
| Accrued expenses | 198,518 | 210,052 | ||||||
| Due to Big Fish Marketing, LLC | 50,000 | 60,000 | ||||||
| Total current liabilities | 1,370,753 | 1,368,474 | ||||||
| Long- term debt | 2,036,570 | 1,786,570 | ||||||
| Total Liabilities | 3,407,323 | 3,155,044 | ||||||
| Stockholders’ Deficiency: | ||||||||
| Common Stock | 81,020 | 81,020 | ||||||
| Additional paid-in capital | 10,408,287 | 10,408,287 | ||||||
| Accumulated deficit | (13,181,137 | ) | (12,587,481 | ) | ||||
| Less: treasury stock | (987 | ) | (987 | ) | ||||
| Total Stockholders’ Deficiency | (2,692,817 | ) | (2,099,161 | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | 714,506 | $ | 1,055,883 | ||||
The accompanying notes are an integral part of these consolidated financial statements
PSI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31,
(Unaudited)
| 2008 | 2007 | |||||||
| REVENUE | $ | 222,140 | $ | 248,300 | ||||
| Cost of Goods Sold | 134,535 | 146,442 | ||||||
| Gross Profit | 87,605 | 101,858 | ||||||
| ADMINISTRATIVE EXPENSES | 332,471 | 274,534 | ||||||
| Loss from operations | (244,866 | ) | (172,676 | ) | ||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest, net | (3,473 | ) | (329,927 | ) | ||||
| Cancellation of indebtedness income | 0 | 10,091 | ||||||
| Loss on settlement | (100,000 | ) | 0 | |||||
| Loss on write-down of inventory | (245,317 | ) | 0 | |||||
| NET LOSS | $ | (593,656 | ) | (492,512 | ) | |||
| Basic and diluted weighted shares outstanding | 81,020,396 | 64,467,396 | ||||||
| Basic and diluted loss per share | $ | (.01 | ) | $ | (.01 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements
PSI CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31,
(Unaudited)
| 2008 | 2007 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (593,656 | ) | $ | (492,512 | ) | ||
| Adjustment to reconcile net loss to net cash from operating activities: | ||||||||
| Depreciation | 500 | 350 | ||||||
| Writedown of inventory | 245,317 | |||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | (26,209 | ) | 65,481 | |||||
| Inventory | (186,640 | ) | (143,390 | ) | ||||
| Other current assets | (41,738 | ) | 4,486 | |||||
| Accounts payable | 23,813 | (47,222 | ) | |||||
| Other current liabilities | (11,534 | ) | 352,355 | |||||
| Net cash Provided By (Used in) operating activities | $ | (590,147 | ) | $ | (260,452 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net advances to formerly affiliated entities | (13,756 | ) | 294,492 | |||||
| Purchase of property and equipment | (836 | ) | (2,518 | ) | ||||
| Net cash Provided by (Used in) investing activities | (14,592 | ) | 291,974 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of long term debt | (10,000 | ) | (26,385 | ) | ||||
| Proceeds from issuance of long term debt | 250,000 | 0 | ||||||
| Net cash provided by (utilized by) financing activities | 240,000 | (26,385 | ) | |||||
| INCREASE (DECREASE) IN CASH | (364,739 | ) | 5,137 | |||||
| Cash, beginning of period | 407,201 | 10,943 | ||||||
| Cash, end of period | 42,462 | 16,080 | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest during the year | $ | 3,473 | $ | 89,937 | ||||
| Cash paid for income taxes during the year | $ | 0 | $ | 0 | ||||
The accompanying notes are an integral part of these consolidated financial statements
PSI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3- MONTH PERIODS ENDED JANUARY 31, 2008 AND 2007
| 1. | BASIS OF PRESENTATION |
These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2007.
| 2. | ORGANIZATION AND GOING CONCERN |
Organization
PSI Corporation (the “Company”) was organized under the laws of Nevada in June, 1991, and is a full service kiosk and digital signage company that specializes in the placement and management of self-service kiosks throughout the country. The e-banking kiosks follow a “general store” concept with multiple functions and profit centers. These kiosks come standard with the ability to process money transfers, cash dispensing, debit card dispensing and reloading, as well as bill payment.
The Company’s kiosks provide consumers with information and functionality needed to perform any of their banking needs and more. Digital signage screens attached to the kiosks provide advertising opportunities for both national and local advertisers.
The Company has two vertical products: full motion video digital signage and full service e-banking kiosks.
The Company’s full service e-banking kiosks are fully functional automated teller machines, allowing consumers to process balance inquiries, withdrawals from checking and savings accounts as well as credit cards and the ability to receive cash in multiple denominations with a multilingual interface. Consumers can cash payroll checks, with real-time visual and biometric validation. When cashing a payroll check, consumers can choose to receive cash instantly or load funds onto a debit card. 24-hour customer support is available via the attached handset. In addition, consumers can choose from hundreds of gift cards to purchase, may purchase pre-paid debit cards, may pay online bills with cash, check or credit card and may purchase domestic and international calling cards or talk time for cell phones.
As of December, 2004, the Company was a non-operating public shell corporation. A summary of the successive name changes of the Company appears in the first paragraph of Note 4 (“Acquisitions”). Prior to December 10, 2004, the Company’s operations consisted of administrative costs necessary to maintain the Company and seeking to identify potential operating entities. The Company became an operating entity when such quest resulted in the transaction set forth in the next paragraph.
On December 10, 2004, the Company entered into a reverse merger transaction with friendlyway, Inc., (“FWI”), an ostensible full-service solutions provider of interactive customer communications systems and applications. As a result of this transaction the six stockholders of FWI became the controlling stockholders of the Company. This reverse merger transaction was accounted for as a recapitalization of FWI, as FWI became the accounting acquirer, effective December 10, 2004.
FWI was an early stage business with a limited operating history. However, assumptions furnished the Company by FWI induced the Company to believe FWI to be a potentially high growth entity with the ability to raise the capital required to fund its promised expansion and working capital needs.
The Company is of the view that none of the assumptions motivating the acquisition of FWI were either accurate or capable of being fulfilled. The paramount failure was the refusal of the principal shareholder of FWI to merge its Munich-based operations with those of FWI. The refusal by this 30% (6,000,000 shares) shareholder of FWI (out of an aggregate of 18.000,000 shares issued by the Company in exchange for FWI), to become part of the public entity (which refusal was manifested in the December 2005, resignations of all of the Munich designees on the Board of the public entity), meant that anticipated financing to be provided by Munich would not be forthcoming, that there would not be significant world-wide sales of FWI products, and that the operations of FWI would have to be curtailed. The one remaining director of the Company then terminated the operations of FWI and turned the Company over to a privately-held entity without audited financial statements, each occurring in the spring of 2006.
Going Concern
The Company’s consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern, which contemplates the continuation of operations, the realization of assets and the liquidation of liabilities in the ordinary course of business, and do not reflect any adjustments that might result from the Company being unable to continue as a going concern. Management has indicated that it is cognizant of the need to raise additional capital not only to meet its financial obligations but also to expand the business. These factors cumulatively indicate that there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Accounting Principles. The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States.
Allowance For Doubtful Accounts. The allowance for doubtful accounts reflects PSI’s best estimate of probable losses inherent in the accounts receivable balance. PSI determines the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Cash and Cash Equivalents. PSI considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair value of these investments will approximate their carrying value. In general, investments with original maturities of greater than three months and remaining maturities of less than one year will be classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash equivalents and short-term investments are classified as available for current operations. All cash equivalents and short-term investments are classified as available for sale and are recorded at market value using the specific identification method.
Equity and other investments may include both debt and equity instruments. Debt securities and publicly traded equity securities will be classified as available for sale and will be recorded at market using the specific identification method.
Fair Value. The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, notes payable and accrued liabilities approximate fair value because of the short maturity of these instruments.
Goodwill. Goodwill was tested for impairment during the fiscal year ended October 31, 2006 using a fair-value-based approach. A full impairment of the goodwill was identified and reflected in the statement of operations during the year tested.
Income Taxes. Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” The Company has not filed federal or state tax returns for the 2006 and 2007 fiscal years. The Company does not expect to owe any federal or state taxes for the 2006 and 2007 fiscal years.
Intangible Assets. Intangible assets consist of deferred financing costs and will be amortized using the straight-line method over their estimated period of benefit, ranging from three to four years. PSI will evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Inventories. Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. PSI will regularly review inventory quantities on hand, future purchase commitments with its suppliers, and the estimated utility of its inventory. If such review indicates a reduction in utility below carrying value, PSI will reduce its inventory to a new cost basis.
Loss per Common Share. In 1998, the Company adopted SFAS No. 128, “Earnings Per Share” (“EPS”), which provides for the calculation of basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing the income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the income (loss) of the Company. The effect of the potentially dilutive shares for the three months ended January 31, 2008 and 2007 have been ignored, as their effect would be antidilutive.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of PSI Corporation and its wholly owned subsidiaries (collectively referred to as the “Company” or “PSI”) after elimination of all significant intercompany balances and transactions. Consolidated subsidiaries include friendlyway, Inc. (December 2004, through May, 2006), and Big Fish Marketing Group, Inc. (August, 2006, to the date hereof).
Product Warranty. PSI provides for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, PSI estimates the costs based on historical and projected project failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and country in which PSI will do business, but generally include technical support, parts, and labor over a period generally ranging from 90 days to three years. For software, PSI estimates the costs to provide bug fixes, such as security patches, over the estimated life of the software. PSI will regularly reevaluate its estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. Sales subject to warranty were immaterial during the three months ended January 31, 2008 and 2007.
Property and Equipment. Property and equipment is stated at cost and depreciated using the straight-line method over the estimated life of approximately five years.
Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In the event PSI should enter into contracts where it is obligated to deliver multiple products and/or services, total revenue will be generally allocated among the products based upon the sale price of each product when sold separately.
In the event PSI should in the future license or lease its products (rather than effect outright sales of the same), revenue derived therefrom will be treated as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage period. PSI’s potential multiple year licensing/lease transactions may include the right to receive future updated improvements to its product line. Some multi-year licensing/lease arrangements may include a perpetual license for current products combined with rights to receive future improved/updated versions of such products. Online advertising revenue derived from the kiosks and signage products are and will be recognized as advertisements are displayed. Costs related to PSI’s product line are recognized when the related revenue is recognized.
Use of Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains substantially all its cash balances in a limited number of financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000.
Recently Issued Accounting Standards
In June, 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The Interpretation provides a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, PSI may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for PSI beginning November 1, 2007. The adoption of FIN No. 48 is not expected to have a material impact on the Company. .
In June, 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF Issue No. 06-2 is effective for PSI beginning November 1, 2007. The cumulative effect of the application of this consensus on prior period results should, in the future, be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Elective retrospective application is also permitted.
In fiscal year 2007, we adopted Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires companies to quantify misstatements using both a balance sheet (iron curtain) and an income statement (rollover) approach to evaluate whether either approach results in an error that is material in light of relevant quantitative and qualitative factors, and provides for a one-time cumulative effect transition adjustment. The adoption of SAB No. 108 will not have an impact on PSI’s financial statements.
In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement was effective for us beginning November 1, 2008.
In February, 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 will afford PSI the irrevocable option to carry many financial assets and liabilities at fair values, with changes in fair value recognized in earnings. No. 159 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 159 is effective for PSI beginning November 1, 2008, although earlier adoption is permitted.
| 4. | ACQUISITIONS |
Since inception, the corporate name of the Company has been changed successively: Global Spill Management, Inc. (1991-1998); Biofarm, Inc. (1998-2005); Friendlyway Corporation (2005-2006); and PSI Corporation (2006-to date). Hereinafter, the Company is referred to as “PSI” or the “Registrant.” The management of PSI as of the date hereof assumed their respective offices subsequent to the transactions described in this note.
| A) | Failed Acquisition of Pantel. As previously reported in Form 8-K and Form 8-K/A filings dated respectively, May 3, 2006, and July 12, 2006, Friendlyway Corporation (“FC”) entered into an agreement, dated April 27, 2006, to acquire 100% of the capital stock of Pantel Systems, Inc. (“Pantel”). Such agreement was manifestly deficient in that it contained inadequate representations and warranties, it did not require the receipt by FC of audited financial statements of Pantel for the preceding two-year period, its escrow provisions (the deposit into an escrow account of an aggregate of 8,600,000 of the twenty million shares to be issued by FC in exchange for 100% of Pantel) were not complied with, and its very execution was violative of Rule 14f-1 (1934 Act) and Item 9.01 of Form 8-K. |
For accounting purposes, Pantel would have been considered the acquiring party had the agreement to acquire Pantel been effective. In such event, the Pantel acquisition would have been accounted for as a reverse purchase in accordance with Generally Accepted Accounting Principles (GAAP) and with the management of Pantel in control of PSI. Notwithstanding the deficiencies in the agreement noted above, the management of Pantel became the directors and officers of PSI. Simultaneously with the acquisition of Pantel, PSI ceased all of its operating activities and friendlyway, Inc. (its sole operating subsidiary) discontinued its operations.
Predicated upon a legal opinion received by the present management of PSI concerning the legal status of the 20,000,000 shares of PSI Common Stock to be issued by PSI in exchange for 100% of the Pantel capital stock, the present management of PSI considers the failed acquisition of Pantel to have been a nullity, to have been void ab initio, and to have never been consummated. Accordingly, the accounts and operations of Pantel (which, in any event were de minimis) have been omitted from PSI’s consolidated financial statements. All Common Stock and per share amounts from the date of the failed acquisition of Pantel to October 31, 2006, have been retroactively adjusted to reflect the nullification of the issuance of the 20,000,000 PSI shares.
With respect to the accounting issue presented by the rescission, effective October 31, 2006, of the proposed Pantel transaction, namely, whether rescission voids the proposed Pantel transaction nunc pro tunc or whether recession requires treatment of the Pantel acquisition as a discontinued operation requiring inclusion of Pantel in the PSI consolidated financial statements for the fiscal year ended October 31, 2006, PSI believes that such decision must be decided upon the facts peculiar to the proposed Pantel transaction. In that regard, PSI learned that the Escrow Agreement included as part of the Pantel acquisition agreement, was never actually consummated. The designated escrow agent received neither the 8,600,000 PSI shares nor 100% of the capital stock of Pantel. The failure to deliver a certificate representing 100% of the capital stock of Pantel is evidence that PSI never took possession of Pantel and cannot be deemed ever to have controlled Pantel. The foregoing failures support the PSI position that the proposed Pantel acquisition was void ab initio. The legal opinion received by PSI supports this conclusion.
Additional evidence of the failure to consummate the proposed acquisition of Pantel consists of the following:
| i. | the July 12, 2006, Form 8-K/A filing of PSI signed by the sole shareholder of Pantel specifically states that “no shares of common stock have been issued to consummate the acquisition of Pantel” and that the obligation to deliver to the escrow agent has not been honored. No subsequent Form 8-K filing reflects either the issuance of the 20,000,000 PSI shares or the failure to deliver to the escrow agent; |
| ii. | all of the 20,000,000 PSI shares delivered to the sole shareholder of Pantel have been returned to PSI and the directors and officers of PSI named by Pantel have resigned; |
| iii. | Rule 14f-1 of the 1934 Act was violated when the Pantel management, then in control of PSI, failed to advise the SEC of the change in the majority of the Board of Directors of PSI and that such change was not approved by the Shareholders of PSI; |
| iv. | Neither the Form 8-K nor the Form 9-K/A filings signed by the solo shareholder of Pantel contained the audited financial statements of Pantel required to be filed by Item 9.01 of Form 8-K; and, |
| v. | The sole shareholder of Pantel did not comply with the requirement to file Schedule 13D pursuant to the 1934 Act, indicating his ownership of more than five (5%) of the issued and outstanding shares of PSI Common Stock. |
Predicated upon all of the foregoing, PSI has concluded that the proposed transaction between PSI and Pantel never, in point of fact, was consummated pursuant to the May 3, 2006, agreement. Therefore, the operations of Pantel never belonged to PSI and should not be included in the PSI financial statements for the periods presented.
| B) | Failed Acquisition of Ignition Media Group, LLC. As previously reported in a Form 8-K filing dated August 25, 2006, a wholly-owned subsidiary of FC entered into an Asset Purchase Agreement (“ASP”), dated August 22, 2006, to acquire substantially all of the assets of Ignition Media Group, LLC (“IMG”), a Pennsylvania limited liability company. The Registrant was not a signatory to such ASP. The wholly-owned subsidiary of the Registrant agreed to purchase the assets of IMG for $1,000,000 in cash and an aggregate of 6,818,182 shares of the parent Registrant’s Common Stock. The $1,000,000 was to have been paid in twelve equal monthly installments of $83,333.33 each. The initial installment payment was made at closing. The 6,818,182 shares of the Registrant’s Common Stock were represented as having an agreed aggregate value of $1,500,000. Thus, the aggregate consideration to be paid by the subsidiary for the assets of IMG amounted to $2,500,000 plus the assumption of $180,000 in debt. |
As reported in a Form 8-K filing dated November 13, 2007, the Registrant and IMG entered into a Settlement Agreement and Release (“SAR”) dated November 9, 2007. Such SAR resolved all issues involved in a February 1, 2007, lawsuit initiated by IMG against the subsidiary and counterclaims interposed by the Registrant on May 14, 2007. The Registrant was not named as a party defendant in the action initiated by IMG. However, then-counsel for the Registrant named the Registrant as the plaintiff in the counterclaim interposed in the action initiated by IMG. The SAR obligated IMG to return to the Registrant for cancellation an aggregate of 3,318,182 shares of the initial 6,818,182 shares issued to IMG pursuant to the ASP. The SAR acknowledged that the Registrant was not then current in its required 1934 Act filings and that, therefore, Rule 144 was not applicable to the remaining 3,318,182 shares. The SAR also obligated the Registrant to pay to IMG the additional sum of $100,000. (In some instances, references herein to IMG refer to the shareholder(s) thereof.)
| C) | Failed Acquisition of Captive Audience LLC. As previously reported in a Form 8-K filing dated August 25, 2006, a wholly-owned subsidiary of FC entered into an Asset Purchase Agreement (“ASP”), dated May 18, 2006, to acquire substantially all of the assets of Captive Audience LLC (“CA”), a New Jersey limited liability company. The Registrant was not a signatory to such ASP. The wholly-owned subsidiary of the Registrant agreed to purchase the assets of CA for $1,000,000 in cash and an aggregate of 5,909,591 shares of the parent Registrant’s Common Stock. The $1,000,000 was to have been paid in twelve equal monthly installments of $83,333.33 each. The initial installment payment was made at closing. The 5,909,591 shares of the Registrant’s Common Stock were represented as having an agreed aggregate value of $1,300,000. Thus, the aggregate consideration to be paid by the subsidiary for the assets of CA amounted to $2,300,00. |
As reported in a Form 8-K filing dated November 22, 2006, the Registrant and CA entered into a Settlement Agreement (“SA”), dated November 17, 2006. Such Settlement Agreement resolved all issues involved in a lawsuit initiated on October 18, 2006, by CA against the subsidiary. The Registrant was not named as a party defendant in the action instituted by CA. The subsidiary of the Registrant, an entity known as Pantel Systems, Inc., and Friendlyway Inc., a former subsidiary, the operations of which ceased as of July 31, 2006, were the named defendants. The lawsuit alleged that the purchase of the assets of CA by the subsidiary pursuant to the ASP originally dated May 18, 2006, the addendum thereto dated August 10, 2006, and the closing thereof dated August 22, 2006, resulted in the default by the subsidiary in the payment of $872,809.95 of the cash portion of the purchase price for CA. The lawsuit also alleged the failure by the subsidiary to deliver to CA the 5,909,591 shares of the Registrant’s Common Stock.
The SA provided for the rescission of the transaction between CA and the subsidiary, the retention by CA of $195,000 of the cash portion of the purchase price previously received by CA, and the payment of the additional sum of $90,000 to CA. CA agreed to relinquish all right, title and interest in and to the 5,909,591 shares of Common Stock to be issued to CA and to surrender the promissory note it had previously received at closing in the amount of $872,809.85. (In some instances, reference herein to CA refers to the shareholder(s) thereof.)
| D) | Consequences of Failed Acquisitions. The Company has entered into several contracts relating to the proposed acquisitions of businesses. In connection with such contracts, the Company may have made cash advances to such proposed acquirees. Each of these investments (with the exception of Big Fish Marketing Group, the one remaining operating subsidiary included in these consolidated financials), has been abandoned and the contracts terminated at October 31, 2006. Abandoned investments for the fiscal year ended October 31, 2006 resulted in charges to operations of $2,165,000. These financial statements include the operations of FWI for the period December 10, 2004, through July 31, 2006. |
The three failed acquisitions mentioned in this note, all of which were initiated and consummated by prior alleged management of the Registrant, have all been disavowed by present management. The resolution by present management of the three transactions is not to be construed in any manner as the ratification of the acquisitions initiated and consummated by prior management.
| E) | Acquisition of Big Fish. On August 7, 2006, the Company acquired substantially all of the assets of Big Fish Marketing Group, Inc, a Colorado corporation (“Big Fish”) pursuant to an Agreement and Plan of Reorganization (the “Purchase Agreement”) effective July 26, 2006. In consideration for the Purchase Agreement, the Company paid to Big Fish $150,000 (the “Cash Consideration”) in cash and delivered 4,952,380 shares of the Company’s common stock (having an agreed-upon aggregate value of $1,350,000). |
| 5. | LITIGATION |
This Note embraces all litigation items commenced, disposed of or otherwise resolved during the period November 1, 2004, through January 31, 2007. Thereafter, one item of litigation is referred to in Note 8 hereinafter as a post-balance sheet event.
| A) | On April 27, 2007, FWAG, a German corporation that had received 6,000,000 of the aggregate of 18,000,000 shares issued by the Company effective December 10, 2004, in exchange for 100% of the capital stock of friendlyway, Inc. (“FWI”), sued the Company in California Superior Court in response to the Company’s attempted cancellation of the shares received by FWAG. The Company then instituted a separate action in California Federal District Court (No. C 07 02869 SBA) on June 1, 2007, against FWAG in which the Company alleged that it was fraudulently induced to acquire FWI and to issue 18,000,000 shares of its Common Stock in exchange therefore. The Company sought rescission of the FWI transaction and, to prevent irreparable harm, moved on June 5, 2007, for a temporary restraining order to attempt to preserve the status quo. (The named defendants in the Federal action were believed to own an aggregate of 15,576,000 of the 18,000,000 shares.) |
The law is settled that a party seeking a temporary restraining order must demonstrate either (a) the combination of probable success on the merits or (b) serious issues being raised and the balance of hardships being in favor of the movant. The Court ruled that the Company failed to show a likelihood of success on the Merits, that the securities fraud and breach of contract claims were time-barred, and that its allegations of fraud were precatory and, therefore, unsupported.
Subsequently, the Company was constrained to execute settlement agreements with each of the four named defendants. Such settlements resolved the litigation instituted both by AG and by the Company. Each such settlement agreement differed in content and result and in the disposition of the shares of Common Stock in issue. In sum, the settlements resulted in the net cancellation of 4,401,906 shares of Common Stock and the release of AG claims to an additional 18 million shares thereof. The Company believes it to be significant that its then counsel did not raise the issues of (a) failure to deliver consideration by the shareholders of FWI and (b) damages sustained by the Company as the proximate cause of all AG-appointed Company directors resigning in December, 2006, resulting in only one director of the Company remaining and that such one director initiated the transaction that resulted in the dissipation of Company assets, the decline in the Company’s stock price, and the necessity that present management (from January, 2007) be compelled to effect a reorganization of the Company.
| B) | Additional litigation matters are discussed in Note 4 (Acquisitions). The final resolution of the settlement reached with one of the four defendants mentioned in Note 4 is referred to in Note 8 (Subsequent Event) hereto. |
| 6. | DEBT |
Round A Secured Term Loans
In August 2006, the Company entered into secured term notes (“Round A Notes”) with several unrelated parties totaling $282,500. The Round A Notes were due on February 18, 2009 and incurred an interest rate of the greater of 12% per annum or the prime interest rate plus 4%. Among other provisions, the Round A Notes provided for monthly repayments of principal and interest over a 28 month period commencing in October 2006. The Company failed to make the required payments at that time. Pursuant to the default provisions of the note, the Company incurred a 25% default penalty payment of the then outstanding balance. The Company recorded a $43,750 penalty during the year ended October 31, 2006 which it reflected as additional interest expense.
In connection with the Round A Notes, the Company also issued warrants to purchase 4,900,000 shares of the Company’s common stock at an exercise price of $.01. The warrants may be exercisable at any time for a period of 7 years. In connection with the issuance of the warrants, the Company has reflected a value for the warrants of $96,023. The fair value of the warrant grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 4.86%; and expected lives of 5 years. The warrants meet the requirements to be classified as equity. The value of the warrants was reflected as additional interest and expensed on the date of issuance.
In August 2007, the Company entered into exchange agreements with the holders of the Round A Notes whereby the notes were converted into 2,280,500 shares of the Company’s common stock.
Round B-1 Convertible Term Loans
In July 2006, the Company entered into convertible term notes (“Round B-1 Notes”) with several unrelated parties totaling $830,000. The Round B-1 Notes were due on January 19, 2009 and incurred an interest rate of 14% per annum. Among other provisions, the Round B-1 Notes provided for monthly repayments of principal and interest over a 28 month period commencing in October 2006. The Company failed to make the required payments at that time. Pursuant to the default provisions of the note, the Company incurred a 25% default penalty payment of the then outstanding balance. The Company recorded a $207,500 penalty during the year ended October 31, 2006 which it reflected as additional interest expense.
In connection with the Round B-1 Notes, the Company also issued warrants to purchase 1,976,191 shares of the Company’s common stock at an exercise price of $.19. The warrants may be exercisable at any time for a period of 5 years. In connection with the issuance of the warrants, the Company has reflected a value for the warrants of $41,912. The fair value of the warrant grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 5.06%; and expected lives of 2.5 years. The warrants meet the requirements to be classified as equity. The value of the warrants was reflected as additional interest and expensed on the date of issuance.
In August 2007, the Company entered into exchange agreements with the holders of the Round B-1 Notes whereby the notes were converted into 8,300,000 shares of the Company’s common stock. In addition, the warrants were exchanged for new warrants to purchase 1,976,191 shares of the Company’s common stock which may be exercised at any time over a 5 year period at an exercise price of $.19 per share. No additional expense was recorded for these warrants as the additional cost was not material.
Round B-2 Convertible Term Loans
In October 2006, the Company entered into convertible term notes (“Round B-2 Notes”) with several unrelated parties totaling approximately $960,000. The Round B-2 Notes were due on November 11, 2009 and incurred an interest rate of 14% per annum. Among other provisions, the Round B-2 Notes provided for monthly repayments of principal and interest over a 28 month period commencing in December 2006. The Company failed to make the required payments at that time. Pursuant to the default provisions of the note, the Company incurred a 25% default penalty payment of the then outstanding balance. The Company recorded a $240,000 penalty during the year ended October 31, 2007 which it reflected as additional interest expense.
In connection with the Round B-2 Notes, the Company also issued warrants to purchase 2,047,634 shares of the Company’s common stock at an exercise price of $.19. The warrants may be exercisable at any time for a period of 5 years. In connection with the issuance of the warrants, the Company has not reflected a value for the warrants as the value was not material. The fair value of the warrant grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 15%, risk free interest rate of 5.06%; and expected lives of 2.5 years.
In August 2007, the Company entered into exchange agreements with the holders of the Round B-1 Notes whereby the notes were converted into 9,599,980 shares of the Company’s common stock. In addition, the warrants were exchanged for new warrants to purchase 2,047,634 shares of the Company’s common stock which may be exercised at any time over a 5 year period at an exercise price of $.19 per share. No additional expense was recorded for these warrants as the additional cost was not material.
Bridge Loans
In February and March 2007, the Company entered into notes (“Bridge Notes”) with several unrelated parties totaling approximately $325,000. The Bridge Notes were due on November 11, 2009 and incurred an interest rate of 12% per annum.
In August 2007, the Company entered into exchange agreements with the holders of 300,000 of the Bridge Notes whereby the notes were converted into 3,000,000 shares of the Company’s common stock. The remaining $25,000 remains outstanding at January 31, 2008.
Round D Loans
From May through October 2007, the Company entered into notes (“Round D Notes”) with several unrelated parties totaling approximately $1,520,000. The Round D Notes were incur interest at a rate of 12% per annum, payable semi-annually. Subsequent to October 31, 2007, the Company sold an additional $1,075,000 of the Round D Notes.
Big Fish Notes
In May and June 2006, the Company entered into notes payable aggregating $45,000 with two unrelated parties. The notes are due three years from the date of issuance and incur interest at the rate of 10% per annum. Interest on the notes is payable on a quarterly basis.
Shelter Island Opportunity Fund Notes
In August 2006, the Company entered into a note agreement for the payment of consulting fees to an unrelated party totaling $98,770. The note is due on October 31, 2008 with 11 monthly payments commencing on January 31, 2007 and incurs interest at the rate of 12.25% per annum. Interest on the notes is payable on a monthly basis commencing November 30, 2007.
Miller Financial Network Note
In June 2006, the Company entered into a note agreement with an unrelated party totaling $100,000. The note incurred interest at the rate of 10% per annum. In January 2007, the Company was notified that the note was in default and the holder had elected to accelerate the note. The Company has been making payments monthly payments towards the interest, legal costs and principal on the note. At January 31, 2008, there was $97,800 in principal remaining on the note.
| 7. | COMMITMENTS |
Operating Leases
The Company leases office space and equipment under non-cancelable operating lease agreements expiring through fiscal 2012. These leases contain renewal options and the Company is responsible for certain executory costs, including insurance, maintenance, taxes and utilities.
Employment Agreements
None of the Company’s employees is currently bound by an employment agreement with the Company or any of its subsidiaries.
| 8. | SUBSEQUENT EVENT |
Settlement with Former Chief Financial Officer. On June 13, 2008, Henry C. Lo, the former Chief Financial Officer of Friendlyway Corporation, completed his obligations pursuant to a settlement agreement executed in November, 2007, that terminated litigation instituted by the Registrant against him. Mr. Lo delivered to the Registrant 700,000 shares of Registrant’s Common Stock and $20,000 in cash. The settlement agreement did not purport to extinguish any claims by the Registrant arising out of the FWI transaction and the resolution thereof. See Note 4 (“Acquisitions”).
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
PSI Corporation, doing business as Pantel Systems, Inc. (“PSI” or “the Company”) is a full service kiosk and digital signage company that specializes in the placement and management of self-service kiosks throughout the country. The e-banking kiosks follow a “general store” concept with multiple functions and profit centers. These kiosks come standard with the ability to process money transfers, cash dispensing, debit card dispensing and reloading, as well as bill payment.
Management has devoted almost eighteen months to the development of the Company’s two product lines. Deliveries to customers of the first product line recently commenced; the first installations of the second product line occurred during the week of July 7, 2008. Although the sales volume anticipated by the Company will require substantial additional working capital, the Company believes that the leasing of its products can be accomplished with lease financing.
Results of Operations
The Company earned revenue of $222,140 in the three months ended January 31, 2008, compared to $248,300 in the year-ago quarter. The Company’s net loss for three months ended January 31, 2008 was $593,656, compared to a net loss of $492,512 in the three months ended January 31, 2007. The net loss increase in 2008 was due primarily to a loss taken on settlement of certain litigation matters (see Note 5 in the Notes to Consolidated Financial Statements hereto) and the write-down of fixed assets.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities was $590,147 for the three months ended January 31, 2008 compared to $260,452 of cash used in operating activities for the three months ended January 31, 2007.
Cash provided by financing activities was $240,000 for the three months ended January 31, 2008, compared to $26,385 of net cash used in financing activities in the nine months ended January 31, 2007. The cash provided by financing activities in the first quarter of 2008 was due to proceeds from the issuance of $250,000 of long-term debt, offset by repayment of certain long-term debt (see Note 6 of the Notes to the consolidated financial statements).
Cash and cash equivalents
We had cash and cash equivalents of $42,462 as of January 31, 2008. Due to the substantial doubt of our ability to meet our working capital needs, history of losses and current shareholders’ deficit, in their report on the annual financial statements for the fiscal year ended October 31, 2007, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors.
Critical Accounting Policies and Procedures and Recent Accounting Pronouncements
The Company’s critical accounting policies and procedures and recent accounting pronouncements are set forth in the Notes to our Consolidated Financial Statements set forth in Item 1 hereof.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this report, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be included in the Company’s periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Legal Proceedings
Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
Unregistered Sales Of Equity Securities And Use Of Proceeds.
None
Defaults Upon Senior Securities
None
Submission of Matters to a Vote of Security Holders
None
Other Information
None
Exhibits
| EXHIBIT NUMBER | DESCRIPTION | |
| Certification of Principal Executive Officer pursuant to Sarbanes-Oxley Section 302 | ||
| Certification of Principal Financial Officer pursuant to Sarbanes-Oxley Section 302 | ||
| Certification of Principal Executive Officer pursuant to Sarbanes-Oxley Section 906 | ||
| Certification of Principal Financial Officer pursuant to Sarbanes-Oxley Section 906 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PSI Corporation | |||
| By: | /s/ David Foni | ||
| Name: | David Foni | ||
| Title: | Chief Executive Officer | ||
| Date: | October 29, 2008 | ||
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