UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2010
Or
o | 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)
(917) 371-2441
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
———————
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.
o Yes x 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 | o |
| Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x 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 June 28, 2010, there were 111,260,622 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding.
PSI CORPORATION
For The Quarterly Period Ended April 30, 2010
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4T |
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PART II – OTHER INFORMATION |
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Item 1 |
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Item 1A |
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Item 2 |
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Item 3 |
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Item 4 |
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Item 5 |
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Item 6. |
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PART I
FINANCIAL INFORMATION
PSI CORPORATION
BALANCE SHEETS
| APRIL 30, 2010 (Unaudited) | OCTOBER 31, 2009 |
ASSETS |
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CURRENT ASSETS |
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Cash | $ 26,636 | $ 29,607 |
Notes receivable | 36,500 | 73,125 |
Accounts receivable, net | 15,046 | 5,626 |
Other current assets | 226,885 | 163,511 |
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Total current assets | 305,067 | 271,869 |
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Fixed Assets, net | 119,246 | 55,651 |
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Other Assets: |
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Financing costs, net | 91,717 | 154,625 |
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Total Assets | $ 516,030 | $ 482,145 |
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The accompanying notes are an integral part of these financial statement
PSI CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
| APRIL 30, 2010 (Unaudited) | OCTOBER 31, 2009 |
CURRENT LIABILITIES |
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Notes Payable | $ 789,570 | $ 775,355 |
Accounts payable | 943,359 | 1,092,081 |
Accrued expenses | 623,566 | 767,663 |
Accrued interest | 851,082 | 761,438 |
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Total current liabilities | 3,207,577 | 3,396,537 |
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Long- term debt | 2,868,458 | 2,541,763 |
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Total liabilities | 6,076,035 | 5,938,300 |
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Stockholders’ Deficiency: |
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Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued and outstanding | -- | -- |
Common Stock, $.001 par value, 300,000,000 shares authorized, 106,308,242 and 88,074,744 shares issued and outstanding | 106,308 | 88,074 |
Additional paid-in capital | 12,012,846 | 11,060,532 |
Deficit | (17,678,172) | (16,603,774) |
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Less: Common stock in treasury | (987) | (987) |
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Total Stockholders’ Deficiency | (5,560,005) | (5,456,155) |
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Total Liabilities and Stockholders’ Deficiency | $ 516,030 | $ 482,145 |
The accompanying notes are an integral part of these financial statements
PSI CORPORATION
STATEMENTS OF OPERATIONS
| THREE MONTHS ENDED | SIX MONTHS ENDED |
| APRIL 30, | APRIL 30, |
| 2010 | 2009 | 2010 | 2009 |
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) |
REVENUE | $ 5,554 | $ 14,148 | $ 26,153 | $ 14,360 |
Cost of Goods Sold | -- | (7,091) | (3,395) | (7,091) |
Gross Profit | 5,554 | 7,057 | 22,758 | 7,269 |
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ADMINISTRATIVE EXPENSES | 352,669 | 946,020 | 657,690 | 1,339,123 |
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Loss from operations | (347,115) | (938,963) | (634,932) | (1,331,854) |
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OTHER INCOME (EXPENSES) |
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Interest, net | (262,697) | (201,087) | (499,476) | (405,568) |
Gain on disposal of fixed assets | 84,028 |
| 84,028 |
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Loss on settlements | 0 | 0 | (24,000) | 0 |
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NET LOSS | $ (525,784) | $ (1,140,050) | $ (1,074,380) | $ (1,737,422) |
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Basic and diluted weighted average shares | 99,693,272 | 81,675,566 | 94,850,183 | 79,495,030 |
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Basic and diluted loss per share | $ (.01) | $ (.01) | $ (.01) | $ (.02) |
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The accompanying notes are an integral part of these
financial statements
PSI CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30,
(Unaudited)
| 2010 | 2009 |
OPERATING ACTIVITIES |
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Net loss | $ (1,074,380) | $ (1,737,422) |
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Adjustment to reconcile net loss to net cash from operating activities: |
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Depreciation | 9,687 | 36,722 |
Amortization of debt financing costs | 62,908 | 63,006 |
Amortization of debt discounts | 179,336 | 98,954 |
Gain on disposal of fixed assets | (84,028) | -- |
Consulting fees | 258,000 | 698,500 |
Changes in assets and liabilities |
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Accounts receivable | 27,205 | -- |
Other current assets | (63,374) | 5,000 |
Accounts payable and accrued expenses | (40,047) | 334,170 |
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Net cash Provided By (Used in) operating activities | (724,693) | (501,070) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Proceeds from sale of fixed assets | 136,149 | -- |
Purchase of property and equipment | (125,403) | -- |
Net cash Provided by (Used in) investing activities | 10,746 | -- |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of long term debt | 419,000 | 208,000 |
Repayment of long term debt | (23,996) | (12,471) |
Proceeds from sale of common stock | 315,972 | 260,000 |
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Net cash provided by (utilized by) financing activities | 710,976 | 455,529 |
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DECREASE IN CASH | (2,971) | (45,541) |
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Cash, beginning of period | 29,607 | 130,913 |
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Cash, end of period | $ 26,636 | $ 85,372 |
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SUPPLEMENTAL DISCLOSURES: | |||||
Cash paid for interest during the period | $ 4,440 | $ 12,021 | |||
Cash paid for income taxes during the period | $ 0 | $ 0 |
The accompanying notes are an integral part of these
financial statements
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
| 1. | ORGANIZATION AND GOING CONCERN |
Organization
PSI Corporation (the “Company” was organized under the laws of Nevada in June, 1991. As of December, 2004, the Company was a non-operating public shell corporation
PSI provides interactive customer communications systems and applications that support targeted marketing programs with point-of-purchase (POP) services and information that serve shoppers and distributors.
The Company’s multi-functional Pantel kiosks are being installed in supermarket chains throughout the East Coast and Midwest and combine multiple POP services such as in-store product advertising and on-demand coupons, as well as redeeming text-messaged and loyalty-card coupons.
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. At April 30, 2010, the Company had total assets of $516,030 and liabilities of $6,076,035. 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.
| 2. | 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.
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. All other investments, excluding those accounted for using the equity method, will be recorded at cost.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
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.
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 had deferred tax assets of approximately $5,568,651 as of April 30, 2010, primarily related to net operating loss carryforwards (“NOL”), which have yet to be utilized. The utilization of these losses, if available, to reduce the future income taxes, will depend upon the generation of sufficient taxable income prior to the expiration of the NOL. Therefore, at April 30, 2010, the Company established a 100% valuation allowance against the deferred tax assets as the likelihood of recognizing this benefit cannot be certain. The net operating losses will expire in various years through 2030.
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. The Company had no inventory on April 30, 2010 and October 31, 2009.
Loss per Common Share. Basic EPS includes no dilution and is computed by dividing the 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 loss of the Company. Total potentially dilutive shares outstanding at April 30, 2010 and 2009 totaled 45,523,800 and 38,067,372.
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. Product warranty costs have not been material to date.
Property and Equipment. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated life of the asset of 5 years.
Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability 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.
The Company may also license or lease its products (rather than effect outright sales of the same). Revenues derived from licenses or leases 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.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
Advertising. The Company expenses all advertising expenditures as incurred. The Company's advertising expenses were $22,288 and $48,661 for the six months ended April 30, 2010 and 2009, respectively.
Debt financing costs. Debt financing costs are the costs incurred relating to the notes payable. The costs are amortized over the term of the related indebtedness.
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.
Recently Issued Accounting Standards
In June 2009, the FASB issued guidance under ASC Topic 105 Generally Accepted Accounting Principles as it relates to the FASB’s accounting standards codification. This standard replaces previously established guidance, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605) – Multiple Deliverable Revenue Arrangements.” ASU No. 2009-13 eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and expands the disclosures related to multiple deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The adoption of ASU No. 2009-13 is not expected to have a material impact on the Company’s results of operations or financial position.
In September 2009, the FASB also ratified authoritative accounting guidance requiring the sales of all tangible products containing both software and non-software components that function together to deliver the product’s essential functionality to be excluded from the scope of the software revenue guidance. The Company adopted the guidance on a prospective basis during the three months ended September 27, 2009 effective for all periods in 2009. Prior to the adoption of this guidance, the Company assessed all software items included in the Company’s product offerings to be incidental to the product itself and, therefore, excluded all sales from the scope of the related software revenue guidance. As a result, the adoption of this guidance had no impact on the Company’s consolidated financial statements.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
| 3. | FURNITURE AND EQUIPMENT |
Furniture and equipment consists of the following:
| April 30 | October 31, |
| 2010 | 2009 |
Digital displays | $125,403 | $ 70,598 |
Less: accumulated amortization | 6,157 | 14,947 |
| $119,246 | $ 55,651 |
Depreciation expense for the six months ended April 30, 2010 and 2009 totaled $9,687 and $36,722, respectively.
| 4. | STOCKHOLDERS’ EQUITY |
Warrants
Warrant transactions are as follows:
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| Number of Warrants |
| Weighted Average Exercise Price |
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Outstanding, November 1, 2008 |
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| 32,372,014 |
| $ | 0.12 |
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Granted |
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| 1,037,500 |
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| 0.13 |
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Exercised |
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Expired |
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Outstanding, October 31, 2009 |
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| 33,409,514 |
| $ | 0.12 |
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Granted |
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| 12,114,286 |
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| 0.05 |
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Exercised |
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Expired |
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Outstanding, January 31, 2010 |
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| 45,523,800 |
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| 0.12 |
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Exercisable warrants: |
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October 31, 2009 |
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| 33,409,514 |
| $ | 0.12 |
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PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
| 5. | LITIGATION |
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 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.
| 6. | DEBT |
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 was converted into 208,333 shares of common stock in December 2008.
In May and June of 2008, the Company entered into a new series of Bridge Notes with several unrelated parties totaling $470,000. The Bridge Notes are due six months from the date of issuance and incur interest at the rate of 10% per annum. The notes are convertible by the holder at any time at a conversion price equal to the per share price of a new issuance. These notes were not paid by the due date of the agreements and are currently in default.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
In connection with the Bridge Notes, the Company also issued warrants to purchase 470,000 shares of the Company’s common stock at an exercise price of $.15, and warrants to purchase 470,000 shares of the Company’s common stock at an exercise price of $.25. 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 totaling $47,112. 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.
In April 2009, the Company entered into additional bridge note agreements aggregating $30,000. The terms and conditions of the notes are substantially identical with the Bridge Notes issued in May and June 2008. The Company also issued warrants to purchase 90,000 shares of the Company’s commons stock at an exercise price of $.05 per share. No expense was recorded for these warrants as the additional cost was not material.
In July and August 2009, the Company entered into additional bridge note agreements aggregating $140,000. The terms and conditions of the notes are substantially identical with the Bridge Notes issued in May and June 2008. The Company also issued warrants to purchase 150,000 shares of the Company’s commons stock at an exercise price of $.05 per share. No expense was recorded for these warrants as the additional cost was not material.
In March 2009, the Company obtained interest free advances from two of its officers totaling $40,000.
Through April 30, 2010, the Company issued 4,531,332 shares of common stock in payment of accrued interest.
Round D Loans
Commencing May through October 2007, the Company entered into notes (“Round D Notes”) with several unrelated parties totaling approximately $2,766,000. The Round D Notes incur interest at rates ranging from 12% to 14% per annum, payable semi-annually and are due 3 years from the date of issuance.
In connection with the Round D Notes, the Company also issued warrants to purchase 7,221,500 shares of the Company’s common stock at an exercise price of $.15. 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 totaling $549,011. 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 3.57%; and expected lives of 5 years.
The Company issued Round D notes aggregating $150,000 in November 2008. In connection with the notes, a warrant to purchase 412,500 shares of stock was granted to the holder. The terms and conditions of the note and warrant are identical to those described above. No expense was recorded for these warrants as the additional cost was not material.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
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 were payable on a monthly basis commencing November 30, 2007. The Company did not make principle payments on the loan and is in default on the note. Accrued interest had been paid through October 31, 2008. During the fiscal year ended October 31, 2009, the Company issued 100,000 shares of common stock in payment of accrued interest.
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 towards the interest, legal costs and principal on the note. At April 30, 2010, there was $12,409 in principal remaining on the note.
Round F loans
In November 2009, the Company entered into a series of convertible notes aggregating $319,000. The notes are due one year from the date of issuance and incur interest at the rate of 10% per annum. In January 2010, the Company issued an additional note totaling $100,000. The terms and conditions of the note are identical to the notes issued in November 2009.
In connection with the notes, the Company issued five year warrants to purchase 12,114,286 shares of the Company’s common stock at an exercise price of $.05 per share. The warrants may be exercisable at any time for a period of 5 years. In connection with the issuance of the warrants and conversion features, the Company has reflected a value totaling $233,427. 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 2.08 to 3.57%; and expected lives of 5 years.
| 7. | COMMITMENTS |
Operating Leases
The Company leases office space and equipment under a non-cancelable operating lease agreement expiring in November 2012.
The minimum rental commitments under noncancelable operating leases that have remaining noncancelable lease terms in excess of one year at October 31, 2009 are as follows:
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Years Ending October 31 |
| Future | |
2010 |
| $ | 24,732 |
2011 |
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| 24,732 |
2012 |
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| 2,061 |
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Total |
| $ | 51,525 |
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Total rent expense for these operating leases was approximately 21,406 and $36,931 for the six months ended April 30, 2010 and 2009, respectively.
PSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 2010
| 8. | INCOME TAXES |
The Company has not filed federal or state tax returns for the years ended October 31, 2006, 2007, 2008 and 2009. The Company did not believe it owes material federal or state taxes for these fiscal years as a result of its operating losses. At April 30, 2010, the Company had an operating loss carry forward of approximately $13,942,541 for federal tax purposes state tax purposes, which expire through 2030.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating losses and tax credit carryforwards. The significant components of net deferred income tax assets for the Company are:
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| April 30, October 31, |
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| 2010 |
| 2009 |
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Deferred tax assets: |
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Net operating loss carryforward |
| $ | 4,680,563 |
| $ | 4,258,140 |
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Accrued expenses not currently deductible |
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| 791,968 |
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| 762,220 |
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Inventory reserve |
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| 96,120 |
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| 96,120 |
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Deferred tax assets before valuation |
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| 5,568,651 |
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| 5,116,480 |
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Valuation allowance |
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| (5,568,651 | ) |
| (5,116,480 | ) |
Net deferred income tax assets |
| $ | — |
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Generally accepted accounting principles requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's history of operating losses, management has provided a valuation allowance equal to its net deferred tax assets.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion of the financial condition and results of operations of the Company set forth below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act. When used in this Form 10-Q, or in the documents incorporated by reference into this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, without limitation, the statements regarding the Company’s strategy, future sales, future expenses, future liquidity and capital resources. All forward-looking statements in this Form 10-Q are based upon information available to the Company on the date of this Form 10-Q, and the Company assumes no obligation to update any such forward-looking statements. The Company’s actual results could differ materially from those discussed in this Form 10-Q. Factors that could cause or contribute to such differences (“Cautionary Statements”) include, but are not limited to, those discussed in Item 1. Business — “Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K, which are incorporated by reference herein and in this report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on the Company’s behalf, are expressly qualified in their entirety by the Cautionary Statements.
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 coupon kiosks throughout the country. These kiosks come standard with the ability to process Coupons and provide loyalty enrolment cards for a loyalty program designed for specific stores.
Our kiosks provide consumers with information and functionality needed to redeem coupons for obtaining immediate discounts in store. Digital signage screens attached to the kiosks provide advertising opportunities for both national and local advertisers
The kiosks are placed in supermarkets and display promoted products on the Digital screen as well providing the ability to redeem coupons in order to purchase at a discounted rate. The system tracks the number of dispensed coupons and as well calculates the rebates that the store is due. The upper screen can be used as a tool to advertise store promotions and it has an interface allowing the local store to display and show special promotions. It receives its information from central servers that distributes the data to specific locations as require. The loyalty enrolment program and dispensing of loyalty cards is designed to automate the manual function provided by the store employees and allow the system to gather information on specific purchase trends.
Results of Operations
The Company earned revenue of $5,554 in the three months ended April 30, 2010, compared to revenue of $14,148 in the previous year’s quarter. The Company earned revenue of $26,153 in the six months ended April 30, 2010, compared to revenue of $14,360 in the previous year’s six month period ended April 30, 2009. The Company continues to derive nominal revenue from its kiosks.
The Company’s net loss for three months ended April 30, 2010 was $525,784, compared to a net loss of $1,140,050 in the three months ended April 30, 2009. The significant decrease in net loss was due primarily to the reduction of administrative expenses from $946,020 to $352,669 due to incurring approximately $440,500 less in consulting fees during the relevant period.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities was $724,693 for the six months ended April 30, 2010 compared to $501,070 of cash used in operating activities for the six months ended April 30, 2009.
Net cash provided by financing activities was $710,976 for the six months ended April 30, 2010, compared to $455,529 of net cash provided by financing activities in the six months ended April 30, 2009. The cash provided by financing activities in the second quarter of 2010 increased primarily due to the issuance of $211,000 more of long-term debt from same period in 2009 (see Note 6 to the financial statements).
As discussed in Note 6 to the financial statements, we are in default of a number of our promissory notes, including, but not limited to, the Shelter Island Opportunity Fund Notes and the Miller Financial Network Note (as such terms are defined in Note 6 to the financial statements).
We have and continue to accrue material and significant penalties and interest expense as a result of these defaults. There is no guaranty we will ever be able to cure these defaults and repay the notes including interest and penalties. These defaults raise a substantial concern regarding our ability to continue as a going concern.
From November 2009 through January 2010, we entered into a series of convertible notes aggregating $419,000. The notes are due one year from the date of issuance and incur interest at the rate of 10% per annum. In connection with the notes, we issued five year warrants to purchase 9,114,286 shares of our common stock at an exercise price of $.05 per share.
In March 2009, we obtained interest free advances from two of its officers totaling $40,000.
In April 2009, we entered into additional bridge note agreements aggregating $30,000. The convertible bridge note is due six months from the date of issuance and incurs interest at the rate of 10% per annum. The note is convertible by the holder at any time at a conversion price equal to the per share price of a new issuance. We also issued warrants to purchase 30,000 shares of our commons stock at an exercise price of $.15 per share and warrants to purchase 30,000 shares of our common stock at an exercise price of $.25 per share.
Cash and cash equivalents
We had cash and cash equivalents of $26,636 as of April 30, 2010.
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, 2009, 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.
We will need to able to raise significant capital to in order to implement the installation of our kiosks. There is no guaranty that we will be able to raise significant funds or that any funds raised will be on terms favorable to us.
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 Financial Statements set forth in Item 1 hereof.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4.
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
Item 1.
Legal Proceedings
From time to time the Company may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of business.
We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations.
Item 1A.
Risk Factors
There have been no material changes to our risk factors as previously disclosed in our most recent 10-K filing.
Item 2.
Unregistered Sales Of Equity Securities And Use Of Proceeds.
None.
Item 3.
| Defaults Upon Senior Securities |
None. Please see Note 6 to our Financial Statements for a complete discussion of all defaults with respect to various promissory notes issued by us that have occurred prior to this fiscal quarter.
Item 4.
Submission of Matters to a Vote of Security Holders
| None. |
Item 5.
Other Information
This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subjected to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.
Item 6.
Exhibits |
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EXHIBIT |
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NUMBER |
| DESCRIPTION |
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31.1 |
| Certification of Principal Executive Officer pursuant to Sarbanes-Oxley Section 302 |
31.2 |
| Certification of Principal Financial Officer pursuant to Sarbanes-Oxley Section 302 |
32.1 |
| Certification of Principal Executive Officer pursuant to Sarbanes-Oxley Section 906 |
32.2 |
| 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 |
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| By: | /s/ David Foni |
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| Name: | David Foni |
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| Title: | Chief Executive Officer |
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| Date: | June 29, 2010 |
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By: | /s/ Eric Kash |
Name: | Eric Kash |
Title: | Chief Financial Officer |
Date: | June 29, 2010 |