U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment Number 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
POWERCHANNEL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0952186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 North Main Street, Suite 395
New City, New York 10956
(Address of Principal Executive Offices)
(845)634-7979
(Issuer's telephone number)
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 13, 2003: 14,295,271 shares of common stock outstanding,
$0.01 par value.
POWERCHANNEL, INC.
(A Development Stage Company)
BALANCE SHEET
(UNAUDITED)
September 30, 2003
September 30, December 31,
2003 2002
(unaudited) (audited)
ASSETS (restated note 15) (restated note 15)
CURRENT ASSETS:
Cash and cash equivalents $ - $ 65,358
Inventory 555,000 693,299
Prepaid Expenses and Advances - 21,502
--------------------------------------------------
TOTAL CURRENT ASSETS 555,000 780,159
--------------------------------------------------
Property and equipment, net 18,997 34,092
Investment in PowerChannel Europe, PLC 630,483 611,025
--------------------------------------------------
$ 1,204,480 $ 1,425,276
--------------------------------------------------
LIABILITIES AND DEFICIENCY IN ASSETS
Accounts payable and accrued liabilities $ 531,039 $ 703,666
Accrued Payroll Taxes payable 115,376
Due to related parties 3,593,884 3,471,216
Note Payable 112,000
--------------------------------------------------
TOTAL CURRENT LIABILITIES 4,352,299 4,174,882
Convertible Notes Payable 280,000 280,000
DEFICIENCY IN ASSETS
Preferred Stock authorized 5,000,000 shares; issued
and outstanding -0- shares - -
Common stock par value $.01 per share; authorized 95,000,000 135,940 21,880
shares, issued and outstanding 13,594,056 shares
Additional paid in capital 6,377,480 4,732,283
Subscription receivable (50,575) (50,575)
Accumulated other comprehensive income (loss) (256,416) (207,417)
Deficit accumulated during development stage (9,634,248) (7,525,777)
--------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (3,427,819) (3,029,606)
--------------------------------------------------
--------------------------------------------------
$ 1,204,480 $ 1,425,276
--------------------------------------------------
See accompanying notes to financial statements.
2
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
NINE MONTHS ENDED NINE MONTHS ENDED July 8, 1998 (Inception)
September 30, 2003 September 30, 2002 to September 30, 2003
(Unaudited) (Unaudited) (Unaudited)
(restated note 15) (restated note 15) (restated note 15)
Gross License Fees - PowerChannel
Europe, PLC $ - $ - 1,894,348
Expenses reimbursed pursuant
to license agreement - - (1,884,348)
---------------------------------------------------------------------------
Net license income - - 10,000
SALES - - -
EXPENSES
Selling general and administrative 446,955 1,641,525 5,389,079
Equity Based Compensation 1,663,446 1,663,446
---------------------------------------------------------------------------
TOTAL EXPENSES 2,110,401 1,641,525 7,052,525
Loss before income (loss) from PowerChannel Europe PLC (2,110,401) (1,641,525) (7,042,525)
---------------------------------------------------------------------------
-
Income (loss) from PowerChannel Europe, PLC 1,932 (50,000) (2,591,723)
NET INCOME (LOSS) BEFORE INCOME TAXES
Income taxes (2,108,469) (1,691,525) (9,634,248)
---------------------------------------------------------------------------
Net Income (loss) (2,108,469) (1,691,525) (9,634,248)
Basic and diluted earnings (loss) per share $ (0.18) $ (0.15)
===========================================================================
Weighted average shares outstanding
basic and diluted 11,661,130 11,212,052
===========================================================================
See accompanying notes to financial statements.
3
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED THREE MONTHS ENDED
September 30, 2003 September 30, 2002
(Unaudited) (Unaudited)
(restated note 15) (restated note 15)
Gross License Fees - PowerChannel
Europe, PLC $ - $ -
Expenses reimbursed pursuant
to license agreement - -
-------------------------------------------------------
Net license income - -
SALES - -
EXPENSES
Selling general and administrative 309,802 270,361
Equity based compensation 1,663,446 -
TOTAL EXPENSES 1,973,248 270,361
Income (Loss) before income (loss) from PowerChannel
Europe PLC (1,973,248) (270,361)
-------------------------------------------------------
-
Income (loss) from PowerChannel Europe, PLC 4,958 (1,633)
NET INCOME (LOSS) BEFORE INCOME TAXES
Income taxes
-------------------------------------------------------
Net Income (loss) $ (1,968,290) $ (271,994)
=======================================================
Basic and diluted earnings (loss) per share $ (0.16) $ (0.02)
=======================================================
Weighted average shares outstanding
basic and diluted 12,334,748 11,212,052
=======================================================
See accompanying notes to financial statements.
4
PowerChannel, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
(Unaudited) (restated note 15)
Common Stock Additional Subscription
Shares Amount Paid in Capital Receivable
Balance at inception
August 10, 1998 - - - -
Shares issued pursuant to intial
capitalization 17,650,000 17,650 (3,350)
Net Loss
---------------------------------------------------------------------
Balance at December 31, 1998 17,650,000 17,650 - (3,350)
Shares issued for exercise of
warrants 2,000,000 2,000 198,000 (200)
Shares issued pursuant to intial
capitalization 1,019,000 1,019 (1,019)
Shares issued pursuant to private
placement 500,000 500 249,500
Shares issued pursuant to
agreement 288,000 288 143,200
Net Loss
---------------------------------------------------------------------
Balance at December 31, 1999 21,457,000 21,457 590,700 (4,569)
Shares issued pursuant to private
placement 200,000 200 199,800
Shares issued for services 40,328 40 99,452
Additional paid in capital from
sale of common stock Powerchannel
Europe, PLC 3,103,764
Instrinsic value of beneficial
conversion feature 280,000
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at December 31, 2000 21,697,328 21,697 4,273,716 (4,569)
Shares issued pursuant to private
placement 183,500 183 458,567 (46,006)
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at December 31, 2001 21,880,828 21,880 4,732,283 (50,575)
Net loss
Other comprehensive income
---------------------------------------------------------------------
Balance at December 31, 2002 21,880,828 21,880 4,732,283 (50,575)
Recapitalization due to reverse
merger (10,668,776) 90,240 (107,091)
Shares issued for services 2,104,226 21,042 1,705,066
Shares issued pursuant to private
placement 277,778 2,778 47,222
Net loss
Other comprehensive loss
---------------------------------------------------------------------
Balance at September 30, 2003 13,594,056 $ 135,940 $ 6,377,480 $ (50,575)
=====================================================================
5
PowerChannel, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
(Unaudited)
(restated note 15) (continued;)
Deficit
Accumulated Accumulated
during Developmen Other Comprehens Total
Stage Income (Loss)
Balance at inception
August 10, 1998 - - $ -
Shares issued pursuant to intial
capitalization 14,300
Net Loss (79,169) (79,169)
-------------------------------------------------
Balance at December 31, 1998 (79,169) - $ (64,869)
Shares issued for exercise of
warrants 199,800
Shares issued pursuant to intial
capitalization -
Shares issued pursuant to private
placement 250,000
Shares issued pursuant to
agreement 143,488
Net Loss (801,212) (801,212)
-------------------------------------------------
Balance at December 31, 1999 (880,381) - (272,793
Shares issued pursuant to private
placement 200,000
Shares issued for services 99,492
Additional paid in capital from
sale of common stock Powerchannel
Europe, PLC 3,103,764
Instrinsic value of beneficial
conversion feature 280,000
Net loss (2,959,100) (2,959,100)
Other comprehensive loss (189,953) (189,953)
-------------------------------------------------
Balance at December 31, 2000 (3,839,481) (189,953) 261,410
Shares issued pursuant to private
placement 412,744
Net loss (1,612,122) (1,612,122)
Other comprehensive loss (147,663) (147,663)
-------------------------------------------------
Balance at December 31, 2001 (5,451,603) (337,616) (1,085,631)
Net loss (2,074,176) (2,074,176)
Other comprehensive income 130,199 130,199
-------------------------------------------------
Balance at December 31, 2002 (7,525,779) (207,417) (3,029,608)
Recapitalization due to reverse
merger (16,851)
Shares issued for services 1,726,108
Shares issued pursuant to private
placement 50,000
Net loss (2,108,469) (2,108,469)
Other comprehensive loss (48,999) (48,999)
-------------------------------------------------
Balance at September 30, 2003 $ (9,634,248) $ (256,416) $ (3,427,819)
=================================================
See accompanying notes to financial statements.
6
POWERCHANNEL, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the period
NINE MONTHS ENDED NINE MONTHS ENDED July 8, 1998 (Inception)
September 30, 2003 September 30, 2002 to September 30, 2003
(Unaudited (Unaudited) (Unaudited)
(restated note 15) (restated note 15) (restated note 15)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: $ (2,108,469) $ (1,691,525) $ (9,634,248)
Intrinsic value of beneficial conversion
feature of convertible notes - - 280,000
Expense recorded on issuance of
stock for services 1,726,108 - 1,825,560
(Loss) income on investment in
PowerChannel Europe PLC (19,458) - 2,265,871
Loss on asset disposal - (16,200) 20,456
Reserve on inventory 138,299 - 138,299
Depreciation 58,868
Change in current operating assets and liabilities
Decrease (increase) in inventory - (687,922) (693,299)
Decrease (increase) in other assets 21,502 (127,889) 1
Due to PowerChannel Europe PLC
relating to operations 122,668 - 820,810
Increase (decrease) in accounts payable - other (58,008) 137,888 645,660
----------------------------------------------------------------
Net cash used in operating activities (177,358) (2,385,648) (4,272,022)
----------------------------------------------------------------
Cash flows from investing activities
Purchases of property and equipment - - (113,416)
Advances to related parties - - (64,935)
Repayments for advances to related parties - - 64,935
Loans to related parties - - (278,027)
Repayments from loans to related parties - - 278,027
---------------------------------------------------------------
Net cash used in investing activities 0 0 (113,416)
---------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes 112,000 - 112,000
Proceeds from issuance of common stock - - 1,220,364
Loans and advances from related parties - 2,400,831 2,773,074
Proceeds from convertible notes - - 280,000
---------------------------------------------------------------
Net cash provided by financing activities 112,000 2,400,831 4,385,438
---------------------------------------------------------------
---------------------------------------------------------------
Net increase (decrease) in cash (65,358) 15,183 0
---------------------------------------------------------------
Cash-beginning of period 65,358 26,980
---------------------------------------------------------------
Cash - end of period $ - $ 42,163
===============================================================
See accompanying notes to financial statements.
7
POWERCHANNEL, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Sealant
Solutions (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operating results expected for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2002.
Note 2. Organization and Operations
PowerChannel Holdings, Inc. was incorporated under the laws of the State of
Delaware on March 26, 1999. The Company's wholly owned subsidiaries,
PowerChannel, Inc. and PowerChannel.com, Inc., were incorporated under the laws
of the State of Delaware on August 10, 1998, and April 19, 2000, respectively.
The Company is a consumer electronics marketing company dedicated to offering a
wide range of electronic appliances and services to the consumer market.
PowerChannel's product line includes low-cost, through-the-television Internet
access in the United States. The Company plans to furnish its products to the
Hispanic market, due to the fact that the product is tailored in all respects to
its audience's linguistic, ethnic, cultural and economic trends. At the same
time, PowerChannel provides these simple and cost-effective Internet access
solutions to the public at large.
Merger
On July 21, 2003 PowerChannel entered into a Stock Purchase and Share Exchange
Agreement whereby Sealant Solutions, Inc. acquired all of the outstanding shares
of PowerChannel, Inc. Under this agreement, Sealant agreed to issue shares equal
to 85% of the fully diluted outstanding shares (or 9,117,525 shares) and an
additional 485,552 shares on a pro-rata basis of Sealant Solutions, Inc. to
8
PowerChannel, Inc. shareholders. Such shares are deemed "restricted" as defined
under the SEC Rule 144. Under the terms of the agreement, Sealant Solutions is
the acquiring company.
The merger is to be accounted for as a reverse merger, which effectively is a
recapitalization of the target company. Subsequent to the merger agreement, the
surviving company changed its name to PowerChannel, Inc. In connection with the
Stock Purchase and Share Exchange Agreement, Sealant Solutions, Inc. increased
its authorized common shares to 95,000,000 and preferred shares to 5,000,000
having a par value of $.01.
Upon the closing date of the merger, the Company entered into an option
agreement with the CEO of Sealant. In exchange for consulting services, the
Company would issue common stock equal to 10% of the fully diluted outstanding
shares of Sealant. Such shares are restricted as defined under SEC Rule 144. The
Company will be granted options to purchase such shares under a right of first
refusal.
After the closing date of the merger, Michael Fasci shall remain on the Board of
Directors and Steven Lampert will be appointed to serve.
Note 3. Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses
amounting to approximately $9,634,246 since inception. The Company intends to
raise additional debt or equity financing to continue its operations if they are
unsuccessful they may be required to cease operations and/or file for
bankruptcy.
Note 4. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. A reserve of $138,299 was recorded for shrinkage or damaged products.
Investment in PowerChannel Europe PLC
The investment in an unconsolidated affiliate, PowerChannel Europe PLC, over
which the Company exercises significant influence but not control, is accounted
for by the equity method.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements and betterments are capitalized, while maintenance and repairs,
which do not extend the useful lives of these assets, are expensed as incurred.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line and accelerated methods. Upon retirement or disposal of assets,
the cost and related accumulated depreciation are removed from the balance
sheet, and a gain or loss is reflected in earnings.
9
The estimated useful lives of the various classes of physical assets were as
follows:
Office equipment 5 years
Furniture & fixtures 7 years
Automobiles 5 years
Income Taxes
The Company is taxed as a C Corporation under the provisions of both the
Internal Revenue Code and state laws.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, accrued expenses
approximate fair value of the short term maturity of these instruments.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with
U.S. generally accepted accounting principles, requires management to make
estimates and assumptions that affects the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
The Company has approximately 9,400 set-top boxes in inventory at December 31,
2003 and believes that these will eventually be sold. However, the Company
recognized no sales from August 10, 1998 (inception) through September 30, 2003.
It is at least reasonably possible that a change in this estimate will occur in
the near term.
Loss Per Share
The Company has adopted SFAS No.128, "Earnings per Share". Loss per common share
are computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the period.
New Accounting Standards
In April 2002, the FASB issued FAS No. 145 (FAS 145), "Recission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical
Corrections," which among other matters, limits the classification of gains and
losses from extinguishment of debt as extraordinary to only those transactions
that are unusual and infrequent in nature as defined by APB Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." FAS 145 are effective no later than January 1, 2003.
10
In June 2002, the FASB issued FAS No. 146 (FAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 generally requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This pronouncement is effective for exit or disposal activities initiated
after December 31, 2002.
In November 2002, the FASB issued FIN No. 45, "Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," an interpretation of SFAS Nos. 5, 57 and 107, and
rescission of FIN No. 34,"Disclosure of Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by the guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after March 31, 2002; while, the provisions of the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of such
interpretation on January 1, 2003 did not have a material impact on the
Corporation's results of operations, financial position or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 will apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply to entities
established prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The disclosure requirements will apply in all
financial statements issued after January 31, 2003. The Corporation has adopted
the provisions of FIN No. 46, such provisions have not had a material effect on
its results of operation, financial position or the related financial statement
disclosures.
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003.
In May 2003, the FASB issued Statements of Financial Accounting Standards No.
150 ("SFAS No. 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". SFAS No. 150 established
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This SFAS is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No.150 and still
existing at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of SFAS No. 150 will not have a material effect on the
financial statements.
The Company adopted the above accounting pronouncements.
11
Note 5. Investment in Unconsolidated Affiliate
Prior to November 1999, the Company beneficially owned 100% of PowerChannel
Limited, which, at the time was an inactive company, with no assets and no
revenues. In November 1999, the Board passed a resolution distributing eighty
(80%) percent of its shareholding in PowerChannel Limited to the Company's
shareholders.
In January 2000, PowerChannel Limited changed its name to PowerChannel Europe
Limited and in April 2000 to PowerChannel Europe PLC ("PCE"). The Company
currently owns 19.68% of the outstanding ordinary shares of PCE. PCE holds the
European rights to the PowerChannel patent-pending business model and know-how,
owned and developed by the Company. A new company with the name PowerChannel
Limited has been incorporated as a subsidiary of PCE to roll out the
PowerChannel model in the UK and Ireland. PowerChannel Limited had entered into
a strategic partnership with Granada Media Group ("Granada").
Under the alliance, the strategic partner was allotted a five (5%) percent
equity investment in PowerChannel Limited convertible into shares in PCE for nil
consideration. PowerChannel Limited was to finance the procurement of the
set-top boxes.
In April 2000, the strategic partner converted its shares in PowerChannel
Limited into shares of PCE and invested approximately (pound) 13 million
(approximately $21 million) for new shares in PCE. As a result of the conversion
and the cash investment, the strategic partner owned 23.5% of the fully diluted
share capital of PCE.
The strategic partnership with Granada terminated in February 2001. As a result
the shares of PCE owned by Granada were returned to PCE, which, in turn were
distributed to its remaining shareholders.
In accordance with accounting for the investment in PCE under the equity method,
the Company is required to record capital transactions of PCE as if the investee
were a consolidated subsidiary. Pursuant to this requirement, the Company, in
2002, recorded an increase of $3,103,764 in their investment in PCE and a
corresponding increase in additional capital.
12
For the years ended December 31, 2002 and 2001, the Company has recorded its
pro-rata share of PCE's (loss) income amounting to ($66,522) and $140,164,
respectively.
Additionally, PCE's consolidated financial statements, which were audited by
auditors, were issued as a going concern since the majority of PCE's assets and
liabilities are to be transferred to the Company.
The following table provides condensed consolidated financial information about
PCE as of December 31, 2002:
2002
-----------
Current assets $ 3,475,844
Non-current assets $ --
Total assets $ 3,475,844
Current liabilities $ 371,043
Total liabilities $ 371,043
Equity $ 3,104,801
Revenues $ 773,145
Net (loss) income $ (338,018)
The current assets included in the above table includes receivables from the
Company aggregating approximately $3.4 million in 2002. Such receivable at
September 30, 2003 was $3.6 million.
Note 6. Series A Convertible Notes
On February 29, 2000, PowerChannel entered into subscription agreements with
seven individuals and in conjunction with such agreements, issued Series A
Convertible Notes. Pursuant to these notes, PowerChannel acquired $280,000 in
investment capital and issued security interests at 7% interest for a term of
three years. At the option of the note holders, these notes may be converted
into common stock for the value of the note at a price of $0.1287 per share. A
beneficial conversion amount was recorded in the amount of $280,000 and expensed
in 2000.
Note 7. Related Party Transaction
PCE
In 2002, the Company bought its entire inventory of set-top boxes from PCE. At
December 31, 2002, the amounts due to PCE consisted of approximately $690,000
related to the aforementioned inventory purchase and approximately $2.8 million
of loans and advances, which are due on demand and are not interest bearing.
Note 8. Stockholders' Equity
PowerChannel, Inc. shareholders exchanged all of their shares of stock for an
equal number of shares in PowerChannel Holdings, Inc. during 1999.
Warrants for the purchase of 300,000 shares of common stock were
outstanding at December 31, 2002 and 2001. These warrants were
subsequently cancelled during July 2003.
13
PowerChannel's certificate of incorporation authorizes the issuance of "blank
check" preferred stock with whatever designation, rights and preferences as may
be determined by the board of directors. Accordingly, the board is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation conversion, voting, or other rights, which could adversely affect
the voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of PowerChannel. The
Company does not currently intend to issue any shares of preferred stock,
however there can be no assurance that it will not do so.
Note 9. Federal Income Taxes
The Company accounts for income taxes in accordance with the asset and liability
method prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
As of December 31, 2002 and 2001 net operating loss (NOL) carryforwards amounted
to approximately $7,500,000 and $5,400,000, respectively and will expire in
between 2016 and 2022. Pursuant to SFAS No. 109, for financial reporting
purposes, a valuation allowance was recorded as of December 31, 2002 and 2001 to
fully offset the Company's net deferred tax assets of approximately $1,125,000
and $810,000, respectively, relating to the NOLs. The Company is not current
with respect to its corporate income tax filings.
Note 10. Commitment
The Company conducts its operations in office space under an operating lease
which expired in December 2002. The lease provided for increases in rent for
utilities and other building operating costs.
Rent expense for the years ended December 31, 2002 and 2001 amounted to
approximately $87,500 and $51,470, respectively.
The Company entered into employment agreements with James Gambrell, Michael
Preston and Steven Lampert on March 1, 2000. The agreements expired on February
28, 2003 and provided for annual salaries of $250,000 for Mr. Gambrell and
$200,000 each for Mr. Preston and Mr. Lampert. Additionally, the agreements
provide for certain fringe benefits and stock options (see Note 12). Amounts
paid to Messrs. Preston and Lampert aggregated to $390,000 and $323,000 for the
years ended December 31, 2002 and 2001, respectively. The aforementioned
employee agreements were cancelled in July 2003. All corresponding liabilities
owed to these employees under these agreements in excess of the amounts already
paid have been waived.
14
Note 11. Licensing Agreements
The Company entered into an Intellectual Property License Agreement in 2000 with
PCE (see Note 7). The Company is the owner of certain inventions, technology,
expertise, know-how and intellectual property, which PCE wishes to use. Pursuant
to the terms of the agreement, the Company has granted PCE a non-transferable
exclusive use of the technology in Europe. In consideration PCE has agreed to
pay the Company an initial payment of $10,000 as well as monthly costs incurred
by the Company for development work. During the period August 10, 1998
(inception) through December 31, 2002, PCE paid the Company $1,894,348, pursuant
to this agreement, of which $1,884,348 is recorded in the financial statements
as license fees.
On August 12, 1998, PowerChannel, Inc. entered into a licensing agreement with
American Interactive Media, Inc. (AIM) to offer free Internet access to
consumers, utilizing AIM supplied set-top appliances and AIM provided Internet
service provider (Web Passport Network). This licensing agreement was superseded
by a new agreement dated May 19, 1999. The new agreement granted to
PowerChannel, Inc. an exclusive worldwide license with the right to sublicense
the "WebPassport system", the "WebPassport intellectual property" and the
"WebPassport technology". PowerChannel, Inc. signed a convertible promissory
note in the amount of $1,090,000 at an interest rate of 3% above the prime rate,
which was scheduled to mature on December 31, 2000. This note represented
$90,000 in set-top appliances and $1,000,000 in prepaid license fees. During
1999, AIM sent PowerChannel, Inc. notification that it was terminating the
license agreement and requested payment in full of the underlying note.
PowerChannel, Inc. disputed the termination notice with AIM and entered into
discussions to settle the dispute. On June 30, 2000, the parties entered into a
termination agreement, which rescinded all previous agreements. Pursuant to this
termination agreement, PowerChannel Holdings, Inc. issued AIM 288,000 shares of
its common stock as payment in full for PowerChannel, Inc. retaining possession
of the set-top appliances (costing $90,000) and as settlement for the $53,000
which was owed to AIM as reimbursement of certain operating costs as called for
under the May 19th agreement. Additionally, the Company issued AIM 50,000
warrants for shares at $2.50 per share, which are exercisable for 3 years, these
warrants were cancelled in July 2003. AIM and PowerChannel, Inc. agreed to
release each other from all other liabilities associated with their
relationship.
Note 12. Litigation
Two lawsuits by stockholders alleging investment fraud have been asserted
against the Company seeking damages of approximately $60,000. Legal counsel
advises that due to the fact that the law firm was only recently retained, they
are not yet able to determine the viability of said claims. Management believes
that the resolution of these claims will not have a material effect on the
financial position or results of operations of the Company.
Note 13. Stock Option Plan
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During 2001, the Company adopted the 2001 Stock Option Plan. The aggregate
number of common shares that may be issued is 2,500,000. Any key employee shall
be eligible to be granted options as determined by the Company's stock option
committee. The price of the shares subject to each option shall not be less than
100% of the fair market value of such shares on the date such option is granted.
Under this plan, options to purchase shares in the stock of PowerChannel
Holdings, Inc. were as follows: 600,000 to James Gambrel, 250,000 to Michael
Preston, and 250,000 shares to Steven Lampert. The exercise price is $1.00 per
share. This stock option plan and the outstanding options thereunder were
cancelled during July 2003.
Note 14. Stock Incentive Plan
In July 2003, the Company created a 2003 Stock Incentive Plan which permits the
Company to make awards of stock options, stock appreciation rights, warrants,
dividend equivalents, stock awards, restricted stock, phantom stock, performance
shares or other securities or rights. All employees of the Company and
affiliates are eligible to participate. The number of shares that may be
delivered or purchased under the plan are up to 3,000,000 shares at a par value
of $.01. Approximately 2,100,000 such shares under this 2003 Stock Incentive
Plan have been issued as of September 30, 2003.
Note 15. Restatement of Form 10QSB for quarter ended September 30, 2003
The primary reasons for the restatement were for as described below:
a) The accounting for the reverse merger equity transactions was not
performed adequately, since the accumulated deficit of the prior
public entity was not eliminated $(1,328,921).
b) The valuation of the shares issued was recorded at $.18 per share
verses the current market price, resulting in an additional $1.3
million in compensation expense to record.
c) The cumulative cash flows and stockholders equity now has been
included for a development stage enterprise.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The analysis of the Company's financial condition, liquidity, capital resources
and results of operations should be viewed in conjunction with the accompanying
financial statements.
The company was incorporated in Delaware in 1995 under the name UC'NWIN Systems,
Inc. In August 1999 the company changed its name to The Winners Edge.com, Inc.
During 1999, as a result of a Chapter 11 Bankruptcy Plan of Reorganization, the
company acquired the assets of The Winners Edge Licensing Corporation. In
addition to the assets, the company also acquired a ten-year license with the
exclusive right to market the Winners Edge handicapping product renewable for a
second ten years. The company did not acquire the ownership of the handicapping
program. In September 2000 the company stopped marketing the Winners Edge
handicapping product due to insufficient income. On March 30, 2001, the Company
acquired a roofing sealant product, Roof Shield, which the company intended to
market worldwide. In July 2001 the Company changed its name to Sealant
Solutions, Inc. In September 2001 the Company acquired the rights to sell and
distribute in the United States the Lady Ole' line of cosmetics products. In
February 2002, the Company entered into a joint venture agreement with IFG
Goldstar Cement Company for the entitlement to a royalty payment based upon the
sale of certain concrete products. In April of 2002 the Company sold its rights
to the Lady Ole line of cosmetic products and is no longer in that business. In
November of 2002 the company agreed to terminate and cancel the remaining term
of its licensing agreement with the Winners Edge Licensing Corporation and will
no longer attempt to market that product.
On July 21, 2003, pursuant to a Stock Purchase Agreement and Share Exchange and
Amendment thereto between Sealant Solutions, Inc., a Delaware corporation and
PowerChannel, Inc., a Delaware corporation, PowerChannel merged into Sealant.
Pursuant to the Amendment, the separate existence of PowerChannel ceased to
exist and Sealant continued as the surviving corporation. In addition, Sealant
changed its name to Powerchannel, Inc. Under this agreement, Sealant Solutions,
Inc. issued shares equal to 85% of the fully diluted outstanding shares of the
Company to PowerChannel, Inc. shareholders. In a unanimous written consent of
the Board of Directors of PowerChannel, Inc., the previous issuance of an
additional 485,552 shares to PowerChannel, Inc. shareholders was authorized and
ratified. Such shares are deemed "restricted" as defined under the SEC Rule 144.
Under the terms of the agreement, Sealant Solutions, Inc. is the acquiring
company. The merger was accounted for as a reverse merger, which effectively is
a recapitalization of the target company.
Pursuant to the Agreement, Michael Fasci remained on the Board of Directors of
the Company, Edward Fasci resigned from the Company's Board of Directors and
Steven Lampert was appointed to fill the vacancy on the Board of Directors of
the Company. In addition, Michael Fasci resigned as President and Chief
Executive Officer of Sealant and Steven Lampert was appointed as President,
Chief Executive Officer, Chief Financial Officer and Secretary of Sealant. The
Acquisition was approved by the unanimous consent of the Board of Directors of
Sealant and PowerChannel on July 21, 2003.
Based on such merger, we have adopted a new business plan. Our principal product
is low-cost access to the Internet and the physical hardware to deliver it
through the use of the consumer's existing television. It is the only product of
its kind focused specifically on the Hispanic market, using a bilingual
(English/Spanish) approach to meet the needs of the differing generations within
17
the Hispanic community. The PowerChannel home page offers the subscriber an
English/Spanish language option at the click of a button. Our portal points the
subscriber to all the major Hispanic portals and to links with Hispanic
commercial, educational and community sites. The reach of our links is designed
to embrace the full extent of diverse Hispanic cultural and ethnic interests. As
we develop, we will continue to utilize the already existing and successful
Hispanic-specific content of others to enhance the practical sense of community
that its planned household penetration creates.
Financial Condition
At September 30, 2003, the Company had total current assets of $555,000 as
compared to $780,159 at December 31, 2002, total assets of $1,204,480, as
compared to $1,425,276 at December 31, 2002, and shareholders deficit of
$3,427,819 compared to a deficit of $3,029,606 as of December 31, 2002. The
decrease in current assets was primarily due to a $138,299 writedown of
inventory, ongoing administrative expenses that the Company incurred during the
three quarters and a writeoff of prepaid expenses in the amount of $21,000. The
increase of $398,213 of shareholders deficit was mainly attributable to the
Company's operating costs for the nine months ended September 2003.
Liquidity
The Company had a net decrease in cash and cash equivalents for the nine months
ended September 30, 2003 of $65,358.
Capital Resources
The company anticipates generating cash to continue its operations either thru
private placements of its common stock or from capital contributions from its
officers and/or directors. The Company incurred a loan in the amount of $112,000
in the third quarter of 2003 to help finance its operations and to effect the
merger with Sealant Solutions, Inc.
Results of Operations
There were no revenues generated from the sales of the Company's products for
the nine months ended September 30, 2003. The Company has been successful in
effectuating a reverse merger with Powerchannel, Inc. during the third
quarter of 2003. The Company believes that this merger offers the best
opportunity for the Company to create revenue and shareholder value.
Operating expenses for the nine months ended September 30, 2003 were $446,955,
as compared to $1,641,525 for the nine months ended September 30, 2002. The
decrease in operating expenses is due to the company reducing its expenditures
substantially in 2003 due to the absence of revenue.
The Company recorded expense of $1,663,446 as equity based compensation for the
nine months ended September 30, 2003 in relation to stock issued for services
rendered.
Operating expenses for the quarter ended September 30, 2003 were $309,802
compared to expenses of $270,361 in the year earlier quarter. A portion of this
increase in operating expenses is attributable to a third quarter 2003 charge of
$32,000 in relation to costs incurred related to the merger.
18
The Company realized a net loss of $2,108,469 for the nine months ending
September 30, 2003, as compared to a net loss of $1,691,525 for the nine months
ending September 2002.
The Company realized a net loss of $1,968,290 for the three months ending
September 30, 2003, as compared to a net loss of $271,994 for the three months
ending September 30, 2002. The increase in the net loss is mainly attributable
to a third quarter 2003 charge of $1,663,446 in relation to stock issued for
services rendered.
The Company knows of no unusual or infrequent events or transactions, nor
significant economic changes that have materially affected the amount of its
reported income from continuing operations for the nine-month period ended
September 30, 2003.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer (collectively the
"Certifying Officers") maintain a system of disclosure controls and
procedures that is designed to provide reasonable assurance that
information, which is required to be disclosed, is accumulated and
communicated to management timely. Under the supervision and with the
participation of management, the Certifying Officers evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule [13a-14(c)/15d-14(c)] under the Exchange
Act) as of September 30, 2003. Based upon that evaluation, the Certifying
Officers concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relative to our
company required to be disclosed in our periodic filings with the SEC.
(b) Changes in internal controls.
Our Certifying Officers have indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there
were no such control actions with regard to significant deficiencies and
material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Two lawsuits by stockholders alleging investment fraud have been asserted
against the Company seeking damages of approximately $60,000. Legal counsel
advises that due to the fact that the law firm was only recently retained, they
are not yet able to determine the viability of said claims. Management believes
that the resolution of these claims will not have a material effect on the
financial position or results of operations of the Company.
Item 2. Changes in Securities.
On July 21, 2003 PowerChannel entered into a Stock Purchase and Share Exchange
Agreement whereby Sealant Solutions, Inc. acquired all of the outstanding shares
of PowerChannel, Inc. Under this agreement, Sealant agreed to issue shares equal
to 85% of the fully diluted outstanding shares (or 9,117,525 shares) and an
additional 485,552 shares on a pro-rata basis of Sealant Solutions, Inc. to
PowerChannel, Inc. shareholders. Such shares are deemed "restricted" as defined
under the SEC Rule 144. The issuance was exemppt from registration under Section
4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security None
Holders.
Item 5. Other Information. None
Item 6. Exhibits and Reports of Form 8-K.
On July 28, 2003, the Company filed a Form 8K with the SEC based on
the merger between the Company and Powerchannel, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized, on January 5, 2004.
POWERCHANNEL, INC.
Date: January 5, 2003 By: /s/ Steven Lampert
-------------------------
Steven Lampert
Chairman and President
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