U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] 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 August 19, 2004: 26,669,829 shares of common stock outstanding,
$0.01 par value.
ITEM 1. FINANCIAL INFORMATION
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(Unaudited)
ASSETS
Current Assets:
Cash $ 635,108
Inventories 129,738
Accounts Receivable, Net 68,375
Prepaid Expenses 6,378
Prepaid Consulting Fees 113,903
--------------
Total Current Assets 953,502
Property and Equipment, Net 34,428
Deferred Consulting Fees, Net of Current Portion 43,991
--------------
$ 1,031,921
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 660,053
Accrued Liabilities 633,727
Convertible Notes Payable 44,305
Deposits Payable 70,000
--------------
Total Current Liabilities 1,408,085
--------------
Commitments and Contingencies
Minority Interest 1,176,543
--------------
Stockholders' Deficit:
Preferred Stock, Par Value $.01; Authorized 5,000,000 Shares,
Issued and Outstanding 0 Shares -
Common Stock, Par Value $.01; Authorized 95,000,000 Shares,
Issued and Outstanding 26,194,829 Shares 261,948
Additional Paid-In Capital 17,174,959
Common Stock to be Issued, 2,315,531 Shares 1,817,808
Deferred Offering Costs (14,000)
Deferred Stock-Based Compensation (2,788,815)
Accumulated Other Comprehensive Income (Loss) (1,325,407)
Deficit Accumulated in the Development Stage (16,679,200)
--------------
Total Stockholders' Deficit (1,552,707)
--------------
$ 1,031,921
==============
The accompanying notes are an integral part of the financial statements.
2
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For The Period
For the Three For the Six August 10, 1998
Months Ended Months Ended (Inception)
June 30, June 30, To
2004 2003 2004 2003 June 30, 2004
------------- ------------ ------------ ----------- -------------
Revenues:
Gross License Fees - PowerChannel Europe, PLC $ - $ - $ - $ - $ 1,894,348
Expenses Reimbursed Pursuant to License Agreement - - - - (1,884,348)
Net License Income - - - - 10,000
Sales - Net (Returns of $84,420 for the Quarter Ended
June 30, 2004) (39,134) - 148,366 - 227,924
Activation Fees - - - - 15,525
------------- ------------ ------------ ----------- -------------
Total Revenues (39,134) - 148,366 - 253,449
------------- ------------ ------------ ----------- -------------
Costs and Expenses:
Cost of Sales (51,038) - 136,462 - 142,273
Write-Down of Inventories 21,593 - 21,593 - 464,656
Selling, General and Administrative Expenses 446,705 24,457 976,047 137,153 6,759,263
Impairment Loss on Investment - - - - 573,887
Settlement of Debt - - - - 111,300
------------- ------------ ------------ ----------- -------------
Stock-Based Compensation 1,867,740 - 3,709,561 - 6,030,814
------------- ------------ ------------ ----------- -------------
Total Costs and Expenses 2,285,000 24,457 4,843,663 137,153 14,082,193
------------- ------------ ------------ ----------- -------------
Loss Before Loss From Unconsolidated Affiliate
And Other Income (Expense) (2,324,134) (24,457) (4,695,297) (137,153) (13,828,744)
Loss from Unconsolidated Affiliate (48,000) (1,526) (48,000) (3,026) (2,678,797)
Interest Expense (12,122) - (16,164) - (171,659)
------------- ------------ ------------ ----------- -------------
Net Loss $ (2,384,256) $ (25,983) $(4,759,461) $ (140,179) $(16,679,200)
============= ============ ============ =========== =============
Basic and Diluted Net Loss Per Share $ (.09) $ (-) $ (.19) $ (.01)
============= ============ ============ ===========
Weighted Average Shares Outstanding - Basic and Diluted 26,165,818 11,212,052 24,531,674 11,212,052
============= ============ ============ ===========
Pro-Forma Net Loss Per Share (Basic and Diluted) $ (.08) $ (-) $ (.18) $ (-)
============= ============ ============ ===========
Pro-Forma Weighted Average Shares Outstanding
(Basic and Diluted) 28,478,011 $ (-) 26,467,248 -
============= ============ ============ ===========
The accompanying notes are an integral part of the financial statements.
3
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For The Period
For the Six August 10, 1998
Months Ended (Inception)
June 30, To
2004 2003 June 30, 2004
------------ ------------- --------------
Cash Flow From Operating Activities:
Net Loss $(4,759,461) $ (140,179) $(16,679,200)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Intrinsic Value of Beneficial Conversion Feature
of Convertible Notes - - 280,000
Stock-Based Compensation 3,709,561 - 6,130,266
Expense Recorded on Issuance of Common Stock
for Debt Settlement - - 111,300
(Loss) Income on Investment in PowerChannel
Europe PLC 48,000 (68,454) 2,370,471
Loss on Asset Disposal - - 20,456
Write-Down of Inventories 21,593 - 464,656
Depreciation 9,756 11,230 90,073
Reserve for Bad Debts 68,376 - 68,376
Impairment Loss on Investment in PowerChannel
Europe PLC - - 573,884
Change in Current Operating Assets and Liabilities:
Decrease in Inventories 93,094 3,332 (594,394)
(Increase) in Accounts Receivable (136,751) - (136,751)
(Increase) in Prepaid Expenses (120,281) - (120,281)
(Increase) Decrease in Other Assets (43,991) 17,127 (43,991)
Increase (Decrease) Due to PowerChannel Europe PLC,
Relating to Operations (10,000) 74,120 678,142
Increase (Decrease) in Accounts Payable and Accrued
Liabilities (111,435) 64,649 1,171,973
Increase in Deposits Payable - - 45,000
------------ ------------- --------------
Net Cash (Used) in Operating Activities (1,231,539) (112,295) (5,570,020)
------------ ------------- --------------
Cash Flow From Investing Activities:
Purchases of Property and Equipment (25,116) - (144,957)
Net Liabilities Acquired in Reverse Merger, Net of Cash - - (16,851)
Advances to Related Party (56,607) - (121,542)
Repayments for Advances to Related Parties 43,300 114,957 108,235
Loans to Related Party - - (278,027)
Repayments from Loans to Related Parties - - 278,027
Purchase of PCE Stock (40,000) - (40,000)
------------ ------------- --------------
Net Cash Provided by (Used) in Investing Activities (78,423) 114,957 (215,115)
------------ ------------- --------------
The accompanying notes are an integral part of the financial statements.
4
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For The Period
For the Six August 10, 1998
Months Ended (Inception)
June 30, To
2004 2003 June 30, 2004
----------- ----------- ------------
Cash Flow From Financing Activities:
Proceeds from Issuance of Common Stock 2,187,500 - 3,532,864
Fees Paid on Sale of Common Stock (265,000) - (275,000)
Loans and Advances from Related Parties - - 2,773,074
Proceeds of Subscription Receivable 300,000 - 300,000
Proceeds from Deposits Payable 25,000 - 25,000
Payments of Convertible Notes (215,695) - (215,695)
Proceeds from Note Payable - - 112,000
Proceeds from Convertible Notes - - 280,000
Payment of Note Payable (112,000) - (112,000)
----------- ----------- ------------
Net Cash Provided By Financing Activities 1,919,805 - 6,420,243
----------- ----------- ------------
Net Increase (Decrease) in Cash 609,843 (2,662) 635,108
Cash - Beginning of Period 25,265 65,358 -
----------- ----------- ------------
Cash - End of Period $ 635,108 $ 68,020 $ 635,108
=========== =========== ============
The accompanying notes are an integral part of the financial statements.
5
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For The Period
For the Six August 10, 1998
Months Ended (Inception)
June 30, To
2004 2003 June 30, 2004
-------------- -------------- ------------------
Supplemental Cash Flow Information:
Cash Paid For Interest $ 91,360 $ - $ 91,360
============== ============== =================
Cash Paid For Income Taxes $ - $ - $ -
============== ============== =================
Non-Cash Financing Activities:
Issuances of Common Stock as Fees for
Sales of Common Stock $ - $ - $ 10,500
============== ============== =================
Issuance of Common Stock on Settlement of
Convertible Note Payable and Accrued Interest $ - $ - $ 25,200
============== ============== =================
Deferred Stock-Based Compensation $ 3,773,611 $ - $ 7,261,601
============== ============== =================
Issuance of Common Stock for Deferred Offering Costs $ - $ - $ 14,000
============== ============== =================
Write-Off of Subscription Receivable $ - $ - $ 50,575
============== ============== =================
Issuance of 250,000 Shares of Common Stock as Payment
for Accrued Salaries - Related Parties $ 205,000 $ - $ 205,000
============== ============== =================
Issuance of 228,122 Shares of Common Stock as Payment
for Accrued Salaries and Fees $ 187,060 $ - $ 187,060
============== ============== =================
Repayment of Advances to Related Party by Applying Accrued
Salaries $ 13,307 $ - $ 13,307
============== ============== =================
Issuance of 120,000 Shares of Common Stock as Payment for
Accrued Liabilities $ 75,600 $ - $ 75,600
============== ============== =================
Issuance of 286,687 Shares of Common Stock as Consideration
for Purchase of PCE Shares from Related Parties $ 77,455 $ - $ 77,455
============== ============== =================
Cancellation of 286,687 Shares of Common Stock by
Related Parties $ 2,869 $ - $ 2,869
============== ============== =================
Additional Paid-In Capital Arising from Acquisition of PCE $ 2,715,234 $ - $ 2,715,234
============== ============== =================
Payable on Purchase of PCE Stock $ 14,898 $ - $ 14,898
============== ============== =================
The accompanying notes are an integral part of the financial statements.
6
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 1-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of PowerChannel, Inc. and its subsidiaries, which are both
wholly and majority owned. All significant inter-company accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the consolidated
financial position and results of operations and cash flows for the periods
presented.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year.
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company is a
development stage company and has incurred recurring losses from operations and
operating cash constraints that raises substantial doubt about the Company's
ability to continue as a going concern.
NOTE 2 - Property and Equipment
Property and equipment consists of the following:
Office Equipment $ 8,000
Furniture and Fixtures 83,175
Leasehold Improvements 27,364
-------------
118,639
Less: Accumulated Depreciation 84,211
-------------
$ 34,428
=============
Depreciation expense amounted to $9,758 and $11,230 for the six months
ended June 30, 2004 and 2003 respectively.
NOTE 3 - Investment In Unconsolidated Affiliate
As of December 31, 2003 the Company determined that there was an other than
temporary decline in value of its investment in PowerChannel Europe PLC ("PCE").
Accordingly, the Company recognized an impairment charge to operations of $
573,887 for the year ended December 31, 2003 representing this other than
temporary decline in value, thereby reducing the carrying value to zero at
December 31, 2003. As of June 30, 2004 the Company increased its ownership
percentage in PCE to 70.41%. Accordingly, the Company no longer accounts for PCE
under the equity method. As a majority owned subsidiary PCE is included in
consolidation (see Note 4).
7
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 4 - Acquisition
On May 31, 2004, the Company acquired 13.47% of Powerchannel Europe PLC
("PCE")(see Note 3) for $54,898 from Internet Investors, Inc., a wholly owned
subsidiary of Long Distance Direct Holdings, Inc. ("LDH"). Mr. Lampert, our sole
executive officer and a director, resigned as an officer and a director of LDH
on December 31, 2002 and currently owns approximately 9% of the issuance and
outstanding shares of common stock of LDH.
On June 30, 2004 the Company acquired 38.44% of PCE for $77,455 from Mr.
Steven Lampert, the Company's Chief Executive Officer and a director, and
Michael Preston. Mr. Preston has occasionally served as a consultant to the
Company and owns a limited number of shares of common stock of the Company. The
Company issued 286,687 shares of common stock to Mr. Lampert and Mr. Preston as
consideration for the PCE shares. Concurrently therewith, the 286,687 shares
were returned to the Company by Mr. Lampert and Mr. Preston as capital
contributions.
At June 30, 2004, the Company's ownership in PCE increased to 70.41% and
the accounts of PCE have been included in these consolidated financial
statements. The transaction has been accounted for under the purchase method.
Accordingly, the consolidated statements of operations will include PCE's
results of operations from June 30, 2004. Prior to June 30, 2004 the Company had
accounted for its investment in PCE under the equity method and has recorded a
loss from the unconsolidated affiliate in the amount of $48,000 for the six
months ended June 30, 2004. PCE does not engage in any operations however it was
formerly engaged in the providing of Internet access.
Unaudited pro forma consolidated results of operations as if the
acquisition had taken place at the beginning of 2003 would not have been
materially different from the amounts reported.
The following table provides unaudited condensed consolidated financial
information about PCE as of June 30, 2004 and for the six months then ended:
Current Assets $ 3 931,504
Total Assets $ 3,931,504
Current Liabilities $ 593,076
Total Liabilities $ 593,076
Equity $ 3,338,428
Revenues $ -
Net (Loss) $ 150,000
The current assets included in the above table includes receivable from the
Company aggregating approximately $3.9 million.
NOTE 5 - Minority Interest
Minority interest at June 30, 2004 represents the minority shareholders'
29.59% interest in the equity of PCE in the amount of $987,841.
NOTE 6 - Convertible Notes Payable
8
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. In December 2003, one $20,000 Series A Note was paid in connection with
a settlement agreement and in January 2004 the Company paid an aggregate of
$215,695 principal to four note holders. At June 30, 2004, the remaining balance
due on these notes was $44,305.
9
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 6- Convertible Notes Payable (Continued)
In May 2004, the Company and Churchill Investments, Inc. ("Churchill")
entered into a mutual release whereby the parties released each other party from
all obligations with respect to the Consulting Agreement and the Non-recourse
Assignment. In addition, Churchill agreed to reassign the remaining outstanding
balance of the Series A Notes in the amount of $169,461 to the Company and the
Company agreed to indemnify Churchill for any losses due to claims instituted by
third party purchasers of shares issued upon conversion of the Series A Notes.
NOTE 7- Note Payable - Other
On June 25, 2003, the Company borrowed $112,000 (the "June 2003 Note") from
Knightsbridge Holdings, LLC ("Knightsbridge") pursuant to that certain
Promissory Note and Security Agreement entered with Knightsbridge. In connection
with the June 2003 Note, which bears interest at 5% per annum and is due March
2004, the Company granted a security interest in all of its inventories. In
addition, several stockholders of the Company, including the CEO of the Company,
pledged their shares (14,803,296 shares) to Knightsbridge to secure the June
2003 Note.
The June 2003 Note was paid in full in May 2004. Simultaneously with the
payment of the outstanding balance of the June 2003 Note, Knightsbridge agreed
to (i) release its security interest on the Company's inventory and (ii) return
all of the shares that had been pledged to it as collateral for the June 2003
Note. In addition, the Company and Knightsbridge entered into a mutual release
whereby the parties released each other from all obligations with respect to the
June 2003 Note.
NOTE 8- Related Party Transactions
Advances to Related Party
During the quarter ended June 30, 2004, the Company made certain loans to
the President and CEO of the Company, aggregating $56,607. During this same
period the loans were repaid through the payment of cash in the amount of
$43,300 and the application of accrued salaries in the amount of $13,307. These
loans made to Mr. Lampert violate Section 402 of the Sarbanes Oxley Act of 2002.
As a result, despite the fact that such loans were repaid, the Company and/or
Mr. Lampert may be subject to fines, sanctions and/or penalties. At this time,
the Company is unable to determine the amount of such fines, sanctions and/or
penalties that may be incurred by the Company and/or Mr. Lampert.
Purchase of Inventories
Inventories consist of set-top boxes, which require modification for use in
their related geographic regions.
In May 2004, The Lampert Group, an entity 100% owned by Steven Lampert, the
Company's Chief Executive Officer and a director, successfully bid on 42.336
set-top boxes auctioned off by S&H Storage & Haulage Ltd. ("S&H") at an
aggregate price of approximately $44,000. Prior to the auction, S&H took
possession of the set top boxes after PowerChannel Europe PLC had failed to pay
for their storage. The Company then purchased the set-top boxes from The Lampert
Group for approximately $44,000.
10
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 9- Other Comprehensive Income (Loss) - Supplemental Non-Cash Investing
Activities
Other comprehensive income (loss) consists of accumulated foreign
translation gains and losses and is summarized as follows:
Balance - December 31, 2003 $ (625,949)
Equity Adjustments from Foreign
Currency Translation (61,756)
Balance - June 30, 2004 $ (687,705)
NOTE 10- Stockholders' Deficit
Issuances of Common Stock and Stock Options in Connection with
Consulting Agreements
On January 20, 2004 the Company agreed to issue an additional 260,943
shares of common stock valued at $245,286 and make payment of $10,000 to a
consultant in lieu of additional compensation bonuses relating to a one year
consulting agreement originally entered into on November 24, 2003. The value of
the stock is being amortized over the remaining life of the agreement.
Amortization reported as stock-based compensation amounted to $130,659 for the
six months ended June 30, 2004.
On January 20, 2004 the Company agreed to issue an additional 270,943
shares of common stock valued at $254,686 to a consultant in lieu of additional
compensation bonuses relating to a one year consulting agreement originally
entered into on November 24, 2003. The value of the stock is being amortized
over the remaining life of the agreement. Amortization reported as stock-based
compensation amounted to $135,666 for the six months ended June 30, 2004. This
consultant was also appointed in January 2004 as a director of the Company.
On February 6, 2004 the Company agreed to issue an additional 50,000 shares
of common stock valued at $61,500 to a consultant as additional compensation
relating to a one year consulting agreement originally entered into on December
4, 2003. This consulting agreement was subsequently terminated in April 2004 and
accordingly the entire amount was charged to operations in the quarter ended
June 30, 2004.
On April 9, 2004 the Company entered into Amendment No. 1 to the Amended
and Restated Consulting Agreement, effective as of February 9, 2004, with a
consultant. The Company had previously entered into a consulting agreement on
November 24, 2003 and an Amended and Restated Consulting Agreement effective as
of January 20, 2004 with the consultant. The amendments provide issuance of an
additional 660,943 shares of common stock valued at $621,286 and payment of
$202,000 to the consultant. The value of the stock is being amortized over the
remaining life of the agreement, as extended. Amortization reported as stock
based compensation amounted to $150,029 for the six months ended June 30, 2004.
In consideration for extending the term of the Restated Agreement to November
24, 2005, the Corporation will grant the consultant 2,000,000 options with a
five year term and piggyback registration rights. The exercise price of the
options is $1 per share. The Company estimated the fair value of these options
to be $ 1,879,735 utilizing the Black-Scholes valuation method using the
following assumptions: a risk-free interest rate of 3.1%, volatility of 339.44%
and a term of five years. Such amount is being amortized over the remaining life
of the agreement, as extended. Amortization amounted to $453,921 for the six
months ended June 30, 2004.
11
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 10- Stockholders' Deficit (Continued)
Other
During the quarter ended March 31, 2004 the Company issued 239,158 shares
of common stock valued at $ 234,466 to various consultants for services. The
entire amount has been reported as stock based compensation for the quarter
ended June 30, 2004.
During the quarter ended March 31, 2004 the Company issued 250,000 shares
of common stock valued at $205,000 to its President as payment of accrued
salaries, 232,122 shares of common stock valued at $182,960 to employees as
payment of accrued salaries and 5,000 shares of common stock valued at $4,100 to
a consultant as payment of accrued fees.
During the quarter ended June 30, 2004 the Company issued 120,000 shares of
common stock valued at $75,600 as payment of previously accrued consulting fees.
2004 Incentive Stock Plan
During January 2004, the Company adopted the 2004 Incentive Stock Plan (the
"2004 Plan") under which options (either incentive or nonqualified), stock
awards and restricted stock purchase offers, covering an aggregate amount of
2,000,000 shares of common stock, may be granted to officers, directors,
employees and consultants of the Company. The exercise price established for any
awards granted under the Plan, shall be determined by a Compensation Committee
appointed by the Company's Board of Directors. The exercise price of incentive
stock options cannot be less than 100% (110% for 10% or greater shareholder
employees) of the fair market value ("FMV") at the date of grant and the
exercise price of nonqualified options cannot be less than 85% of the FMV at the
date of grant. The exercise period of incentive options cannot extend beyond 10
years from the date of grant and nonqualified options cannot extend beyond 10
years from the date of grant. During the six months ended June 30, 2004 the
Company issued an aggregate of 2,000,000 shares of common stock under the 2004
Plan.
Private Placement
During February and March 2004 the Company sold 99.5 Units to private
investors, each Unit consisting of 50,000 shares of common stock and 50,000
common stock purchase warrants at a price of $25,000 per Unit, pursuant to a
private placement memorandum that called for a maximum offering of 50 Units. In
connection with this offering the Company issued an aggregate of 4,975,000
shares of common stock and 4,975,000 common stock purchase warrants. The
warrants are exercisable into one share of common stock at an exercise price of
$.75 per warrant. The warrants are callable when the five-day average closing
bid price of the common stock equals or exceeds $1. The warrants are exercisable
for a period of 36 months from the final closing of the offering. In connection
with this offering the Company received gross proceeds of $2,487,500 and
incurred offering costs of approximately $265,000.
12
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 11- Commitments and Contingencies
Consulting Services
On June 23, 2003, the Company entered into an Engagement Letter with
Knightsbridge Holdings, LLC, ("Knightsbridge") pursuant to which the Company
engaged Knightsbridge to provide certain consulting and related services for a
one-year term. As consideration for the services to be rendered under the
Engagement Letter, the Company issued an aggregate of 625,000 shares of common
stock valued at $625,000 to Knightsbridge. The Engagement Letter provides that
the Company issue to Knightsbridge, or its designees, an amount of common stock
of the Company, upon the closing of a merger/acquisition with a public company,
in an amount not less than 11.50% of the fully diluted shares of the post merger
company. The Engagement Letter further provides that such shares will have full
ratchet anti dilution provisions for the term of the Engagement Letter. The
Company believes that Knightsbridge failed to provide the consideration and
services that were contracted for, and, as a result, does not intend to issue
any additional shares to Knightsbridge. As of December 31, 2003, the Company has
reserved for issuance however, 1,504,193 shares of common stock valued at
$1,045,191 based upon the terms of the Engagement Letter and during the six
months ended June 30, 2004, the Company has reserved an additional 811,338
shares valued at $772,617. Such 2,315,531 shares of common stock to be issued
have been reported as a component of stockholders' deficit. The value of these
shares to be issued along with the original 625,000 shares issued is being
amortized over one year and the remaining life of the contract. Amortization
reported as stock based compensation amounted to $1,664,576 for the six months
ended June 30, 2004. There can be no assurance that Knightsbridge will not
commence an action against the Company relating to its rights to receive the
shares, or if instituted, that such action will not be successful. Although the
Company believes that any action which may be commenced would be without merit,
and it would vigorously defend any such action, the cost of such litigation can
be substantial even if the Company were to prevail. Further, an unfavorable
outcome could have a material adverse effect on the Company's revenues, profits,
results of operations, financial condition and future prospects.
Litigation
Except for the following, the Company is currently not party to any
material legal proceedings.
In October 2003, a stockholder alleging investment fraud filed a claim in
the Civil Court of the City of New York seeking damages in the amount of
approximately $48,000.
In April 2003, a stockholder alleging investment fraud filed a claim in the
Supreme Court of Nassau County seeking damages in the amount of $25,000 plus
interest. The plaintiff has withdrawn his claim but may commence this action at
a future point in time.
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.
13
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
NOTE 11- Commitments and Contingencies (Continued)
Antidilution Agreement
Steven Lampert, the Company's President, has entered into a Confidential
Antidilution Agreement dated July 1, 2003 with Michael Fasci, a former director
and officer of the Company. In consideration for Mr. Fasci agreeing to vote in
favor of the reverse merger the Company entered into in July 2003, Mr. Lampert
agreed to transfer to Mr. Fasci shares of his common stock whereby Mr. Fasci's
ownership would at all times be maintained at 10% of the outstanding shares of
the Company. The term of this agreement is for three years. As a result, Mr.
Lampert may be required to transfer all or a portion of his shares to Mr. Fasci.
Employment Agreement
On February 10, 2004, the Company entered into an employment agreement with
its Chief Executive Officer. The agreement is for a one year term with annual
renewal options. It provides for an annual base salary of $160,000, annual
performance bonuses, stock and stock option eligibility, and employee benefits.
Accrued Liabilities
Included in accrued liabilities are federal payroll taxes payable of
approximately $150,000 under federal tax liens.
NOTE 12- Subsequent Events
In July 2004, 500,000 restricted shares of common stock were issued.
In July 2004, 25,000 restricted shares of common stock were returned by a
consultant due to non performance of services to be rendered.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our History
We were incorporated in Delaware in 1995 under the name UC'NWIN Systems, Inc. In
August 1999, we changed our name to The Winners Edge.com, Inc. During 1999, as a
result of a Chapter 11 Bankruptcy Plan of Reorganization, we acquired the assets
of The Winners Edge Licensing Corporation. In addition to the assets, we also
acquired a ten-year license with the exclusive right to market the Winners Edge
handicapping product renewable for a second ten years. We did not acquire the
ownership of the handicapping program. In September 2000, we stopped marketing
the Winners Edge handicapping product due to insufficient income. On March 30,
2001, we acquired a roofing sealant product, Roof Shield. In July 2001, we
changed our name to Sealant Solutions, Inc. In September 2001, we acquired the
rights to sell and distribute in the United States the Lady Ole' line of
cosmetics products. In February 2002, we 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, we sold our rights
to the Lady Ole line of cosmetic products. In November of 2002, we agreed to
terminate and cancel the remaining term of our licensing agreement with the
Winners Edge Licensing Corporation.
On July 21, 2003, pursuant to a Stock Purchase Agreement and Share Exchange, as
amended, between our company and PowerChannel, Inc., a Delaware corporation,
PowerChannel merged into our company. Pursuant to the Stock Purchase Agreement,
PowerChannel ceased to exist and we continued as the surviving corporation. In
addition, we changed our name to Powerchannel, Inc. Under this agreement, we
issued 10,137,897 shares of our common stock. Such shares are deemed
"restricted" as defined under Rule 144 as promulgated under the Securities Act
of 1933, as amended. Under the terms of the agreement, we are 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 our Board of Directors
until his resignation in February 2004, Edward Fasci resigned from our Board of
Directors and Steven Lampert was appointed to our Board of Directors. In
addition, Michael Fasci resigned as President and Chief Executive Officer and
Steven Lampert was appointed as President, Chief Executive Officer, Chief
Financial Officer and Secretary. The Acquisition was approved by the unanimous
consent of the Board of Directors of our company and PowerChannel on July 21,
2003. Mr. Lampert has entered into a Confidential Antidilution Agreement dated
July 1, 2003 with Michael Fasci, a former director and officer of the Company.
In consideration for Mr. Fasci agreeing to vote in favor of the reverse merger
the Company entered into in July 2003, Mr. Lampert agreed to transfer to Mr.
Fasci shares of his common stock so that Mr. Fasci's ownership would at all
times be maintained at 10% of the outstanding shares of the Company. The term of
this agreement is for three years. As a result, Mr. Lampert may be required to
transfer all or a portion of his shares to Mr. Fasci.
Business Summary
We provide low-cost access to the Internet. In order to accomplish this, we also
provide the physical hardware to deliver it through the use of the consumer's
existing television. We are primarily focused on the Hispanic market, using a
bilingual (English/Spanish) approach to meet the needs of the differing
generations within the Hispanic community. Our 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.
Acquisition of a Controlling Interest in Powerchannel Europe PLC
On May 31, 2004, the Company acquired 13.47% of Powerchannel Europe PLC ("PCE")
for $54,898 from Internet Investors, Inc. , a wholly owned subsidiary of Long
Distance Direct Holdings, Inc. ("LDH"). Mr. Lampert, our sole executive officer
and a director, resigned as an officer and a director of LDH on December 31,
2002 and currently owns approximately 9% of the issuance and outstanding shares
of common stock of LDH.
On June 30, 2004 the Company acquired 38.44% of PCE for $77,455 from Mr. Steven
Lampert, the Company's Chief Executive Officer and a director, and Michael
Preston. Mr. Preston has occasionally served as a consultant to the Company and
owns a limited number of shares of common stock of the Company. The Company
issued 286,687 shares of common stock to Mr. Lampert and Mr. Preston as
consideration for the PCE shares. Concurrently therewith, the 286,687 shares
were returned to the Company by Mr. Lampert and Mr. Preston as capital
contributions.
15
At June 30, 2004, the Company's ownership in PCE increased to 70.41% and the
accounts of PCE have been included in the Company's consolidated financial
statements. The transaction has been accounted for under the purchase method.
Accordingly, the consolidated statements of operations will include PCE's
results of operations from June 30, 2004. Prior to June 30, 2004 the Company had
accounted for its investment in PCE under the equity method and has recorded a
loss from the unconsolidated affiliate in the amount of $48,000 for the six
months ended June 30, 2004. PCE does not engage in any operations however it was
formally engaged in the providing of Internet access.
Results of Operations
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
Revenues
During the six ended June 30, 2004 we had sales of approximately $148,366.
During the six months ended June 30, 2003, we did not generate any revenue. The
reason for the increase in the revenues was the commencement of the Company's
new business of providing low cost Internet access.
Costs and Expenses
Cost and expenses incurred for the six months ended June 30, 2004, aggregated
$4,843,663 as compared to $137,153 for the six months ended June 30, 2003. Cost
and expenses increased by $4,706,510 for the six months ended June 30, 2004 when
compared to the comparable period of the prior year. This increase resulted from
the following:
o Cost of sales of $136,462 during the six months ended June 30, 2004;
o write down of inventories of $21,593 during the six months ended June
30, 2004;
o selling, general and administrative expenses for the six months ended
June 30, 2004 was $976,047, as compared to $137,153 during the six
months ended June 30, 2003, which represents an increase of $838,894;
and
o the Company recognized stock based compensations in the amount of
$3,709,561 during the six months ended June 30, 2004 as compared to
none during the six months ended June 30, 2003.
Net Loss
The net loss was $4,759,461 for the six months ended June 30, 2004, as compared
to a net loss of $140,179 for the six months ended June 30, 2003. The net loss
increased by $4,619,282 from the previous period primarily as a result of the
reasons set forth above.
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
Revenues
During the quarter ended June 30, 2004 we had sales of approximately $45,000 and
sales returns of approximately $84,000, resulting in net negative sales of
approximately $39,000. During the three months ended June 30, 2003, we did not
generate any revenue. The reason for the generation of net negative sales was
the return of a majority of our set-top terminals previously delivered to
ISS-LG, Inc. for sale in Puerto Rico. Revenues from the sale of the Company's
set-top boxes are recognized at the time of shipment to the customer. As a
result, the revenues were booked upon shipment of the set top boxes to ISS-LG,
Inc., which were subsequently returned. Access fees are deferred and amortized
over the life of the subscription.
Costs and Expenses
Cost and expenses incurred for the three months ended June 30, 2004, aggregated
$2,285,000 as compared to $24,457 for the three months ended June 30, 2003. Cost
and expenses increased by $2,260,543 for the three months ended June 30, 2004
when compared to the comparable period of the prior year. This increase resulted
from the following:
o write down of inventories of $21,593 during the three months ended
June 30, 2004;
o selling, general and administrative expenses for the three months
ended June 30, 2004 was $446,705, as compared to $24,457 during the
three months ended June 30, 2003, which represents an increase of
$422,248; and
o the Company recognized stock based compensations in the amount of
$1,867,740 during the three months ended June 30, 2004 as compared to
none during the three months ended June 30, 2003.
Net Loss
The net loss was $2,384,256 for the three months ended June 30, 2004, as
compared to a net loss of $25,983 for the three months ended June 30, 2003. The
net loss increased by $2,358,273 from the previous period primarily as a result
of the reasons set forth above.
16
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements for the three months ending
June 30, 2004.
Liquidity and Capital Resources
Financial Condition
The Company has generated minimal revenue to date and has financed its
operations through sales of its common stock and debt. The future success of the
Company depends upon its ability to raise additional financing, generate greater
revenue, and exit the development stage. There is no guarantee that the Company
will be able to do so.
At June 30, 2004, the Company had total current assets of $953,502 and total
current liabilities of $1,408,085 resulting in a working capital deficit of
$454,583. In addition, the Company had a stockholders deficit of $1,552,707 at
June 30, 2004.
The Company is a development stage company that has a working capital deficit at
June 30, 2004 of $454,583 and for the period August 10, 1998 (inception) to June
30, 2004 has incurred net losses aggregating $16,679,200. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to alleviation of the going concern issues
include establishment of strategic partnerships with key suppliers and
customers, the raising of capital by the sale of shares of common stock in the
Company, and through potential operating revenues stemming from the sale of
set-top boxes and internet access. Continuation of the Company is dependent on
the following:
o consummation of the contemplated financings;
o achieving sufficiently profitable operations;
o subsequently maintaining adequate financing arrangements; and
o its exiting the development stage.
The achievement and/or success of the Company's planned measures, however,
cannot be determined at this time.
Capital Resources
The Company anticipates generating cash to continue its operations either though
private sales of its common stock or from capital contributions from its
officers and/or directors. In addition, the Company hopes to reach levels of
revenue sufficient to meet its operating costs. There is no guarantee that the
Company will be able to reach these levels or generate cash through the sale of
its common stock. The Company currently does not have any agreements or
arrangements for financing.
Since the merger in July 2003 through April 2004, our investors have provided
funding approximately in the amount of $2,600,000 in cash, and various parties
have provided services valued at approximately $5,000,000, in consideration for
the issuance of securities issued or to be issued. To obtain funding for our
ongoing operations, pursuant to an offering conducted under Rule 506 of
Regulation D, as promulgated under the Securities Act of 1933, we sold units to
accredited investors with each unit consisting of 50,000 shares of common stock
and 50,000 common stock purchase warrants at a price of $25,000 per unit. In
connection with this offering we issued an aggregate of 4,975,000 shares of
common stock and 4,975,000 common stock purchase warrants for an aggregate
purchase price of $2,487,500. The common stock purchase warrants are each
exercisable into one share of common stock at the holder's option at an exercise
price of $.75 per warrant. At anytime after the filing of this registration
statement, we may call the warrants when the five-day average closing bid price
of the common stock equals or exceeds $1.00. The warrants are exercisable for a
period of thirty-six months.
The Company needs to raise an additional $2,000,000 during the next 12 months to
effectively institute its business plan to market and distribute its products.
The Company is currently seeking debt and/or equity financing arrangements to
provide an alternative source for its future capital needs. However, there can
be no assurance that it will be able to obtain this capital on acceptable terms,
if at all. In such an event, this may have a materially adverse effect on our
business, operating results and financial condition. The following discusses the
manner in which we will utilize our material funding requirements of $2,000,000:
Expense Amount
- ------------------------------------------------------- ------------------------
Working Capital $800,000
- ------------------------------------------------------- ------------------------
Marketing $750,000
- ------------------------------------------------------- ------------------------
Professional Expenses $250,000
- ------------------------------------------------------- ------------------------
General and Administrative $200,000
- ------------------------------------------------------- ------------------------
17
Related Party Loans
During the quarter ended March 31, 2004, we made certain loans to the President
and CEO, aggregating $56,607. During this same period the loans were repaid
through the payment of cash in the amount of $43,300 and the application of
accrued salaries in the amount of $13,307. These loans made to Mr. Lampert
violate Section 402 of the Sarbanes Oxley Act of 2002. As a result, despite the
fact that such loans were repaid, our company and/or Mr. Lampert may be subject
to fines, sanctions and/or penalties. At this time, we are unable to determine
the amount of such fines, sanctions and/or penalties that may be incurred by our
company and/or Mr. Lampert. The purpose of such loan was for personal use.
Additional Transactions
In February 2000, the Company issued Series A Convertible Notes (the "Series A
Notes") in the aggregate amount of $280,000 to several investors (the "Original
Holders").
On June 23, 2003, the Company entered into an Engagement Letter with
Knightsbridge Holdings, LLC, ("Knightsbridge") pursuant to which the Company
engaged Knightsbridge to provide certain consulting and related services for a
one-year term. As consideration for the services to be rendered under the
Engagement Letter, the Company issued an aggregate of 625,000 shares of common
18
stock valued at $625,000 to Knightsbridge. The Engagement Letter provides that
the Company issue to Knightsbridge, or its designees, an amount of common stock
of the Company, upon the closing of a merger/acquisition with a public company,
in an amount not less than 11.50% of the fully diluted shares of the post merger
company. The Engagement Letter further provides that such shares will have full
ratchet anti dilution provisions for the term of the Engagement Letter. The
Company believes that Knightsbridge failed to provide the consideration and
services that were contracted for, and, as a result, does not intend to issue
any additional shares to Knightsbridge. The Company has reserved for issuance
however, 1,504,193 shares of common stock valued at $1,045,191 based upon the
terms of the Engagement Letter and during the quarter ended March 31, 2004 the
Company has reserved an additional 797,538 shares valued at $763,923. Such
2,301,731 shares of common stock to be issued have been reported as a component
of stockholders' deficit. The value of these shares to be issued along with the
original 625,000 shares issued is being amortized over one year and the
remaining life of the contract. Amortization reported as stock based
compensation amounted to $688,502 for the quarter ended March 31, 2004. There
can be no assurance that Knightsbridge will not commence an action against the
Company relating to its rights to receive the shares, or if instituted, that
such action will not be successful. Although the Company believes that any
action which may be commenced would be without merit, and it would vigorously
defend any such action, the cost of such litigation can be substantial even if
the Company were to prevail. Further, an unfavorable outcome could have a
material adverse effect on the Company's revenues, profits, results of
operations, financial condition and future prospects.
As of December 31, 2003 the Company has reserved for issuance however, 1,504,193
shares of common stock valued at $1,045,191 based upon the terms of the
Engagement Letter and during the quarter ended March 31, 2004 the Company has
reserved an additional 797,538 shares valued at $763,923. Such 2,301,731 shares
of common stock to be issued have been reported as a component of stockholders'
deficit. The value of these shares to be issued along with the original 625,000
shares issued is being amortized over one year and the remaining life of the
contract.
On June 25, 2003, the Company borrowed $112,000 (the "June 2003 Note") from
Knightsbridge pursuant to that certain Promissory Note and Security Agreement
entered with Knightsbridge. In connection with the June 2003 Note, the Company
granted a security interest in all of its inventory. In addition, several
stockholders of the Company, including Steven Lampert, the CEO of the Company,
pledged their shares to Knightsbridge to secure the June 2003 Note.
In December 2003, one $20,000 Series A Note was paid in connection with a
settlement agreement and in January 2004 the Company paid an aggregate of
$215,695 principal to four note holders. At March 31, 2004, the remaining
balance due on these notes was $44,305.
In May 2004, the Company and Churchill Investors, Inc. entered into a mutual
release whereby the parties released each other from all obligations with
respect to the Consulting Agreement and the Non-recourse Assignment. In
addition, Churchill agreed to reassign the remaining outstanding balance of the
Series A Notes in the amount of $169,461 to the Company and the Company agreed
to indemnify Churchill for any losses due to claims instituted by third party
purchasers of shares issued upon conversion of the Series A Notes.
19
In addition, in May 2004, we paid off the balance owed in connection with the
June 2003 Note. Simultaneously with such payment of the outstanding balance of
the June 2003 Note, Knightsbridge agreed to
o release its security interest on our inventory; and
o return all of the shares that had been pledged to it as collateral for
the June 2003 Note.
In addition, our company and Knightsbridge entered into a mutual release whereby
the parties released each other from all obligations with respect to the June
2003 Note.
On April 22, 2004, the Company issued 120,000 shares of common stock to Michael
Fasci, a former director and officer of the Company. The Company issued these
shares in consideration for the forgiveness of debt owed to Mr. Fasci by
Advantage Fund I, LLC, which such debt was assumed by the company in connection
with a settlement agreement entered with Advantage Fund LLC.
Risk Factors
Risks relating to our company
We have a history of losses since our inception and expect to incur losses for
the foreseeable future.
We incurred net losses for the year ended December 31, 2003 of $4,393,962 and
for the six months ended June 30, 2004 of $4,759,461. We have not yet achieved
profitability and we can give no assurances that we will achieve profitability
within the foreseeable future as we fund acquisitions, operating and capital
expenditures in areas such as establishment and expansion of markets, sales and
marketing, operating equipment and research and development. We cannot assure
investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.
We have a limited operating history in which to evaluate our business
Although our predecessor was in business for eight years, we have been in
business less than one year. We have limited operating history and limited
assets. Our limited financial resources are significantly less than those of
other companies, which can develop a similar product in the U.S.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability.
In the event that cash flow from operations is less than anticipated and we are
unable to secure additional funding to cover these added losses, in order to
preserve cash, we would be required to further reduce expenditures and effect
further reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. To the extent that operating expenses increase or we need additional
funds to make acquisitions, develop new technologies or acquire strategic
assets, the need for additional funding may be accelerated and there can be no
assurances that any such additional funding can be obtained on terms acceptable
to us, if at all. If we are not able to generate sufficient capital, either from
operations or through additional financing, to fund our current operations, we
may not be able to continue as a going concern. If we are unable to continue as
a going concern, we may be forced to significantly reduce or cease our current
operations. This could significantly reduce the value of our securities, which
could result in our de-listing from the OTC Bulletin Board and cause investment
losses for our shareholders.
Our Independent Auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
In their report dated April 16, 2004, our independent auditors stated that our
financial statements for the year ended December 31, 2003 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going
concern is an issue raised as a result of recurring losses from operations and
cash flow deficiencies from our inception. We continue to experience net losses.
Our ability to continue as a going concern is subject to our ability to generate
a profit and/or obtain necessary funding from outside sources, including
obtaining additional funding from the sale of our securities, increasing sales
or obtaining loans and grants from various financial institutions where
possible. Our continued net losses and stockholders' deficit increases the
difficulty in meeting such goals and there can be no assurances that such
methods will prove successful.
Our future success is dependent, in part, on the performance and continued
service of our President.
20
Our performance and future operating results are substantially dependent on the
continued service and performance of Steven Lampert, our President, Chief
Executive Officer and shareholder. We will rely on Mr. Lampert to develop our
business and possible acquisitions. If Mr. Lampert's services become
unavailable, our business and prospects would be adversely affected. We do not
currently maintain "key man" insurance for any of our executive officers or
other key employees and do not intend to obtain this type of insurance until
such time as the Company has positive cash flow and is profitable. The loss of
the services of Mr. Lampert could have a material adverse effect on our
financial condition, operating results, and, on the public market for our common
stock.
Increased competition in the Internet service industry may make it difficult for
our company to attract and retain members and to maintain current pricing
levels.
We operate in the Internet services market, which is extremely competitive. Our
current and prospective competitors include many large companies that have
substantially greater market presence, financial, technical, marketing and other
resources than we have. We compete directly or indirectly with the following
categories of companies:
o established online service providers, such as America Online, Inc.,
the Microsoft Network and Prodigy Communications Corporation;
o local, regional and national Internet service providers;
o national telecommunications companies;
o regional Bell operating companies, such as BellSouth Corporation and
SBC Communications Inc.;
o personal computer manufacturers with Internet service provider
businesses such as Gateway, Inc. and Dell Computer Corporation;
o "free access" Internet service providers; and
o online cable services; and
o television manufacturers with "built in Internet capabilities" such as
Sony, Toshiba and Mitsubishi.
21
We will also face competition from companies that provide broadband and other
high-speed connections to the Internet, including local and long-distance
telephone companies, cable television companies, electric utility companies, and
wireless communications companies. These companies may use broadband
technologies to include Internet access or Web hosting in their basic bundle of
services or may offer Internet access or Web hosting services for a nominal
additional charge. Broadband technologies enable consumers to transmit and
receive print, video, voice and data in digital form at significantly faster
access speeds than existing dial-up modems.
Our competition is likely to increase. We believe this will probably happen as
large diversified telecommunications and media companies acquire Internet
service providers, as Internet service providers consolidate into larger, more
competitive companies and as providers who offer free access to the Internet
grow in number and size. Diversified competitors may bundle other services and
products with Internet connectivity services, potentially placing us at a
significant competitive disadvantage. In addition, competitors may charge less
than we do for Internet services, or may charge nothing at all in some
circumstances, causing us to reduce, or preventing us from raising, our fees.
Furthermore, the increase in "wired" homes with high speed Internet access
equipment built directly into the home may prevent us from achieving a
substantial member based. As a result, our business may suffer.
Any disruption in the Internet access provided by our company could adversely
affect our business, results of operations and financial condition.
Our systems and infrastructure will be susceptible to natural and man-made
disasters such as earthquakes, fires, floods, power loss and sabotage. Our
systems also will be vulnerable to disruptions from computer viruses and
attempts by hackers to penetrate our network security.
We will be covered by insurance from loss of income from some of the events
listed above, but this insurance may not be adequate to cover all instances of
system failure. Any of the events described above could cause interference,
delays, service interruptions or suspensions and adversely affect our business
and results of operations.
We must continue to expand and adapt our system infrastructure to keep pace with
the increase in the number of members who use the services we expect to provide.
Demands on infrastructure that exceed our current forecasts could result in
technical difficulties with our servers. Continued or repeated system failures
could impair our reputation and brand names and reduce our revenues.
If, in the future, we cannot modify these systems to accommodate increased
traffic, we could suffer slower response times, problems with customer service
and delays in reporting accurate financial information. Any of these factors
could significantly and adversely affect the results of our operations.
If our third party network providers are unable or unwilling to provide Internet
access to our members on commercially reasonable terms, we may suffer the loss
of customers, higher costs and lower overall revenues.
We provide dial-up access through company-owned points of presence and through
third party networks. We will be able to serve our members through the
combination of network providers that we deem most efficient. Our ability to
provide Internet access to our members will be limited if:
o our third-party network providers are unable or unwilling to provide
access to our members;
o we are unable to secure alternative arrangements upon termination of
third-party network provider agreements; or
o there is a loss of access to third-party providers for other reasons.
These events could also limit our ability to further expand nationally and/or
internationally, which could have a material adverse affect on our business. If
we lose access to third-party providers under current arrangements, we may not
be able to make alternative arrangements on terms acceptable to us, or at all.
We do not currently have any plans or commitments with respect to alternative
third-party provider arrangements in areas served by only one network provider.
Moreover, while the contracts with the third-party providers require them to
provide commercially reliable service to our members with a significant
assurance of accessibility to the Internet, the performance of third-party
providers may not meet our requirements, which could materially adversely affect
our business, financial condition and results of operations.
Our revenues and results of operations will be dependent upon our proprietary
technology and we may not be successful in protecting our proprietary rights or
avoiding claims that we are infringing upon the proprietary rights of others.
22
Our success depends in part upon our software and related documentation. We
principally rely upon copyright, trade secret and contract laws to protect our
proprietary technology. We cannot be certain that we have taken adequate steps
to prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
We could incur substantial costs and diversion of management resources in the
defense of any claims relating to proprietary rights, which could materially
adversely affect our business, financial condition, and results of operations.
Parties making these claims could secure a judgment awarding substantial damages
as well as injunctive or other equitable relief that could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could have a material adverse effect on our business, financial condition and
results of operations. If a third party asserts a claim relating to proprietary
technology or information against us, we may seek licenses to the intellectual
property from the third party. We cannot be certain, however, that third parties
will extend licenses to us on commercially reasonable terms, or at all. If we
fail to obtain the necessary licenses or other rights, we could materially
adversely affect our business, financial condition and results of operations.
If we fail to grow our user base, we may not be able to generate revenues,
decrease per user telecommunications costs or implement our strategy
If we are unable to grow our user base, we may not be able to generate revenues,
decrease per-user telecommunications costs or implement our strategy. We intend
to generate new users through other distribution channels, such as television,
radio and print media advertising, direct marketing campaigns, and bundling,
co-branding and retail distribution arrangements. However, we have little
practical experience with marketing our service through these channels. If these
distribution channels prove more costly or less effective than anticipated, it
could adversely impact our ability to grow. We would also be unable to grow our
user base if a significant number of our current registered users stopped using
our service. We cannot assure you that we will be able to successfully address
these issues and retain our existing user base.
Changed in government regulation could decrease our revenues and increase our
costs.
Changes in the regulatory environment could decrease our revenues and increase
our costs. As a provider of Internet access and e-mail services, we are not
currently subject to direct regulation by the Federal Communications Commission.
However, several telecommunications carriers are seeking to have communications
over the Internet regulated by the FCC in the same manner as other more
traditional telecommunications services. Local telephone carriers have also
petitioned the FCC to regulate Internet access providers in a manner similar to
long distance telephone carriers and to impose access fees on these providers,
and recent events suggest that they may be successful in obtaining the treatment
they seek. In addition, we operate our services throughout the United States,
and regulatory authorities at the state level may seek to regulate aspects of
our activities as telecommunications services. As a result, we could become
subject to FCC and state regulation as Internet services and telecommunications
services converge.
We remain subject to numerous additional laws and regulations that could affect
our business. Because of the Internet's popularity and increasing use, new laws
and regulations with respect to the Internet are becoming more prevalent. These
laws and regulations have covered, or may cover in the future, issues such as:
o user privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
o distribution; and
o characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our subscribers for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. In addition, the FTC is conducting an ongoing
investigation into the marketing practices of Internet-related companies,
including Juno. As part of the FTC's activities, we have been requested to
provide, and have provided, marketing-related and customer service-related
information to the FTC. Depending on the outcome of the FTC inquiry, we could be
required to modify our marketing or customer service practices in a way that
could negatively affect our business.
23
It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could harm us. Additionally,
while we do not currently operate outside of the United States, the
international regulatory environment relating to the Internet market could have
an adverse effect on our business, especially if we should expand
internationally.
The growth of the Internet, coupled with publicity regarding Internet fraud, may
also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer.
Regulation of content and access could limit our ability to generate revenues
and expose us to liability
Prohibition and restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed, including laws which would require Internet service
providers to supply, at cost, filtering technologies to limit or block the
ability of minors to access unsuitable materials on the Internet. Because of
these content restrictions and potential liability to us for materials carried
on or disseminated through our systems, we may be required to implement measures
to reduce our exposure to liability. These measures may require the expenditure
of substantial resources or the discontinuation of our product or service
offerings that subject us to this liability. Further, we could incur substantial
costs in defending against any of these claims and we may be required to pay
large judgments or settlements or alter our business practices. In addition, our
liability insurance may not cover potential claims relating to the Internet
services we provide or may not be adequate to indemnify us for all liabilities
that may be imposed on us.
We could be exposed to liability for defamation, negligence and infringement.
Because users download and redistribute materials that are cached or replicated
by us in connection with our Internet services, claims could be made against us
for defamation, negligence, copyright or trademark infringement, or other
theories based on the nature and content of such materials. While we have
attempted to obtain safe harbor protection against claims of copyright
infringement under the Digital Millenium Copyright Act of 1998, there can be no
guarantee that we will prevail in any such claims. We also could be exposed to
liability because of third-party content that may be accessible through our
services, including links to Web-sites maintained by our users or other third
parties, or posted directly to our Web-site, and subsequently retrieved by a
third party through our services. It is also possible that if any third-party
content provided through our services contains errors, third parties who access
such material could make claims against us for losses incurred in reliance on
such information. You should know that these types of claims have been
successfully brought against other online service providers. In particular,
copyright and trademark laws are evolving and it is uncertain how broadly the
rights provided under these laws will be applied to online environments. It is
impossible for us to determine who the potential rights holders may be with
respect to all materials available through our services.
We are dependent on strategic marketing alliances as a source of revenues and
our business could suffer if any of these alliances are terminated.
We have strategic marketing alliances with a number of third parties, and most
of our strategic marketing partners have the right to terminate their agreements
with us on short notice. Any termination may result in the substantial loss of
members obtained through the alliance. If any of our strategic marketing
agreements are terminated, we cannot assure you that we will be able to replace
the terminated agreement with an equally beneficial arrangement. We also expect
that we will not be able to renew all of our current agreements when they expire
or, if we are, that we will be able to do so on acceptable terms. We also do not
know whether we will be successful in entering into additional strategic
marketing alliances, or that any additional relationships, if entered into, will
be on terms favorable to us. Our receipt of revenues from our strategic
marketing alliances may also be dependent on factors which are beyond our
control, such as the quality of the products or services offered by our
strategic marketing partners.
24
The Company and/or its President and CEO may be subject to fines, sanctions
and/or penalties of an indeterminable nature as a result of violations of the
Sarbanes Oxley Act of 2002 in connection with loans made to the President and
CEO.
During the quarter ended March 31, 2004, we made certain loans to Mr. Steven
Lampert, the Company's President and CEO, aggregating $56,607. During this same
period the loans were repaid through the payment of cash in the amount of
$43,300 and the application of accrued salaries in the amount of $13,307. These
loans made to Mr. Lampert violate Section 402 of the Sarbanes Oxley Act of 2002.
As a result, despite the fact that such loans were repaid, our company and/or
Mr. Lampert may be subject to fines, sanctions and/or penalties. At this time,
we are unable to determine the amount of such fines, sanctions and/or penalties
that may be incurred by our Company and/or Mr. Lampert. The purpose of such loan
was for personal use.
Risks Related To Our Stock
A former consultant may be entitled to receive 11.50% of the Company's fully
diluted outstanding shares which, if the Company is required to issue these
shares, could have a material adverse effect on our financial condition.
On June 23, 2003, the Company entered into an Engagement Letter which requires
that the Company issue to Knightsbridge, or its designees, an amount of common
stock of the Company, upon the closing of a merger/acquisition with a public
company, in an amount not less than 11.50% of the fully diluted shares of the
post merger company. The Engagement Letter further provides that such shares
will have full ratchet anti dilution provisions for the term of the Engagement
Letter. The Company believes that Knightsbridge failed to provide the
consideration and services that were contracted for, and, as a result, does not
intend to issue any additional shares to Knightsbridge. There can be no
assurance that Knightsbridge will not commence an action against the Company
relating to its rights to receive the shares, or if instituted, that such action
will not be successful. Although the Company believes that any action which may
be commenced would be without merit, and it would vigorously defend any such
action, the cost of such litigation can be substantial even if the Company were
to prevail. Further, an unfavorable outcome could have a material adverse effect
on the Company's revenues, profits, results of operations, financial condition
and future prospects.
Shares of common stock issued in connection with the conversion of Series A
Convertible Notes may have not have been in compliance with certain state and
federal securities laws.
25
On July 31, 2003, the Company entered into a Consulting Agreement pursuant to
which the Company engaged the consultant to provide certain advisory services
for a one-year term, for an aggregate fee of $250,000. In lieu of payment, the
Consultant agreed to accept a non-recourse assignment of $280,000 Series A
Convertible Notes. Following the execution and delivery of the Non-recourse
Assignment, the consultant or its assignees, converted $110,539 of the Series A
Convertible Notes into 855,000 shares of common stock. The issuance of the
shares of common stock in connection with the conversion of the Series A
Convertible Notes may not have been in compliance with certain state and federal
securities laws due to the fact that the Consultant or its assignees, at the
time of the conversion, may not have been the lawful holder in due course of the
Notes by virtue of the fact that the Notes were assigned to them without the
consent of the original note holders. It should be noted that the Company
subsequently settled with all of the original note holders. In addition, any
subsequent sale of the shares issuable upon conversion of the Notes, may have
violated Rule 144.
The Company is currently unable to determine the amount of damages, if any, that
it may incur as a result of these share issuances and/or any subsequent sales,
which include, but are not limited to, damages that may result from the Company
having to rescind the issuance of these shares. The payment of damages could
have a material adverse effect on the Company's revenues, profits, results of
operations, financial condition and future prospects.
Steven Lampert, the Company's sole officer and a director, entered into an
agreement whereby he may be required to transfer his shares of common stock of
the Company
Steven Lampert has entered into a Confidential Antidilution Agreement dated July
1, 2003 with Michael Fasci, a former director and officer of the Company. In
consideration for Mr. Fasci agreeing to vote in favor of the reverse merger the
Company entered into in July 2003, Mr. Lampert agreed to transfer to Mr. Fasci
shares of his common stock so that Mr. Fasci's ownership would at all times be
maintained at 10% of the outstanding shares of the Company. The term of this
agreement is for three years. As a result, Mr. Lampert may be required to
transfer all or a portion of his shares to Mr. Fasci.
We have anti-takeover provisions, which could inhibit potential investors or
delay or prevent a change of control that may favor you.
Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law could, together or separately, discourage potential acquisition
proposals or delay or prevent a change in control. In particular, our board of
directors is authorized to issue up to 5,000,000 shares of preferred stock (less
any outstanding shares of preferred stock) with rights and privileges that might
be senior to our common stock, without the consent of the holders of the common
stock.
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment.
Our auditors included an explanatory paragraph in their report on our financial
statements for the year ended December 31, 2003 which states that, due to
recurring losses from operations since inception of the Company, there is
substantial doubt about our ability to continue as a going concern.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
26
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Principals of Consolidation
The consolidated financial statements include the accounts of PowerChannel, Inc.
and its wholly owned and majority owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Stock-Based Compensation
As permitted under FAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees", and related interpretations
in accounting for stock-based awards to employees. Accordingly, compensation
cost for stock options and restricted stock grants is measured as the excess, if
any, of the market price of the Company's common stock at the date of grant over
the exercise price. Warrants and options issued to nonemployees are accounted
for using the fair value method of accounting as prescribed by FAS No. 123 and
Emerging Issues Tak Force ("EITF") No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services". Compensation costs are amortized in a manner
consistent with Financial Accounting Standards Board Interpretation No. 28 (FIN
No. 28), "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans". The Company uses the Black-Scholes option pricing model
to value options, restricted stock grants and warrants granted to nonemployees.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
period. The Common stock issued and outstanding with respect to the pre-merger
Sealant stockholders has been included since January 1, 2001.
Because the Company is incurring losses, the effect of stock options and
warrants is antidilutive. Accordingly, the Company's presentation of diluted net
loss per share is the same as that of basic net loss per share.
Pro-forma weighted average shares outstanding includes the pro-forma issuance of
1,504,953 common shares reserved to be issued pending potential litigation (see
Note 11).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures 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 these estimates.
27
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
143 (FAS 143), "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" which is required to be adopted in fiscal years beginning
after June 15, 2002. FAS 143 establishes accounting standards for the
recognition of and measurement of an asset retirement obligation and its
associated asset retirement cost.
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 extinguishments 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 is effective no later than January 1, 2003.
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 May 2003, the FASB issued FAS No. 150 (FAS 150), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement affects the classification, measurement and disclosure requirements of
certain freestanding financial instruments including mandatorily redeemable
shares. FAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supercedes FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and amends Accounting Principles Board ("APB") Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". FAS No. 144 retains the fundamental provisions of FAS
No. 121 for recognition and measurement of impairment, but amends the accounting
and reporting standards for segments of a business to be disposed of. FAS No.
144 was effective in 2002.
On December 31, 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". FAS No. 148 amends FAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to FAS No. 123's fair value method of accounting for stock-based
employee compensation. FAS No. 148 also amends the disclosure provisions of FAS
No. 123 and Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the statement does not
amend FAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of FAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of FAS
No. 123, or the intrinsic value method of APB Opinion 25, "Accounting for Stock
issued to Employees" ("APB 25").
The adoption of FAS 143,144, 145 (other than as noted below), 146 and 150 is not
expected to have a material effect on the Company's results of operations or
financial position. The adoption of FAS 145 in recording the Company's shares of
PowerChannel Europe PLC's 2001 net income was not material.
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 June 30, 2004. 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.
28
(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.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Except for the following, we are currently not a party to any material legal
proceedings.
o In October 2003, a stockholder alleging investment fraud filed a claim
in the Civil Court of the City of New York seeking damages in the
amount of approximately $48,000;
o In April 2003, a stockholder alleging investment fraud filed a claim
in the Supreme Court of Nassau County seeking damages in the amount of
$25,000 plus interest. The plaintiff has withdrawn his claim but may
commence this action at a future point in time; and
o On July 20, 2004, the Company filed a complaint In the Circuit Court
of the 11th Judicial Circuit in and for Miami-Dade County, Florida
against Knightsbridge Holdings, LLC, Advantage Fund I, LLC, Triple
Crown Consulting Co., Phoenix Capital Partners, LLC, Churchill
Investments, Inc., Alyce B. Schreiber, Robert Press, Benjamin Kaplan,
Newbridge Securities Corporation and Anslow & Jacklin, LLP, the
Company's former attorneys. The Company is seeking relief deemed
appropriate by the court and to establish a constructive trust over
all securities held by the defendants and all proceeds from the sale
of such securities. The Company is also seeking to rescind the Letter
Agreement entered with Knightsbridge Holdings, LLC. In its complaint,
the Company alleged fraudulent inducement, breach of contract,
conspiracy and breach of fiduciary duty.
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 June 30, 2004, the Company acquired 38.44% of PowerChannel Europe PLC for
$77,455 from Steven Lampert, the CEO and a director of the Company, and Michael
Preston. The Company issued an aggregate of 286,687 shares of common stock to
Mr. Lampert and Mr. Preston. Concurrently therewith, the 286,687 shares were
returned to the Company by Mr. Lampert and Mr. Preston as capital contributions.
On February 29, 2000, the Company entered into subscription agreements with
seven individuals and in conjunction with such agreements, issued Series A
Convertible Notes. Pursuant to these notes, the Company 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. In
December 2003, one $20,000 Series A Note was paid in connection with a
settlement agreement and in January 2004 the Company paid an aggregate of
$215,695 principal to four note holders. At June 30, 2004, the remaining balance
due on these notes was $44,305. In May 2004, the Company and Churchill
Investments, Inc. ("Churchill") entered into a mutual release whereby the
parties released each other party from all obligations with respect to the
Consulting Agreement and the Non-recourse Assignment. In addition, Churchill
agreed to reassign the remaining outstanding balance of the Series A Notes in
the amount of $169,461 to the Company and the Company agreed to indemnify
Churchill for any losses due to claims instituted by third party purchasers of
shares issued upon conversion of the Series A Notes.
During the quarter ended June 30, 2004, the Company issued 120,000 shares of
common stock to Michael Fasci, the Company's former director, valued at $75,600
as payment of consulting fees.
In July 2004, the Company issued 500,000 shares of common stock to Isaac
Weinhouse in consideration for consulting services.
* All of the above offerings and sales were deemed to be exempt under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of PowerChannel or executive officers
of PowerChannel, and transfer was restricted by PowerChannel in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons were accredited or sophisticated investors,
and that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
30
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security None Holders.
None
Item 5. Other Information.
In May 2004, The Lampert Group, an entity 100% owned by Steven Lampert, the
Company's Chief Executive Officer and a director, successfully bid on 42,336
set-top boxes auctioned off by S&H Storage & Haulage Ltd. ("S&H") at an
aggregate price of approximately $44,000. Prior to the auction, S&H took
possession of the set top boxes after Powerchannel Europe PLC had failed to pay
for their storage. The Company then purchased the set-top boxes from The Lampert
Group for $44,000.
Item 6. Exhibits and Reports of Form 8-K.
Reports on Form 8K
None.
Exhibits
Exhibit Number Description
31.1 Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
32.1 Certification of CEO and CFO Pursuant to section 906 of the Sarbanes
Oxley Sarbanes Oxley Act of 2002
31
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 August 19, 2004.
POWERCHANNEL, INC.
Date: August 20, 2004 By: /s/ Steven Lampert
-------------------------
Steven Lampert
Chairman and President
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