As filed with the Securities and Exchange Commission on December 2, 2004
An Exhibit List can be found on page II-6.
Registration No. 333-112784
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Amendment No. 4 to the
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POWERCHANNEL, INC.
(Name of small business issuer)
Sealant Solutions, Inc.
(Former name of small business issuer)
Delaware 7379 65-0952186
(State or other jurisdiction (Primary standard industrial (IRS Employer
of incorporation) code number) identification number)
16 North Main Street, Suite 395
New City, New York 10956
(845)634-7979
(Address and telephone number of principal executive offices and
principal place of business)
Steven Lampert, Chief Executive Officer
POWERCHANNEL, INC.
16 North Main Street, Suite 395
New City, New York 10956
(845)634-7979
(Name, address and telephone number of agent for service)
Copies to:
Richard A. Friedman, Esq.
Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
i
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
ii
CALCULATION OF REGISTRATION FEE
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price per aggregate offering Amount of
registered registered share price registration fee
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Common stock, $.01 10,270,365 $ .36(1) $ 3,697,331.40 $ 468.45
par value per share
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Common stock, $.01 4,975,000 $ .75(2) $ 3,731,250.00 $ 472.75
par value per share,
issuable upon
exercise of common
stock purchase
warrants
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Common stock, $.01 1,200,000 $ .40(3) $ 480,000.00 $ 60.82
par value per share,
issuable upon
exercise of stock
options
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Common stock, $.01 1,200,000 $ .36(4) $ 432,000.00 $ 57.73
par value per share,
issuable upon
exercise of stock
options
- ---------------------- --------------------- -------------------- ---------------------- ------------------
- ---------------------- --------------------- -------------------- ---------------------- ------------------
Total 17,645,365 $ 8,340,581.40 $1,056.75*
- ---------------------- --------------------- -------------------- ---------------------- ------------------
*Previously paid
f(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
June 25, 2004, which was $.36 per share.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the higher
of the exercise price of $.75 or the registration fee computed in accordance
with Rule 457(c).
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the higher
of the exercise price of $.40 or the registration fee computed in accordance
with Rule 457(c).
(4) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the higher
of the exercise price of $.20 or the registration fee computed in accordance
with Rule 457(c).
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
iii
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 2, 2004
Powerchannel, Inc.
17,645,365 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
17,645,365 shares of our common stock, including 10,270,365 shares of common
stock, up to 4,975,000 issuable upon the exercise of common stock purchase
warrants and 2,400,000 shares of common stock issuable upon exercise of options.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "PWRC". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on November 29, 2004, was $.06.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2004.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by
PowerChannel, Inc., with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
PowerChannel, Inc.
Our principal service is the provision low-cost access to the Internet together
with the physical hardware to deliver it through the use of the consumer's
existing television. We are presently focusing primarily on the Hispanic market,
using a bilingual (English/Spanish) approach to meet the needs of the differing
generations within the Hispanic community, and offering value to the subscriber
through offers, discounts, coupons and prizes. We have our operations in New
York. We have formed a number of strategic alliances and commercial
relationships designed in aggregate to enable us to offer our services including
low-cost hardware and access to the Internet available through the television.
The alliances and relationships will focus initially on the Hispanic markets in
Los Angeles and New York. During the quarter ended September 30, 2004 we had
sales of approximately $37,500. For the quarter ended September 30, 2004 we
generated net losses of $1,429,871 as compared to $1,968,290 for the comparable
period in 2003. In addition, for the year ended December 31, 2003, we generated
revenues in the amount of $95,083 and incurred losses in the amount of
$4,393,962. As a result of recurring losses from operations and a net deficit in
both working capital and stockholders' equity, our auditors, in their report
covering our financial statements for the year ended December 31, 2003, have
expressed substantial doubt about our ability to continue as going concern.
Our principal offices are located at 16 North Main Street, Suite 395, New City,
New York 10956, and our telephone number is (845) 634-7979. We are a Delaware
corporation.
- ------------------------------------------------------------ -----------------------------------------------
The Offering
- ------------------------------------------------------------ -----------------------------------------------
Common stock offered by selling stockholders................17,645,365 shares of common stock, including
10,270,365 shares of common stock, up to
4,975,000 shares of common stock underlying
common stock purchase warrants and up to
2,400,000 shares of common stock underlying
options, assuming full exercise of the common
stock purchase warrants and options. This
number represents 53.9% of our total number of
shares outstanding assuming the exercise of
all common stock purchase warrants and options.
- ------------------------------------------------------------ -----------------------------------------------
Common stock to be outstanding after the offering............Up to 34,044,829 shares assuming the exercise
of all common stock purchase warrants and
options.
2
- ------------------------------------------------------------ -----------------------------------------------
Use of proceeds We will not receive any proceeds from the sale
of the common stock. However, we will receive
the exercise price for any shares of common
stock delivered in connection with the
exercise of the common stock purchase warrants
and options. We expect to use the proceeds
received from the exercise of the common stock
purchase warrants and optiosn, if any, for
general working capital purposes. We have
received gross proceeds in the amount of
$2,487,500 from the sale of common stock and
common stock purchase warrants.
- ------------------------------------------------------------ -----------------------------------------------
OTCBB Symbol PWRC
- ------------------------------------------------------------ -----------------------------------------------
The above information regarding common stock to be outstanding after the
offering is based on 26,669,829 shares of common stock outstanding as of
November 29, 2004 and assumes the exercise of warrants by our selling
stockholders. However, it should be noted that our outstanding shares of common
stock excludes 2,370,156 shares of common stock that we may be required to
issue, as of September 30, 2004, to Knightsbridge Holdings LLC pursuant to that
certain Engagement Letter entered on June 23, 2003.
3
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
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 nine months ended September 30, 2004 we incurred net losses of
$6,189,332. During the nine months ended September 30, 2004 we had net sales of
approximately $186,000. 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.
For the year ended December 31, 2003, 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.
4
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 we have 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.
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.
5
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.
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
6
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
7
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.
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.
8
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.
Our company and/or our 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, our 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.
We may be required to pay penalties to the investors that participated in our
private placement that closed in January 2004 due to the fact that the
registration statement registering the shares issued in connection with this
private placement has not been declared effective within the required deadline.
If we are required to pay such penalties, we may be forced to cease or curtail
our operations.
To obtain funding for our ongoing operations, pursuant to an offering conducted
under Rule 506 of Regulation D, 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 raised $2,487,500. In connection with this private placement, we
agreed to file a registration statement registering the shares of common stock
issued and to have such registration statement declared effective by May 29,
2004. In the event a registration statement covering these shares of common
stock has not been declared effective by May 29, 2004, we are required to pay a
penalty equal to 2% per month on the amount invested by each investor. If we are
required to pay this penalty, our working capital will be severely limited and
we may be forced to curtail or ceased our operations.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale could
cause our common stock price to decline even if the we are successful.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of June 1, 2004, we have outstanding options to purchase
2,400,000 shares. There are also outstanding warrants to purchase 4,975,000
shares of common stock.
A former consultant may be entitled to receive 11.50% of our company's fully
diluted outstanding shares which, if we are required to issue these shares,
could have a material adverse effect on our financial condition and result in
substantial dilution to our stockholders. Further, we will be required to defend
any action brought by the consultant which will result in substantial expense to
our company.
9
On June 23, 2003, we entered into an Engagement Letter which requires that we
issue to Knightsbridge Holdings LLC, or its designees, an amount of common stock
of our 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. We
believe 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 us relating to its rights to receive the shares, or
if instituted, that such action will not be successful. Although we believe that
any action which may be commenced would be without merit, and we would
vigorously defend any such action, the cost of such litigation can be
substantial even if we were to prevail. Further, an unfavorable outcome could
have a material adverse effect on our revenues, profits, results of operations,
financial condition and future prospects.
The issuance of shares of common stock in connection with the conversion of
Series A Convertible Notes may have not have been in compliance with certain
state and federal securities laws and any damages that we may have to pay as a
result of such issuance could have a material adverse effect on our revenues,
profits, results of operations, financial condition and future prospects.
On July 31, 2003, we entered into a Consulting Agreement pursuant to which
we 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 in the form of 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 we subsequently
settled with a majority of the original note holders and we entered into a
settlement with the consultant whereby the remaining portion of the assigned
note was cancelled.
In addition, any subsequent sale of the shares issuable upon conversion of
the notes, may have violated Rule 144 if the consultant sold the shares under
Rule 144 and relied upon the holding period of the initial note holder to
qualify for such sale. As we have settled with the consultant, we do not plan to
offer rescission at this time. We are currently unable to determine the amount
of damages, if any, that it may incur as a result of this issuance, which
include, but are not limited to, damages that may result from the following
o subsequent third party purchaser(s) of the shares that were resold by
the consultant and its assignees upon conversion of the Series A
Notes, and/or
o other existing shareholders of our Company that may make a claim, on a
derivative basis, that these transactions and the shares issued, may
have resulted in a dilution of the value of their shareholdings.
The payment of damages could have a material adverse effect on our revenues,
profits, results of operations, financial condition and future prospects.
10
Steven Lampert, our sole officer and a director, entered into an agreement
whereby he may be required to transfer his shares of common stock of our company
which could result in a change in control of our company.
Steven Lampert has entered into a Confidential Antidilution Agreement dated July
1, 2003 with Michael Fasci, a former director and officer of our company. In
consideration for Mr. Fasci agreeing to vote in favor of the reverse merger, we
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 our 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. If Mr. Lampert is required to transfer all
or a portion of his shares this could result in a change in control and a change
in management.
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 ofour company, there is
substantial doubt about our ability to continue as a going concern. Our
financial statements for the nine months ended September 30, 2004 do not include
any adjustments that might result from our inability to continue as a going
concern. These adjustments could include additional liabilities and the
impairment of certain assets. If we had adjusted our financial statements for
these uncertainties, our operating results and financial condition would have
been materially and adversely affected.
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.
11
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.
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.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive up to $4,451,250 upon exercise of the common stock purchase
warrants and options held by the selling stockholders however there is no
assurance that we will receive these proceeds as the warrant holder may not
exercise its common stock purchase warrants. We expect to use the proceeds
received from the exercise of the common stock purchase warrants, if any, for
general working capital purposes.
12
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "PWRC".
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
- -------------------------------------- ----------------------------------- -----
High Low
- -------------------------------------- ----------------------------------- -----
2004
- -------------------------------------- ----------------------------------- -----
Fourth Quarter* $0.17 $0.06
- -------------------------------------- ----------------------------------- -----
Third Quarter $.036 $0.09
- -------------------------------------- ----------------------------------- -----
Second Quarter $0.83 $0.25
- -------------------------------------- ----------------------------------- -----
First Quarter $1.70 $0.52
- -------------------------------------- ----------------------------------- -----
- -------------------------------------- ----------------------------------- -----
2003
- -------------------------------------- ----------------------------------- -----
Fourth Quarter $1.20 $0.09
- -------------------------------------- ----------------------------------- -----
Third Quarter $1.50 $0.12
- -------------------------------------- ----------------------------------- -----
Second Quarter $1.01 $0.10
- -------------------------------------- ----------------------------------- -----
First Quarter $2.25 $0.10
- -------------------------------------- ----------------------------------- -----
2002
- -------------------------------------- ----------------------------------- -----
Fourth Quarter $1.01 $0.01
- -------------------------------------- ----------------------------------- -----
Third Quarter $0.04 $0.01
- -------------------------------------- ----------------------------------- -----
Second Quarter $0.04 $0.01
- -------------------------------------- ----------------------------------- -----
First Quarter $0.10 $0.02
- -------------------------------------- ----------------------------------- -----
*Through November 29, 2004.
As of November 29, 2004, there were 26,669,829 shares of common stock
outstanding.
As of November 29, 2004, there were approximately 3,020 stockholders of record
of our common stock. This does not reflect those shares held beneficially or
those shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
Equity Compensation Plan Information
We currently do not have securities remaining available for the future issuance
of under equity compensation plans.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, we 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, we acquired 38.44% of PCE for $77,455 from Mr. Steven Lampert,
our Chief Executive Officer and a director, and Michael Preston. Mr. Preston has
occasionally served as a consultant to our company and owns a limited number of
our shares of common stock. We 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 us by Mr. Lampert and Mr. Preston
as capital contributions.
At June 30, 2004, our ownership in PCE increased to 70.41% and the accounts of
PCE have been included in our 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, we 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
Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30,
2003
Revenues
During the nine months ended September 30, 2004 we had sales of approximately
$185,866, which is net of returns of $84,420. During the nine months ended
September 30, 2003, we did not generate any revenue. The reason for the increase
in the revenues was the commencement of our new business of providing low cost
Internet access.
Costs and Expenses
Cost and expenses incurred for the nine months ended September 30, 2004,
aggregated $6,309,040 as compared to $2,110,401 for the nine months ended
September 30, 2003. Cost and expenses increased by $4,198,639 for the nine
months ended September 30, 2004 when compared to the comparable period of the
prior year. This increase resulted from the following:
14
o Cost of sales of $151,462 during the nine months ended September
30, 2004 as compared to none for the nine months ended September
30, 2003;
o write down of inventories of $21,593 during the nine months ended
September 30, 2004 as compared to none for the nine months ended
September 30, 2003;
o selling, general and administrative expenses for the nine months
ended September 30, 2004 of $1,443,455, as compared to $446,955
during the nine months ended September 30, 2003, which represents
an increase of $996,500; and
o stock based compensation in the amount of $4,692,530 during the
nine months ended September 30, 2004 as compared to $1,663,446
during the nine months ended September 30, 2003.
Net Loss
The net loss was $6,189,332 for the nine months ended September 30, 2004, as
compared to a net loss of $2,108,469 for the nine months ended September 30,
2003. The net loss increased by $4,080,863 from the previous period primarily as
a result of the reasons set forth above.
Three Months Ended September 30, 2004 compared to Three Months Ended September
30, 2003
Revenues
During the quarter ended September 30, 2004 we had sales of approximately
$37,500, which is net of returns of $84,420. During the three months ended
September 30, 2003, we did not generate any revenue. The reason for the returns
was the return of a majority of our set-top terminals previously delivered to
ISS-LG, Inc. for sale in Puerto Rico. The reason for the increase in the
revenues was the commencement of our new business of providing low cost Internet
access. Access fees are deferred and amortized over the life of the
subscription.
Costs and Expenses
Cost and expenses incurred for the three months ended September 30, 2004,
aggregated $1,465,377 as compared to $1,973,248 for the three months ended
September 30, 2003. Cost and expenses decreased by $507,871 for the three months
ended September 30, 2004 when compared to the comparable period of the prior
year. This decrease resulted from a decrease in stock based compensation in the
amount of $680,477. During the three months ended September 30, 2004 the
Company's stock based compensation was $982,969 and during the three months
ended September 30, 2003, the Company's stock based compensation was $1,663,446.
The decrease resulting from the decrease in stock based compensation was off-set
by an increase in the amount of $15,000 for the costs of sales and $157,606 in
selling, general and administrative expenses.
Net Loss
The net loss was $1,429,871 for the three months ended September 30, 2004, as
compared to a net loss of $1,968,290 for the three months ended September 30,
2003. The net loss decreased by $538,419 from the previous period primarily as a
result of a decrease in stock based compensation and an increase in revenues.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements for the three months ending September
30, 2004.
Results of Operations - Year Ended December 31, 2003 compared to Year Ended
December 31, 2002
Revenues
15
We generated $95,083 of revenues during the year ended December 31, 2003. During
the year ended December 31, 2002, we had no revenues. The reason for the
increase in the revenues was our change in our business plan in connection with
its reverse merger in July 2003. Revenues from the sale of our set-top boxes are
recognized at the time of shipment to the customer. Access fees are deferred and
amortized over the life of the subscription.
Costs and Expenses
Cost and expenses incurred for the year ended December 31, 2003, aggregated
$5,157,548 as compared to $2,007,652 for the year ended December 31, 2002. Cost
and expenses increased by $3,149,896 for the year ended December 31, 2003 when
compared to the previous year. This increase resulted from the following:
o cost of sales for the year ended December 31, 2003 was $5,811 as
compared to none for the year ended December 31, 2002, which such
increase was the result of our change in its business plan in
connection with its reverse merger in July 2003;
o we recognized a charge of $443,063 representing a write down of
our inventories;
o we incurred an impairment loss on our investment in Powerchannel
Europe, PLC, an unconsolidated affiliate, in the amount of
$574,000;
o we incurred a cost related to the settlement of debt in the
amount of $111,000; and
o we recognized stock based compensations in the amount of
$2,321,000 during the year ended December 31, 2003 as compared to
none during the year ended December 31, 2002.
The foregoing elements of costs and expenses are offset by a decrease in the
selling, general and administrative expenses of approximately $1,167,000. We
incurred interest expense in the amount of $155,495 for the year ended December
31, 2003.
Net Loss
The net loss was $4,393,962 for the year ended December 31, 2003, as compared to
a net loss of $2,074,174 for the year ended December 31, 2002. The net loss
increased by $2,319,788 from the previous period primarily as a result of the
reasons set forth above.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements for the fiscal year ending December 31,
2003.
Liquidity and Capital Resources
16
Financial Condition
We generated minimal revenue to date and have financed our operations through
sales of our common stock and debt. The future success of our company depends
upon our ability to raise additional financing, generate greater revenue, and
exit the development stage. There is no guarantee that we will be able to do so.
At September 30, 2004, we had total current assets of $545,902 and total current
liabilities of $1,607,201 resulting in a working capital deficit of $1,061,299.
In addition, we had a stockholders deficit of $2,193,609 at September 30, 2004.
We are a development stage company that has a working capital deficit at
September 30, 2004 of $1,061,299 and for the period August 10, 1998 (inception)
to September 30, 2004 has incurred net losses aggregating $18,109,071. These
factors combined with our urgent need to provide near-term operating cash raise
substantial doubt about our 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 our company, and
through potential operating revenues stemming from the sale of set-top boxes and
internet access. Continuation of our 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 exiting the development stage.
The achievement and/or success of our company's planned measures, however,
cannot be determined at this time.
Capital Resources
We anticipate generating cash to continue our operations either though private
sales of our common stock or from capital contributions from our officers and/or
directors. In addition, we hope to reach levels of revenue sufficient to meet
our operating costs. There is no guarantee that we will be able to reach these
levels or generate cash through the sale of our common stock. We currently do
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.
We need to raise an additional $2,000,000 during the next 12 months to
effectively institute our business plan to market and distribute our products.
In connection with this private placement, we agreed to file a registration
statement registering the shares of common stock issued and to have such
registration statement declared effective by May 29, 2004. In the event a
registration statement covering these shares of common stock has not been
declared effective by May 29, 2004, we are required to pay a penalty equal to 2%
per month on the amount invested by each investor. If we are required to pay
this penalty, our working capital will be severely limited and we may be forced
17
to curtail or ceased our operations. We are currently seeking debt and/or equity
financing arrangements to provide an alternative source for our future capital
needs. We currently do not have any agreements or arrangements for financing.
There can be no assurance that we 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
- ----------------------------------- -------------------------------------
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, we 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, we entered into an Engagement Letter with Knightsbridge
Holdings, LLC, ("Knightsbridge") pursuant to which we 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, we
issued an aggregate of 625,000 shares of common stock valued at $625,000 to
Knightsbridge. The Engagement Letter provides that we issue to Knightsbridge, or
our designees, an amount of common stock of our 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. We believe that Knightsbridge
failed to provide the consideration and services that were contracted for, and,
as a result, do not intend to issue any additional shares to Knightsbridge. We
have 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 we have 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 us
relating to our rights to receive the shares, or if instituted, that such action
will not be successful. Although we believe that any action which may be
commenced would be without merit, and we would vigorously defend any such
action, the cost of such litigation can be substantial even if we were to
prevail. Further, an unfavorable outcome could have a material adverse effect on
18
our revenues, profits, results of operations, financial condition and future
prospects.
As of September 30, 2004, we have reserved for issuance however, 2,370,156
shares of common stock valued at $1,827,756 based upon the terms of the
Engagement Letter. Such 2,370,156 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, we 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, we granted a security
interest in all of our inventory. In addition, several stockholders, including
Steven Lampert, our CEO, pledged their shares to Knightsbridge to secure the
June 2003 Note.
In December 2003, $20,000 principal amount of the Series A Notes was paid to one
holder, and in January 2004 we 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, our 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 us and we agreed to indemnify
Churchill for any losses that may arise from claims instituted by third party
purchasers of shares issued upon conversion of the Series A Notes.
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, we issued 120,000 shares of common stock to Michael Fasci, a
former director and officer of our company. We 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.
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.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. We have recognized a loss of $443,063 and $21,593 during the year ended
December 31, 2003 and the nine months ended September 30, 2004, respectively,
related to the valuation of its inventories.
Deferred Offering Costs
19
Deferred offering costs represent costs incurred in connection with a proposed
offering of our securities. Upon successful completion of the proposed offering
such costs will be charged to additional paid-in capital. These deferred
offering costs represent the issuance of 35,000 shares of common stock valued at
$14,000. Accordingly, deferred offering costs are reported as a component of
stockholders' deficit.
Revenue Recognition
Revenues from the sale of set-top boxes are recognized at time of shipment to
customer. Access fees are deferred and amortized over the life of the
subscription.
Comprehensive Income (Loss)
Comprehensive income (loss) which is reported on the accompanying consolidated
statement of stockholders' deficit as a component of accumulated other
comprehensive income (loss) consists of accumulated foreign translation gains
and losses.
Stock-Based Compensation
As permitted under FAS No. 123, "Accounting for Stock-Based Compensation", we
have 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 our 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". We use 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 we are incurring losses, the effect of stock options and warrants is
antidilutive. Accordingly, our 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.
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.
Recent Accounting Pronouncements
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.
20
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 144 and 150 is not expected to have a material effect on our
results of operations or financial position.
21
BUSINESS
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. We subsequently changed our name to
PowerChannel, Inc. We currently trade on the OTC Electronic Bulletin Board under
the symbol PWRC. Our web site address is www.powerrchannel.net.
Business
Our principal product is low-cost access to the Internet. We offer an on-line
service that enables consumers to experience the Internet through their
televisions. We provide this service through a set-top terminal that attaches to
a television and telephone line and enables consumers to access our
subscription-based on-line service. By attempting to reduce the cost and
complexity barriers to Internet access, our goal is to make the Internet
available to a wider audience than has previously been possible.
We provide the physical hardware that is used to deliver the Internet through
the use of the consumer's existing television. We market our product as an
"introduction to the Internet". There is no need to buy a computer and there is
no need to know how to use one. 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, and offering value to the subscriber
through offers, discounts, coupons and prizes. We have our operations in New
York.
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 and sometimes non-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 our planned household penetration creates. Within the next five years we
intend to develop our low cost Internet package in such a way that we are
capable of providing our prepackaged low cost Internet on a worldwide basis. We
intend to focus our marketing efforts on low income communities.
22
Strategic Alliances
Our goal is to have certain distinct, if not unique, features within a five-year
timeframe. These features include a sub-$100 Internet solution and a focus on
the Hispanic community. We have specifically targeted the Hispanic Community in
the United States, as well as Latin America, as we believe that this market is
not properly serviced due to the high cost of various Internet options and the
language barrier. In order to more fully service this market, we will need to
form strategic alliances and commercial relationships designed in the aggregate
to enable us to offer our services, low cost hardware and access to the Internet
available through the television, to the Hispanic market, in the United States
and Latin America. Theses alliances and relationships, if any, will focus
initially on the Los Angeles and New York sectors of the market, in which we
have engaged in limited sales of our set-top boxes and related Internet
services. To date, in order to access this segment of the industry, we have
created the following alliance:
o Caribe.Net - an Internet solution for Puerto Rico and the Caribbean.
Caribe.net intends to provide our Puerto Rican and Caribbean
subscribers our pre-paid Internet access bundle with immediate access
to the most advanced and experienced Internet access networks in the
Caribbean. Caribe.net has local dial-up numbers that cover the entire
Island of Puerto Rico. Pursuant to the agreement with Caribe.Net,
Caribe.Net has agreed to provide dial up network connectivity to our
customers. Caribe.Net is compensated on an hourly basis for its
services.
Products, Services and Technology
We offer an Internet on-line service primarily to the Hispanic community that
can be accessed by consumers via our set-top terminal which connects to a
television and a telephone line. Once our set-top terminal is connected, the
user pays an annual fee for unlimited access to the Internet via our network,
which performs all of the underlying operations necessary to provide the
consumer with access to the Internet.
The Set-Top Terminal
Our set-top terminal, or PowerChannel System, connects to a television and a
telephone line to enable the user to access the Internet via our service. In
addition to the power cord, the set-top terminal has two cables: one connects to
the consumer's television and the other plugs into the telephone line. A
t-splitter is also included, which enables the user to plug their telephone and
our PowerChannel System into the same phone line. The PowerChannel System
incorporate the following features:
o Simple Installation and Operation: Our set-top terminal utilizes
standard electrical and telephone connections to enable consumers to
attach the unit to a television and telephone line. Once our set-top
terminal is connected to the television and telephone line, the user
turns the unit on by pressing the power button, bringing up a brief
on-screen registration, requiring the subscriber will have to agree by
clicking the "I Agree" which includes name, address, phone number,
credit card information and preference information.
o Browsing Speed and Reliability: We utilize a variety of hardware,
software and network technologies to provide consumers with fast and
reliable Internet access, Web-based content and e-mail communication.
The PowerChannel Systems comes standard with a V90.56k modem. In
addition, we employ network management technology that connects the
user to any one of the set top box that is purchased by our consumers
includes a PCTV 750 Internet appliance, which provides the consumer
with Internet access through its television, and a wireless keyboard.
In addition, we have customized software that is utilized for
authorization and integration purposes. Further, we have entered into
agreements with Level 3 and UUNet, which provides the Internet
capability to our customers. In addition, we employ network management
technology that connects the user to any one of several alternative
Internet service providers to help provide a reliable and efficient
connection to the Internet even if a particular Internet service
provider's network is overloaded or shut down.
23
o Infrared Keyboard: Our set top boxes come with a wireless keyboard
that has traditional keyboard functions.
Our Network
Our network is accessed through the PowerChannel System and consists of three
primary components:
o user interface and functionality;
o network content and features; and
o network operations technology.
User Interface and Functionality
We designed our bilingual browser for consumer viewing on a television by
incorporating certain video techniques such as scrolling screens to indicate
vertical page movement and fading to new pages as well as substantially
eliminating certain effects such as the piecemeal construction of web pages
typical of PC-based browsers, resizable windows and horizontal scroll bars. In
addition, our network offers an on-line help function which guides users through
certain aspects of the browsing process and introduces the user to certain of
our network's features.
Network Content and Features
Our network currently offers basic services, including unlimited access to the
Internet for an annual subscription price. Key features of the our services
include the following:
o The PowerChannel Home Page. The first page seen by the user of our
network is our home page. From the home page, the subscriber can
access email, chat, shop and explore other areas of the Internet.
o Search Capability. Our subscribers can search the Internet through
third-party search engines. This search capability allows users to
search Web sites for information on selected topics by key words input
by the user.
o E-mail. Our network has e-mail capability. Users can send HTML and
multimedia enhanced messages to, and receive messages from, anyone
with an address on the Internet. In addition, subscribers are
allocated designated storage space in order to save e-mail messages
for future reference.
Network Operations Technology
Our network operations are based in San Jose, California. The technology
utilized by the our network includes the following:
o Internet Access and Load-Balancing Technology: We provide users with
Internet access service through the use of multiple ISP relationships.
We currently utilize a number of different ISPs in order to provide
Internet access to our subscriber base. Our network management
technology enables us to perform load balancing among various ISPs and
to employ a form of least-cost routing across multiple ISPs.
o Proxy Caching: We are able to cache, transcode, reformat, stream and
reorder Web data from individual Web sites for downloading to the
user's set-top terminal. The PowerChannel System determines the timing
for content updates from standard periodicity data incorporated in
many Web sites or from learning algorithms where the periodicity data
is not included.
24
o Modular Scalablity: We currently maintain our network through the use
of multiple workstations. Our network is designed so that it can be
scaled to accommodate increased volumes of activity by adding
additional workstations to our existing inventory.
o Security Encryption: Client/server encryption technology is employed
to help maintain a secure connection between our network server and
our set-top terminal client.
Sales, Marketing and Distribution
The PowerChannel System is distributed primarily through the normal consumer
electronics distribution channels to retail stores. We complement this
distribution effort by installing the PowerChannel System for demonstration
purposes and training the dealers to demonstrate the use of our product.
Manufacturing
We have entered into agreements with various parties to manufacture our set-top
terminals. These manufacturers build our set-top boxes according to our
specifications.
Customer Service
We provide service and technical support organization to provide first-level
customer support services to our subscribers. Our customer support and care team
respond to customer service and technical support issues received via e-mail or
telephone and is available 24 hours a day, seven days a week.
Patents, Copyrights and Trademarks
We regard our patents, copyrights, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success and we rely upon patent
law, copyright law, trademark law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, licensees and others to
protect our proprietary rights. We have filed United States and foreign patent
applications relating to our hardware, client software and network system
software inventions. We pursue the registration of our copyrights and trademarks
in the United States and internationally. Effective patent, copyright, trademark
and trade secret protection may not be available in every country in which our
products and services are distributed or made available through the Internet.
There can be no assurance that any pending registration or application will be
granted or that the denial of any such registration or application would not
have a material adverse effect on our business.
Competition
The business of providing Internet access services is extremely competitive,
rapidly evolving and subject to rapid technological change. We expect that such
competition will continue to intensify. We operate in the same space as many
other Internet access companies, such as other computer and TV based ISP
services, dial-up ISPs, cable companies, interactive television and other
providers of Internet access to the general public. A large number of companies
are developing or have introduced devices and technologies to facilitate access
to the Internet via a television. In addition, Microsoft currently offers its
MSNTV service. Such competitors include suppliers of low-cost Internet access
technologies. In addition, manufacturers of television sets have announced plans
to introduce Internet access and Web browsing capabilities into their products
or through set-top boxes, using technology supplied by them and others.
Operators of cable television systems also have offered Internet access in
conjunction with cable service. We also competes with internet service providers
and commercial on-line services such as AOL and Compuserve. There can be no
assurance that ours competitors will not develop Internet access products and
services that are superior to, and priced competitively with our products,
thereby achieving greater market acceptance than our offerings. Many of our
existing competitors, as well as potential competitors, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than our
company. In addition, certain of our current and prospective competitors may be
acquired by, receive investments from or enter into other commercial
25
relationships with larger, more well-established and well funded companies. Such
competition could have a material adverse effect on our business, operating
results and financial condition.
Employees
As of August 20, 2004, we had a total of eight employees, of which three are
full time and five are part time. Two of the employees are operating in the
areas of engineering, product development, one in marketing and sales and four
in finance and administration.
None of our employees is represented by a labor organization, and we are not a
party to any collective bargaining agreement. We have never had any employee
strike or work stoppage and considers our relations with our employees to be
good.
In addition to the above, we have also entered into five consulting agreements,
one of which is with James Davidson, a director of our company, for the purpose
of obtaining certain corporate planning and financial restructuring advice, as
well as assistance with contract negotiation and general business matters. We
entered into a consulting agreement with James D. Davidson, a director of our
company, pursuant to which Mr. Davidson has agreed to provide certain corporate
planning and financial restructuring advice to us for a period of one year. Such
services included providing assistance in restructuring the balance sheet,
negotiation with creditors and the preparation and review of a private placement
memorandum. Thereafter, on January 20, 2004, our company and Mr. Davidson
entered into an amended and restated consulting agreement. Pursuant to the
consulting agreement, as amended, we have paid Mr. Davidson (i) 1,020,943 shares
of common stock with piggyback registration rights and (ii) a cash bonus of
$10,000. As these services have fallen outside of the scope of Mr. Davidson's
position as an outside director of our company, including governing the general
direction of our company, we elected to enter into a consulting agreement with
Mr. Davidson to memorialize his additional responsibilities and our obligations.
The initial agreement was entered on November 24, 2003 and was amended on
January 20, 2004.
Regulation
We are not currently subject to direct regulation by any government agency in
the United States, other than regulations applicable to businesses generally,
such as registering to operate a business within each state or the collection of
sales tax. However, due to the increasing popularity of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet. Our business is also subject to the FCC regulations for compliance
with various suitability mandates in order for our set-top boxes to access the
public telephone networks. We have utilized highly reputable testing
organizations to ensure our compliance with all safety regulations.
Description of Properties
Our principal executive offices are located at 280 South Mountain Road, New
City, New York 10956 and our mailing address is located at 16 North Main Street,
Suite 395 New City, New York 10956. Our telephone number is (845)634-7979. The
facility is utilized in the following manner:
o administrative offices;
o professional offices; and
o storage and warehousing.
The facility consists of approximately 1,800 square feet and we lease it for
$3,000 per month from Steven Lampert, our Chief Executive Officer and director.
The lease expires in 2006. We believe that our existing facilities are adequate
for our current use.
Legal Proceedings
Except for the following, we are currently not a party to any material legal
proceedings.
26
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; and
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.
o On July 20, 2004, we 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, our former
attorneys. We are 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. We are
also seeking to rescind the Letter Agreement entered with
Knightsbridge Holdings, LLC. In its complaint, we alleged fraudulent
inducement, breach of contract, conspiracy and breach of fiduciary
duty.
o We have recently received a Notice of Motion seeking a default
judgment and attorneys' fees in connection with a complaint filed by
AKW Holdings, LLC against our company in the Supreme Court of the
State of New York - County of Rockland Index #2693/04. AKW Holdings,
LLC is seeking unpaid rents of approximately $160,000 and attorneys'
fees. As of the date hereof, we have no knowledge as to whether a
default judgment has been entered by the Supreme Court of the State of
New York - County of Rockland against our company. We believe this
lawsuit is baseless and without merit and intend to vigorously defend
this lawsuit.
Management believes that the resolution of these claims will not have a material
effect on the financial position or results of operations of our company.
27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their ages and positions are:
- -------------------------------------- ---------------------------------- ------------------------------
Name Age Position
- -------------------------------------- ---------------------------------- ------------------------------
Steven Lampert 54 President, Chief Executive
Officer, Chief Financial and
Chairman of the Board
- -------------------------------------- ---------------------------------- ------------------------------
James Davidson 54 Director
- -------------------------------------- ---------------------------------- ------------------------------
Directors are elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Directors serve without cash
compensation and without other fixed remuneration. Officers are elected by the
Board of Directors and serve until their successors are appointed by the Board
of Directors. Biographical resumes of each officer and director are set forth
below.
Steven Lampert, President, Chief Executive Officer, Chief Financial and Chairman
of the Board
Steven Lampert was appointed as President, Chief Executive Officer, Chief
Financial and Chairman of the Board on July 21, 2003. Mr. Lampert has been the
President and Chief Executive Officer of PowerChannel, Inc. since 1998. Prior to
1998, Mr. Lampert co-founded Long Distance Direct and was its Chief Executive
Officer from December 1991. Prior to founding Long Distance Direct, Mr. Lampert
was President of Comtec, Inc., a New York based telecommunications corporation
that provided voice-response telephony services, from November 1985 through
November 1991. Prior to 1985, Mr. Lampert served as a Director of
Telecommunications for NBC and Corning Labs. Mr Lampert holds a BA degree from
Hunter College, New York.
James Davidson, Director
James Dale Davidson, has served as a Director since inception. Mr. Davidson is a
private investor and analyst. He founded Agora, Inc. a worldwide publishing
group with offices in Baltimore, London, Dublin, Paris, Johannesburg, Melbourne
and other cities, The Hulbert Financial Digest and Strategic Investment. In
conjunction with Lord Rees-Mogg, co-editor of Strategic Investment and former
editor of the Times of London, he co-authored a series of books on financial
markets. Mr. Davidson also is a current or recent director of a number of
companies, many of which he founded. They include MIV Therapeutics, GeneMax, New
Paradigm Capital (Bermuda), Anatolia Minerals Development Corporation, and
Wharekauhau Holdings (New Zealand). In addition, Mr. Davidson is a director of
Plasmar, S.A. (La Paz, Bolivia) Martinborough Winery Ltd. (New Zealand) and New
World Premium Brands Ltd. (New Zealand). He is the editor of Vantage Point
Investment Advisory, a private financial newsletter with a worldwide
circulation. Mr. Davidson has a B.A., M.A. in Literature, Oxford University,
U.K.
The Committees
The Board of Directors does not have a Compensation, Audit or Nominating
Committee, and the usual functions of such committees are performed by the
entire Board of Directors. The board of directors have determined that at
present we do not have an audit committee financial expert. The Board believes
that the members of the Board of Directors are collectively capable of analyzing
and evaluating our financial statements and understanding internal controls and
procedures for financial reporting. In addition, we have been seeking and
continue to seek an appropriate individual to serve on the Board of Directors
and the Audit Committee who will meet the requirements necessary to be an
independent financial expert.
Executive Officers of our company
28
Officers are appointed to serve at the discretion of the Board of Directors.
None of the executive officers or directors of our company have a family
relationship with any other executive officer or director of our company.
Code of Ethics
We have adopted our Code of Ethics and Business Conduct for Officers, Directors
and Employees that applies to all of the officers, directors and employees of
our company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on our review of copies of all disclosure reports filed by directors and
executive officers of our company pursuant to Section 16(a) of the Securities
Exchange Act of 1934, as amended, we believe that there was compliance with all
filing requirements of Section 16(a) applicable to directors and executive
officers of our company during 2003, except that Mr. James Davidson failed to
file once.
29
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and each of
our most highly compensated executive officers whose total annual salary and
bonus for the fiscal year ending December 31, 2003, 2002 and 2001 exceeded
$100,000.
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Michael E. Fasci (1) 2003 -- -- -- -- -- -- --
CEO, CFO 2002 37,500 0 0 12,500 -- -- --
Steven Lampert 2003 -- -- $305,000(3) -- -- --
CEO, CFO 2002(2) $217,017 -- -- -- -- -- --
2001(2) $331,003 -- -- -- -- -- --
(1) Mr. Fasci resigned as CEO and CFO in July 2003 and a director in February
2004.
(2) Mr. Lampert received the compensation as an officer and director of
PowerChannel, Inc. prior to its merger with Sealant Solutions, Inc.
(3) In connection with services provided, Mr. Lampert received an aggregate of
500,000 shares of common stock valued at $305,000. Of the shares issued, 250,000
of the shares valued at $100,000 were issued under the 2003 Stock Incentive Plan
and 250,000 of the shares valued at $205,000 were issued under the 2004 Stock
Incentive Plan. All of the shares were registered on a Form S-8 Registration
Statement.
Options/SARs Grants During Last Fiscal Year
During the fiscal year ended December 31, 2003, no executive officer or director
was granted options to purchase shares of common stock.
Directors and committee members did not receive, and were not eligible for,
compensation from us for serving as directors or committee members during the
fiscal year ending December 31, 2003.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
None.
Executive Employment Agreements
In February 2004, we have entered into an employment agreement with Steven
Lampert, our CEO and a director. The employment agreement provides Mr. Lampert
with $160,000 per annum in compensation. We currently have no other employment
agreements in place with any officers of our company.
Consulting Agreements
We have entered into the following consulting agreements:
o On November 24, 2003, we entered into a consulting agreement with James D.
Davidson, a director of our company, pursuant to which Mr. Davidson has agreed
to provide certain corporate planning and financial restructuring advice to our
company for a period of one year. Such services included providing assistance in
restructuring the balance sheet, negotiation with creditors and the preparation
and review of a private placement memorandum. Thereafter, on January 20, 2004,
30
our company and Mr. Davidson entered into an amended and restated consulting
agreement. Pursuant to the consulting agreement, as amended, we paid Mr.
Davidson 1,020,943 shares of common stock with piggyback registration rights and
a cash bonus of $10,000. As these services have fallen outside of the scope of
Mr. Davidson's position as an outside director of our company, including
governing the general direction of our company, we elected to enter into a
consulting agreement with Mr. Davidson to memorialize his additional
responsibilities and our obligations.
o On November 24, 2003, we entered into a consulting agreement with Salvatore
Russo pursuant to which Mr. Russo has agreed to provide certain corporate
planning and financial restructuring advice to our company for a period of one
year, which was extended for an additional year. This agreement was amended on
January 20, 2004 and again on February 9, 2004. As consideration for services
provided, Mr. Russo received (i) 450,000 shares of common stock, (ii) 1,460,943
shares of common stock that were registered on Form S-8 Registration Statement,
(iii) the sum of $202,000, (iv) stock options with a term of five years to
purchase 1,200,000 shares of common stock at $.20 per share and (v) stock
options with a term of five years to purchase 2,000,000 shares of common stock
at $1.00 per share. The 750,000 shares of common stock and the shares of common
stock issuable upon exercise of the stock options carry piggy back registration
rights.
o On November 24, 2003, we entered into a consulting agreement with G. Robert
Tatum pursuant to which Mr. Tatum has agreed to provide certain corporate
planning and financial restructuring advice to our company for a period of one
year. Thereafter, on January 20, 2004, our company and Mr. Tatum entered into an
amended and restated consulting agreement. Pursuant to the consulting agreement,
as amended, we paid Mr. Tatum (i) 1,010,943 shares of common stock with
piggyback registration rights and (ii) a cash bonus of $10,000.
o In December 2003, we entered into a consulting agreement with Cioffi Business
Management Services pursuant to which Cioffi Business Management Services agreed
to provide certain corporate planning and contract negotiation services for a
period of one year, which was subsequently terminated. As consideration for the
services, we issued Cioffi Business Management Services 150,000 shares of common
stock of our company, which shares have demand and piggyback registration
rights. In addition, in February 2004, Cioffi Business Management Services was
issued an additional 50,000 shares of common stock.
o On December 12, 2003, we entered into a consulting agreement with Barry Honig
pursuant which Mr. Honig agreed to provide certain business advice to us for a
period of one year. In consideration for entering into the agreement, we issued
450,000 shares of common stock as well as an option to purchase 1,200,000 shares
of common stock at an exercise price of $.40 per share. The shares are
exercisable for a period of five years and vest in increments of 250,000 on the
first day of each month. To date, we have issued 425,000 shares of common stock
that were registered pursuant to a Form S-8 Registration Statement and we are
obligated to issue an additional 25,000 shares of common stock. We are required
to file a Form S-8 Registration Statement covering the shares and the shares
underlying the options. In addition, pursuant to a consulting agreement entered
with Mr. Honig in August 2003, we issued Mr. Honig 450,000 shares of common
stock that were registered on a Form S-8 Registration Statement. Mr. Honig is
the nephew of the wife of Steven Lampert, the Chief Executive Officer and a
director of our company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 2002, we issued 15,000 restricted shares of common stock to two
non-affiliates in full settlement of pending litigation.
In January 2004, we issued 250,000 shares of common stock under our 2004 Stock
Incentive Plan to Steven Lampert, our CEO and director, for services rendered.
These shares were registered on a Form S-8 Registration Statement.
In January 2004, we issued James Davidson, a director of our company, 750,000
shares of common stock for services rendered as a director. The shares are
restricted in accordance with Rule 144 as promulgated under the Securities Act
of 1933, as amended.
31
We currently lease our executive offices from Steven Lampert, our CEO and a
director. The facility consists of approximately 1,800 square feet and we lease
it for $2,000 per month.
On November 24, 2003, we entered into a consulting agreement with James D.
Davidson, a director of our company, pursuant to which Mr. Davidson has agreed
to provide certain corporate planning and financial restructuring advice to us
for a period of one year. Such services included providing assistance in
restructuring the balance sheet, negotiation with creditors and the preparation
and review of a private placement memorandum. Thereafter, on January 20, 2004,
our company and Mr. Davidson entered into an amended and restated consulting
agreement. Pursuant to the consulting agreement, as amended, we have paid Mr.
Davidson (i) 1,020,943 shares of common stock with piggyback registration rights
and (ii) a cash bonus of $10,000. As these services have fallen outside of the
scope of Mr. Davidson's position as an outside director of our company,
including governing the general direction of our company, we elected to enter
into a consulting agreement with Mr. Davidson to memorialize his additional
responsibilities and our obligations. The initial agreement was entered on
November 24, 2003 and was amended on January 20, 2004.
On December 12, 2003, we entered into a consulting agreement with Barry Honig
pursuant which Mr. Honig agreed to provide certain business advice to us for a
period of one year. Mr. Honig's services including related to marketing and
included the following:
o Developing marketing strategies;
o Location of advertisers;
o Researching marketing alliances; and
o Coordination of sales and support.
In consideration for entering into the agreement, we issued 450,000 shares of
common stock as well as an option to purchase 1,200,000 shares of common stock
at an exercise price of $.40 per share. The shares are exercisable for a period
of five years and vest in increments of 250,000 on the first day of each month.
To date, we have issued 425,000 shares of common stock that were registered
pursuant to a Form S-8 Registration Statement and we are obligated to issue an
additional 25,000 shares of common stock. We are required to file a Form S-8
Registration Statement covering the shares and the shares underlying the
options. In addition, pursuant to a consulting agreement entered with Mr. Honig
in August 2003, we issued Mr. Honig 450,000 shares of common stock that were
registered on a Form S-8 Registration Statement. Mr. Honig is the nephew of the
wife of Steven Lampert, the Chief Executive Officer and a director of our
company. We believe the fees paid in connection with this transaction are
comparable to fees we would have paid in an arms length transaction.
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.
In May 2004, The Lampert Group, an entity 100% owned by Steven Lampert, our
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. We then
purchased the set-top boxes from The Lampert Group for $44,000.
32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 29, 2004
o by each person who is known by us to beneficially own more than 5% of our
common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Unless otherwise indicated, the shareholders listed in the table have sole
voting and investment power with respect to the shares indicated.
- -------------------------------------- ----------------------------------- ----------------------------------
Name of Beneficial Owner Common Stock Beneficially Owned Percentage of Common Stock**
- -------------------------------------- ----------------------------------- ----------------------------------
Steven Lampert*** 3,597,025 13.88%
- -------------------------------------- ----------------------------------- ----------------------------------
James Davidson*** 1,024,101 3.95%
- -------------------------------------- ----------------------------------- ----------------------------------
- -------------------------------------- ----------------------------------- ----------------------------------
SOS Resources Services, Inc.**** 2,475,000 9.55%
- -------------------------------------- ----------------------------------- ----------------------------------
All of executive officers and
directors (2 persons) 4,621,126 17.8%
- -------------------------------------- ----------------------------------- ----------------------------------
* Less than 1% of the outstanding common stock.
** Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of November 29, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 26,669,829 shares of common stock outstanding on November
29, 2004, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of November 29, 2004, as described below.
*** Executive officer and/or director.
****SOS Resources Services, Inc. is owned by Sal Russo who has beneficial and
dispositive control over the shares of common stock.
33
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue up to 95,000,000 shares of common stock, par value
$.01. As of November 29, 2004, there were 26,669,829 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock, par value
$.01 per shares. As of November 29, 2004, there were no shares of preferred
stock outstanding. The board of directors has authority, without action by the
stockholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series. The preferred stock, if and when issued, may carry rights
superior to those of the common stock.
We do not have any plans to issue any shares of preferred stock. However, we
consider it desirable to have one or more classes of preferred stock to provide
us with greater flexibility in the future in the event that we elect to
undertake an additional financing and in meeting corporate needs that may arise.
If opportunities arise that would make it desirable to issue preferred stock
through either public offerings or private placements, the provision for these
classes of stock in our certificate of incorporation would avoid the possible
delay and expense of a stockholders' meeting, except as may be required by law
or regulatory authorities. Issuance of the preferred stock would result,
however, in a series of securities outstanding that may have certain preferences
with respect to dividends, liquidation, redemption, and other matters over the
common stock which would result in dilution of the income per share and net book
value of the common stock. Issuance of additional common stock pursuant to any
conversion right that may be attached to the preferred stock may also result in
the dilution of the net income per share and net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. As a result, it is not possible at
this time to determine the respects in which a particular series of preferred
stock will be superior to our common stock. The board of directors does not have
any specific plan for the issuance of preferred stock at the present time and
does not intend to issue any such stock on terms which it deems are not in our
best interest or the best interests of our stockholders.
Common Stock Purchase Warrants
We currently have 4,975,000 common stock purchase warrants outstanding. 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 a registration statement covering the shares of
common stock underlying the warrants, 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 from issuance.
Stock Options
We currently have an aggregate of 2,400,000 options outstanding. Of the
2,400,000 outstanding, 1,200,000 are exercisable at a price of $0.20 per share
and 1,200,000 are exercisable at a price of $0.40 per share.
34
Transfer Agent
Our transfer agent is Olde Monmouth Stock Transfer Company, Inc. Their address
is 77 Memorial Parkway, Suite 101, Atlantic Highlands, NJ 07716 and their
telephone number is 732-872-2727.
35
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize our
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
36
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
37
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Shares Beneficially Owned Shares Beneficially Owned
------------------------------- ----------------------------------
Prior to the Offering(1) After the Offering(2)
Total
Name Number Percent Shares Number Percent
Registered
- ------------------------------------------- ---------------- ------------- ------------------ --------------- -------------------
Steven Lampert(3) 3,597,025 13.88% 500,000 3,097,025 11.95%
Robert Tatum 1,010,943 3.90% 1,010,943 0 0
James Davidson 1,024,101 3.95% 1,024,101 0 0
SOS Resource Services, Inc.(4) 2,475,000 9.55% 1,650,000 525,000 1.65%
Jonathan Honig 1,218,587 4.70% 1,218,587 0 0
Herbert Hersey 499,672 1.93% 499,672 0 0
Douglas Clausen 420,634 1.62% 420,634 0 0
Ronald Hubbard 71,428 * 71,428 0 0
Barry Zide 186,500 * 50,000 136,500 *
Kenneth Friedman 100,000 * 50,000 50,000 *
Barry Honig(5) 1,200,000 4.63% 1,200,000 0 0
Wolfe, LP(6) 50,000 * 50,000 0 0
Michael Gleason(6A) 50,000 * 50,000 0 0
Genesis Microcap, Inc.(7) 500,000 1.93% 500,000 0 0
NeurenbergerKapitalVerwaltung(8) 100,000 * 100,000 0 0
Jeffrey McLaughlin(9) 100,000 * 100,000 0 0
Jerdan Enterprises(10) 200,000 * 200,000 0 0
Peekskill, LLC(11) 400,000 1.54% 400,000 0 0
Applied Media, Inc.(12) 200,000 * 200,000 0 0
Cambridge Family Partnership(13) 400,000 1.54% 400,000 0 0
OTAPE Investments, LLC(14) 600,000 2.32% 600,000 0 0
Omega Capital Small Cap Fund(15) 200,000 * 200,000 0 0
Douglas F. Welpton Trust(16) 100,000 * 100,000 0 0
LRG Holdings Inc.(17) 100,000 * 100,000 0 0
Tripp Family Trust 1997 (18) 100,000 * 100,000 0 0
North Bar Capital(19) 100,000 * 100,000 0 0
Platinum Partners Value Arbitrage Fund 600,000 2.40% 600,000 0 0
LP(20)
Gross Foundation, Inc.(21) 400,000 1.60% 400,000 0 0
Abraham Schwartz(22) 100,000 * 100,000 0 0
Riddell Alexander(23) 400,000 1.60% 400,000 0 0
38
Hazelton Capital Ltd. (24) 400,000 * 400,000 0 0
Professional Traders Fund, LLC(25) 1,000,000 3.86% 1,000,000 0 0
Reuven Rosenberg(26) 200,000 * 200,000 0 0
Veen Kaila(27) 200,000 * 200,000 0 0
Marketwise Trading, Inc. (28) 400,000 1.54% 200,000 0 0
Omicron Master Trust (29) 1,000,000 3.86% 1,000,000 0 0
Colbart Birnet LP(30) 200,000 * 200,000 0 0
Castle Creek Technology Partners, LLC(31) 800,000 3.09% 800,000 0 0
Leonard Cohen(32) 100,000 * 100,000 0 0
Quentin Olwell(33) 50,000 * 50,000 0 0
Nathan B. Herzka(34) 400,000 1.54% 400,000 0 0
DDS Inc. Pension(35) 400,000 1.54% 400,000 0 0
Iron Grid(36) 100,000 * 100,000 0 0
TOTAL 17,645,365
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholders has sole or shared voting power or
investment power and also any shares, which the selling stockholders has
the right to acquire within 60 days.
(2) Assumes that all securities registered will be sold and that all shares
of common stock underlying the options and common stock purchase warrants
will be issued.
(3) Executive officer and director of our company. Includes 254,652 shares
of common stock owned by Karen Lampert, the wife of Steven Lampert.
(4) SOS Resources Services, Inc. is owned by Sal Russo who has beneficial
and dispositive control over the shares of common stock. Includes 1,275,000
shares of common stock and 1,200,000 shares of common stock underlying
options exercisable at $.20 per share.
(5) Represents 1,200,000 shares of common stock underlying stock options
exercisable at $.40 per share.
(6) Represents (i) 25,000 shares of common stock and (ii) 25,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. Wolfe, LP is beneficially owned by Gerald Wolfe and Alana Wolfe.
Mr. Wolfe may be deemed the control person of the shares owned by such
entity, with final voting power and investment control over such shares.
(6A) Represents (i) 25,000 shares of common stock and (ii) 25,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share.
(7) Represents (i) 250,000 shares of common stock and (ii) 250,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Genesis Microcap, Inc. is a private investment fund that is
owned by all its investors and managed by Mr. Wilhelm Ungar. Mr. Ungar may
be deemed the control person of the shares owned by such entity, with final
voting power and investment control over such shares.
39
(8) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. NeurenbergerKapitalVerwaltung is beneficially owned by Ralf P.
Schwarz.
(9) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share.
(10) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Jerden Enterprises is beneficially owned by Myles Jerden.
Mr. Jerden may be deemed the control person of the shares owned by such
entity, with final voting power and investment control over such shares.
(11) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Peekskill LLC is a private investment fund that is owned by
all its investors and managed by Mr. Mark Nordlicht . Mr. Nordlicht may be
deemed the control person of the shares owned by such entity, with final
voting power and investment control over such shares.
(12) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Applied Media is beneficially owned by Tony Tseng. Mr.
Tseng may be deemed the control person of the shares owned by such entity,
with final voting power and investment control over such shares.
(13) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Cambridge Family Partnership is beneficially owned by each
of its partners and managed by its general partner, Sharon Silber. Ms.
Silber may be deemed the control person of the shares owned by such entity,
with final voting power and investment control over such shares.
(14) Represents (i) 300,000 shares of common stock and (ii) 300,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. OTAPE Investments LLC is a private investment fund that is
owned by all its investors. Ira M. Leventhal, a US citizen, may be deemed
the control person of the shares owned by such entity, with final voting
power and investment control over such shares. Mr. Leventhal disclaims
beneficial ownership.
(15) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Omega Capital Small Cap Fund is a private investment fund
that is owned by all its investors and managed by Mr. Herman Segal. Mr.
Segal may be deemed the control person of the shares owned by such entity,
with final voting power and investment control over such shares.
(16) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. David F. Welpton Trust is beneficially owned by each of its
beneficiaries and managed by its trustee, David F. Welpton. Mr. Welpton may
be deemed the control person of the shares owned by such entity, with final
voting power and investment control over such shares.
(17) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. LRG Holdings Inc. is a private investment company that is owned
by all its shareholders and managed by Mr. Shimshon Gross. Mr. Gross may be
deemed the control person of the shares owned by such entity, with final
voting power and investment control over such shares.
(18) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. Tripp Family Trust 1997 is beneficially owned by each of its
40
beneficiaries and managed by its trustee, John M. Tripp. Mr. Tripp may be
deemed the control person of the shares owned by such entity, with final
voting power and investment control over such shares.
(19) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. North Bar Capital is owned by Stephen Schwartz who serves as the
President.
(20) Represents (i) 300,000 shares of common stock and (ii) 300,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Platinum Partners Value Arbitrage Fund LP is a private
investment fund that is owned by all its investors and managed by Mr. Mark
Nordlicht. Mr. Nordlicht may be deemed the control person of the shares
owned by such entity, with final voting power and investment control over
such shares.
(21) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Gross Foundation, Inc. is a private charity foundation that
is managed by Mr. Chaim Gross, its President. Mr. Gross may be deemed the
control person of the shares owned by such entity, with final voting power
and investment control over such shares.
(22) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share.
(23)Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share.
(24) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Hazelton Capital Ltd. is a private investment fund that is
owned by all its investors and managed by Mr. Andy DeFrancesco. Mr.
DeFrancesco may be deemed the control person of the shares owned by such
entity, with final voting power and investment control over such shares.
(25)Represents (i) 500,000 shares of common stock and (ii) 500,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Professional Traders Fund, LLC is a private investment fund
that is owned by all its investors and managed by Mr. Marc K. Swickle. Mr.
Swickle may be deemed the control person of the shares owned by such
entity, with final voting power and investment control over such shares.
(26)Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share.
(27)Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share.
(28)Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Marketwise Trading Inc. is beneficially owned by Ms. Rachel
Gershan.
(29)Represents (i) 500,000 shares of common stock and (ii) 500,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Omicron Capital, L.P., a Delaware limited partnership
("Omicron Capital"), serves as investment manager to Omicron Master Trust,
a trust formed under the laws of Bermuda ("Omicron"), Omicron Capital,
Inc., a Delaware corporation ("OCI"), serves as general partner of Omicron
Capital, and Winchester Global Trust Company Limited ("Winchester") serves
as the trustee of Omicron. By reason of such relationships, Omicron Capital
and OCI may be deemed to share dispositive power over the shares of our
common stock owned by Omicron, and Winchester may be deemed to share voting
41
and dispositive power over the shares of our common stock owned by Omicron.
Omicron Capital, OCI and Winchester disclaim beneficial ownership of such
shares of our common stock. Omicron Capital has delegated authority from
the board of directors of Winchester regarding the portfolio management
decisions with respect to the shares of common stock owned by Omicron and,
as of the date of this prospectus, Mr. Olivier H. Morali and Mr. Bruce T.
Bernstein, officers of OCI, have delegated authority from the board of
directors of OCI regarding the portfolio management decisions of Omicron
Capital with respect to the shares of common stock owned by Omicron. By
reason of such delegated authority, Messrs. Morali and Bernstein may be
deemed to share dispositive power over the shares of our common stock owned
by Omicron. Messrs. Morali and Bernstein disclaim beneficial ownership of
such shares of our common stock and neither of such persons has any legal
right to maintain such delegated authority. No other person has sole or
shared voting or dispositive power with respect to the shares of our common
stock being offered by Omicron, as those terms are used for purposes under
Regulation 13D-G of the Securities Exchange Act of 1934, as amended.
Omicron and Winchester are not "affiliates" of one another, as that term is
used for purposes of the Securities Exchange Act of 1934, as amended, or of
any other person named in this prospectus as a selling stockholder. No
person or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, or the SEC's Regulation 13D-G) controls
Omicron and Winchester.
(30) Represents (i) 100,000 shares of common stock and (ii) 100,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. Colbart Birnet LP is controlled by Mr. Eli Levitin, who
holds voting power and investment control over such shares.
(31) Represents (i) 400,000 shares of common stock and (ii) 400,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. As investment manager under a management agreement, Castle
Creek Partners, LLC may exercise dispositive and voting power with respect
to the shares owned by Castle Creek Technology Partners LLC. Castle Creek
Partners, LLC disclaims beneficial ownership of such shares. Daniel Asher
is the managing member of Castle Creek Partners, LLC. Mr. Asher disclaims
beneficial ownership of the shares owned by Castle Creek Technology
Partners LLC.
(32) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share.
(33) Represents (i) 25,000 shares of common stock and (ii) 25,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share.
(34) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share.
(35) Represents (i) 200,000 shares of common stock and (ii) 200,000 shares
of common stock underlying common stock purchase warrants exercisable at
$.75 per share. DDS, Inc. is managed by Mr. David Klugman.
(36) Represents (i) 50,000 shares of common stock and (ii) 50,000 shares of
common stock underlying common stock purchase warrants exercisable at $.75
per share. Iron Grid is owned by Julie King.
42
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
A member of Sichenzia Ross Friedman Ference LLP has received 85,000 shares of
common stock, from us for general corporate matters.
EXPERTS
Wolinetz, Lafazan & Company, P.C., Independent Registered Public Accountants,
have audited, as set forth in their report thereon appearing elsewhere herein,
our financial statements at December 31, 2003, and for the year then ended that
appear in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the auditors' opinion based on
their expertise in accounting and auditing.
Yohalem Gillman & Company LLP, Independent Certified Public Accountants, have
audited, as set forth in their report thereon appearing elsewhere herein,
PowerChannel Holdings, Inc. and subsidiaries financial statements (per merger)
for the year ended December 31, 2002 and the for the period from August 10, 1998
(inception) to December 31, 2002 that appear in the prospectus. The financial
statements referred to above are included in this prospectus with reliance upon
the auditors' opinion based on their expertise in accounting and auditing.
CHANGE IN ACCOUNTANTS
On January 23, 2004, we notified Radin Glass & Co., LLP, our independent public
accountants, that we were terminating its services, effective as of that date.
On January 26, 2004, we engaged Wolinetz, Lafazan & Company, P.C. as our
principal independent accountant. This decision to dismiss Radin and engage
Wolinetz was ratified by the majority approval of the Board of Directors ofour
company.
During the last two fiscal years ended December 31, 2002 and December 31, 2001
and through January 23, 2004, (i) there were no disagreements between our
company and Radin on any matter of accounting principles or practices, financial
statement disclosure or Fauditing scope or procedure which, if not resolved to
the satisfaction of Radin would have caused Radin to make reference to the
matter in its reports on our financial statements, and (ii) Radin's report on
our financial statements did not contain any other adverse opinion, disclaimer
of opinion, or modification or qualification of opinion, except that Radin's
report on the consolidated financial statements for the year ended December 31,
2002 contains an explanatory paragraph indicating that there is substantial
doubt as to our ability to continue as a going concern. In addition, Radin
resigned as our independent auditors on November 24, 2003. Radin informed our
company that the resignation resulted from the fact that we filed our Form
10-QSB on November 14, 2003, for the quarter ended September 30, 2003, without
adequate disclosure indicating that a review of the financial statements
included therein had not been completed by Radin. Effective as of December 16,
2003, we re-engaged Radin as our independent auditor. On January 5, 2004, we
filed an amended Form 10-QSB, which was reviewed by Radin. During the last two
most recent fiscal years ended December 31, 2002 and December 31, 2001 and
through January 23, 2004, there were no reportable events as the term described
in Item 304(a)(1)(iv) of Regulation S-B.
During the two most recent fiscal years and through January 26, 2004, we have
not consulted with Wolinetz regarding either:
o the application of accounting principles to any specified transaction,
either completed or proposed, or the type of audit opinion that might
be rendered on our financial statements, and neither a written report
was provided to us nor oral advice was provided that Wolinetz
concluded was an important factor considered by us in reaching a
decision as to the accounting, auditing or financial reporting issue;
or
43
o any matter that was either subject of disagreement or event, as
defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related
instruction to Item 304 of Regulation S-B, or a reportable event, as
that term is explained in Item 304(a)(1)(iv)(A) of Regulation S-B.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Powerchannel, Inc., filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 that require us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330 Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
44
INDEX TO FINANCIAL STATEMENTS
POWERCHANNEL, INC.
FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2004 and 2003
Condensed Consolidated Balance Sheet F-1
Condensed Consolidated Statement of Operations F-2
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficit) F-3 to
F-4
Condensed Consolidated Statement of Cash Flows F-5 to
F-7
Condensed Notes to Consolidated Financial Statements F-8
For the Years Ended December 31, 2003 and 2002 of PowerChannel, Inc. and Subsidiaries
Report of Independent Registered Public Accountants F-16
Report of Independent Certified Public Accountants F-17
Consolidated Balance Sheet F-18
Consolidated Statement of Operations F-19
Consolidated Statement of Stockholders' Equity (Deficit) F-20 to
F-23
Consolidated Statement of Cash Flows F-24 to
F-25
Notes to Financial Statements F-26
45
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(Unaudited)
ASSETS
Current Assets:
Cash $ 253,898
Inventories 114,238
Accounts Receivable, Net 61,455
Prepaid Expenses 5,414
Prepaid Consulting Fees 110,897
------------
Total Current Assets 545,902
Property and Equipment, Net 27,774
Deferred Consulting Fees, Net of Current Portion 16,459
------------
$ 590,135
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 643,471
Accrued Liabilities 849,425
Convertible Notes Payable 44,305
Deposits Payable 70,000
------------
Total Current Liabilities 1,607,201
------------
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 26,669,829 Shares 266,698
Additional Paid-In Capital 17,057,729
Common Stock to be Issued, 2,370,156 Shares 1,827,756
Deferred Offering Costs (14,000)
Deferred Stock-Based Compensation (1,902,294)
Accumulated Other Comprehensive Income (Loss) (1,320,427)
Deficit Accumulated in the Development Stage (18,109,071)
------------
Total Stockholders' Deficit (2,193,609)
------------
$ 590,135
============
The accompanying notes are an integral part of the financial statements.
F-1
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three For the Nine For The Period
Months Ended Months Ended August 10, 1998
September 30, September 30, (Inception)
---------------------------- -------------------------- To September
2004 2003 2004 2003 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 Nine Months
Ended September 30, 2004) 37,500 - 185,866 - 265,424
Activation Fees - - - - 15,525
------------ ------------ ------------ ----------- --------------
Total Revenues 37,500 - 185,866 - 290,949
------------ ------------ ------------ ----------- --------------
Costs and Expenses:
Cost of Sales 15,000 - 151,462 - 157,273
Write-Down of Inventories - - 21,593 - 464,656
Selling, General and Administrative Expenses 467,408 309,802 1,443,455 446,955 7,226,671
Impairment Loss on Investment - - - - 573,887
Settlement of Debt - - - - 111,300
Stock-Based Compensation 982,969 1,663,446 4,692,530 1,663,446 7,013,783
------------ ------------ ------------ ----------- --------------
Total Costs and Expenses 1,465,377 1,973,248 6,309,040 2,110,401 15,547,570
------------ ------------ ------------ ----------- --------------
Loss Before Income (Loss) From Unconsolidated Affiliate
And Other Income (Expense) (1,427,877) (1,973,248) (6,123,174) (2,110,401) (15,256,621)
Income (Loss) from Unconsolidated Affiliate - 4,958 ( 48,000) 1,932 ( 2,678,797)
Interest Expense ( 1,994) - ( 18,158) - ( 173,653)
------------ ------------ ------------ ----------- --------------
Net Loss $ (1,429,871) $ (1,968,290) $ (6,189,332) $(2,108,469) $ (18,109,071)
============ ============ ============ =========== ==============
Basic and Diluted Net Loss Per Share $ (.05) $ (.16) $ (.24) $ (.18)
============ ============ ============ ===========
Weighted Average Shares Outstanding - Basic and Diluted 26,669,829 12,334,748 25,288,737 11,661,130
============ ============ ============ ===========
Pro-Forma Net Loss Per Share (Basic and Diluted) $ (.05) $ (.15) $ (.23) $ (.18)
============ ============ ============ ===========
Pro-Forma Weighted Average Shares Outstanding
(Basic and Diluted) 29,039,984 13,515,160 27,456,422 11,988,003
============ ============ ============ ===========
The accompanying notes are an integral part of the financial statements.
F-2
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 1, 2004 TO SEPTEMBER 30, 2004
(Unaudited)
Deferred
Deficit Accumulated Stock-Based
Common Accumulated Other Compensation
Common Stock Additional Stock In The Comprehensive and
----------------------- Paid-In to be Development Income Offering
Shares Amount Capital Issued Stage (Loss) Costs Total
----------- ---------- ----------- ----------- --------------- ------------ ------------- -----------
Balance at January 1, 2004 9,139,720 $191,397 $8,465,701 $ 1,045,191 $(11,919,739) $ (625,949) $(2,442,799) $(5,286,198)
Shares Issued in January
2004 to Related
Party for Accrued Services 250,000 2,500 202,500 - - - - 205,000
Shares Issued in January
2004 for Accrued
Wages and Fees 228,122 2,281 184,779 - - - - 187,060
Shares Issued in January
2004 for Services 128,000 1,280 103,680 - - - - 104,960
Shares Issued in January
2004 for Services 3,158 32 3,094 - - - - 3,126
Shares Issued in January
2004 for Services 50,000 500 46,500 - - - - 47,000
Shares Issued in February
2004 for Services 48,000 480 67,200 - - - - 67,680
Shares Issued in February
2004 for Services 10,000 100 11,600 - - - - 11,700
Shares Issued in February
2004 for Services 50,000 500 61,000 - - - - 61,500
Shares Issued in January
2004 for Services 1,192,829 11,928 1,109,331 - - - (1,121,259) -
Options Granted in January
2004 for Services - - 1,879,735 - - - (1,879,735) -
Shares in Connection with
Letter of Engagement - - - 782,565 - - (782,565) -
Shares Issued in February
2004 in Connection
with Private Placement 4,975,000 49,750 2,437,750 - - - - 2,487,500
Expenses of Private
Placements - - (265,000) - - - - (265,000)
Shares Issued in April
2004 for Accrued Services 120,000 1,200 74,400 - - - - 75,600
Shares Issued in June
2004 for Purchase of PCE 286,867 2,869 74,586 - - - - 77,455
Shares Donated Back to
Company in June 2004 (286,867) (2,869) 2,869 - - - - -
Shares Cancelled in July 2004 (25,000) (250) (23,250) - - - - (23,500)
Shares Issued in July
2004 for Services 500,000 5,000 105,000 - - - - 110,000
Private Placement Penalty - - (199,000) - - - - (199,000)
Additional Paid-In
Capital Arising from
Consolidation of PCE - - 2,715,254 - - - - 2,715,254
Amortization of Deferred
Stock Based Compensation - - - - - - 4,310,064 4,310,064
F-3
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 1, 2004 TO SEPTEMBER 30, 2004
(Unaudited) (continued)
-----------
Comprehensive Income (Loss) 4,690,201
-----------
Net Loss - - - - (6,189,332) - - (6,189,332)
Other Comprehensive
Income (Loss)
Equity Adjustment
from Translation - - - - - (694,478) - (694,478)
Comprehensive Income (Loss) - - - - - - - (6,883,810)
----------- ---------- ----------- ----------- --------------- ------------ ------------- -----------
Balance at September
30, 2004 26,669,829 $266,698 $17,057,729 $ 1,827,756 $(18,109,071) $(1,320,427) $(1,916,294) $(2,193,609)
=========== ========== =========== =========== =============== ============ ============= ===========
The accompanying notes are an integral part of the financial statements.
F-4
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For The Period
For the Nine August 10, 1998
Months Ended (Inception)
September 30, To
2004 2003 September 30, 2004
------------- ------------ -------------
Cash Flow From Operating Activities:
Net Loss $ (6,189,332) $ (2,108,469) $(18,109,071)
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 4,692,530 1,726,108 7,113,235
Expense Recorded on Issuance of Common Stock
for Debt Settlement - - 111,300
(Loss) Income on Investment in PowerChannel
Europe PLC 48,000 (19,458) 2,370,471
Loss on Asset Disposal - - 20,456
Write-Down of Inventories 21,593 138,299 464,656
Depreciation 16,411 - 96,728
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 108,594 - (578,894)
(Increase) in Accounts Receivable (129,831) - (129,831)
(Increase) in Prepaid Expenses (116,311) - (116,311)
(Increase) Decrease in Other Assets (16,459) 21,502 (16,459)
Increase (Decrease) Due to PowerChannel Europe PLC,
Relating to Operations (10,000) 122,668 678,142
Increase (Decrease) in Accounts Payable and Accrued
Liabilities (106,320) (58,008) 1,177,088
Increase in Deposits Payable - - 45,000
------------- ------------ -------------
Net Cash (Used) in Operating Activities (1,612,749) (177,358) (5,951,230)
------------- ------------ -------------
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 - 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) - (215,115)
------------- ------------ -------------
The accompanying notes are an integral part of the financial statements.
F-5
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For The Period
For the Nine August 10, 1998
Months Ended (Inception)
September 30, To
2004 2003 September 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 - 112,000 112,000
Proceeds from Convertible Notes - - 280,000
Payment of Note Payable (112,000) - (112,000)
------------ ---------- ------------------
Net Cash Provided By Financing Activities 1,919,805 112,000 6,420,243
------------ ---------- ------------------
Net Increase (Decrease) in Cash 228,633 (65,358) 253,898
Cash - Beginning of Period 25,265 65,358 -
------------ ---------- ------------------
Cash - End of Period $ 253,898 $ - $ 253,898
============ ---------- -------------------
The accompanying notes are an integral part of the financial statements.
F-6
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For The Period
For the Nine August 10, 1998
Months Ended (Inception)
September 30, To
2004 2003 September 30, 2004
---------------- -------------- -------------
Supplemental Cash Flow Information:
Cash Paid For Interest $ 94,753 $ - $ 94,753
============= ============== =============
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 $ $3,783,559 $ - $7,271,549
============= ============== =============
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 $2,715,254 $ - $2,715,254
============= ============== =============
Payable on Purchase of PCE Stock $ 14,898 $ - $ 14,898
============= ============== =============
Penalties Accrued and Charged Against Additional Paid-In
Capital Pursuant to Private Placement $ 199,000 $ - $ 199,000
============= ============== =============
Increase in Minority Interest $1,176,543 $ - $1,176,543
============= ============== =============
The accompanying notes are an integral part of the financial statements.
F-7
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.
Our ultimate ability to continue as a going concern depends on the market's
acceptance of our products and our ability to raise additional funding and to
generate revenues, operating profits, and positive cash flow. We have an urgent
need for additional funding to provide near-term operating cash and enable us to
continue our operations and execute our plans to move toward profitability.
Although there can be no assurance, management believes that future financings
and additional sales that we hope to generate from our product lines will be
sufficient to allow us to continue in operation.
NOTE 2 - Property and Equipment
Property and equipment consists of the following:
Office Equipment $ 8,000
Furniture and Fixtures 83,275
Leasehold Improvements 27,364
-----------
118,639
Less: Accumulated Depreciation 90,865
-----------
$ 27,774
===========
Depreciation expense amounted to $16,411 for the nine months ended September 30,
2004.
F-8
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
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 September 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).
NOTE 4 - Acquisition
On May 31, 2004 the Company acquired 13.47% of PCE (see Note 3) for $54,898 from
a third party and on June 30, 2004 the Company acquired 38.44% of PCE for
$77,455 from two related parties. The Company issued 286,687 shares of common
stock to the two related parties as consideration for the PCE shares.
Concurrently therewith, the 286,687 shares of the Company were donated back to
the Company and cancelled by the two related parties.
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 September 30, 2004 represents the minority shareholders'
29.59% interest in the equity of PCE in the amount of $1,176,543.
F-9
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 6 - Convertible Notes Payable
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 September 30, 2004, the remaining
balance due on these notes was $44,305.
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.
F-10
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 8 - Related Party Transactions (Continued)
Purchase of Inventories
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.
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 (694,478)
-------------
Balance - September 30, 2004 $ (1,320,427)
=============
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 $204,405 for the nine months
ended September 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 $212,239 for the nine months ended September 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.
F-11
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 10 - Stockholders' Deficit (Continued)
Issuances of Common Stock and Stock Options in Connection with Consulting
Agreements (Continued)
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 $234,708 for the nine months ended September 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 $710,122 for the nine
months ended September 30, 2004.
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.
During the quarter ended September 30, 2004 the Company issued 500,000 shares of
common stock valued at $110,000 to a consultant for services. The entire amount
has been reported as stock based compensation for the quarter ended September
30, 2004.
During the quarter ended September 30, 2004 the Company cancelled 25,000 shares
of common stock valued at $23,500 previously issued to a consultant for
services. The entire amount has been reported as a reduction of stock based
compensation for the quarter ended September 30, 2004.
F-12
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 10 - Stockholders' Deficit (Continued)
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 nine months ended September 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. Since a registration
statement covering these shares of common stock has not been declared effective
by May 29, 2004 the Company is required to pay a penalty equal to 2% per month
on the amount invested by each investor. Accordingly, the Company has accrued
$199,000 as of September 30, 2004 with a corresponding charge to additional
paid-in capital.
F-13
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine
months ended September 30, 2004, the Company has reserved an additional 865,963
shares valued at $782,564. 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 $1,674,524 for the nine months
ended September 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.
On July 31, 2003, the Company entered into a consulting agreement ("the
Consulting Agreement") pursuant to which it engaged Churchill Investments, Inc.
("Churchill") to provide certain advisory services for a one-year term, for an
aggregate fee of $250,000. In lieu of payment, Churchill accepted a non-recourse
assignment of $280,000 Series A Convertible Notes (the "Non-recourse
Assignment'). Following the execution and delivery of the Non-recourse
Assignment, Churchill or its assignees, converted $110,539 of the Series A
Convertible Notes into 855,000 shares of common stock. These shares were valued
at $579,700 and were charged to operations in the year ended December 31, 2003.
The issuance of the shares of common stock in connection with the conversion of
the Series A Notes may not have been in compliance with certain state and
federal securities laws. The Company is currently unable to determine the amount
of damages, if any, that it may incur as a result of this issuance. The payment
of damages could have a material adverse effect on the Company's revenues,
profits, results of operations, financial condition and future prospects.
In May 2004, the Company and 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.
F-14
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
NOTE 11 - Commitments and Contingencies (Continued)
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.
The Company has recently received a Notice of Motion seeking a default judgment
and attorneys' fees in connection with a complaint filed by AKW Holdings, LLC
against the Company in the Supreme Court of the State of New York - County of
Rockland Index #2693/04. AKW Holdings, LLC is seeking unpaid rents of
approximately $160,000 and attorneys' fees. As of the date hereof, the Company
has no knowledge as to whether a default judgment has been entered by the
Supreme Court of the State of New York - County of Rockland against the Company.
The Company believes this lawsuit is baseless and without merit and intends to
vigorously defend this lawsuit.
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.
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.
F-15
INDEPENDENT AUDITORS' REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
PowerChannel, Inc.
We have audited the accompanying consolidated balance sheet of PowerChannel,
Inc. and Subsidiaries (A Development Stage Company) ("the Company") as of
December 31, 2003, and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for the year then ended and for
the period August 10, 1998 (Inception) to December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements for the
period August 10, 1998 (inception) through December 31, 2002 were audited by
other auditors whose report dated September 30, 2003 expressed an unqualified
opinion on those consolidated financial statements. The consolidated financial
statements for the period August 10, 1998 (inception) through December 31, 2002
include total operating expenses and a net loss of $4,932,122 and $7,525,777,
respectively. Our opinion on the consolidated statements of operations, changes
in stockholders' deficit and cash flows for the period August 10, 1998
(inception) through December 31, 2003 insofar as it relates to amounts for prior
periods through December 31, 2002 is based solely on the report of other
auditors.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PowerChannel, Inc. and
Subsidiaries as of December 31, 2003 and the consolidated results of their
operations and their cash flows for the year then ended and for the period
August 10, 1998 (Inception) to December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is a development stage company
whose operations have generated recurring losses and cash flow deficiencies from
its inception. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WOLINETZ, LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
April 16, 2004
(Except for Note 13 (other), as to which the date is May 11, 2004)
F-16
Independent Auditor's Report
To the Board of Directors and Stockholders PowerChannel Holdings, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and cash flows of PowerChannel Holdings, Inc.
and Subsidiaries (a development stage company subsequently re-named
PowerChannel, Inc. (see Note 1 to the consolidated financial statements) for the
year ended December 31, 2002 and for the period from August 10, 1998 (inception)
to December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to formulate an opinion based on our
audits. We did not audit the consolidated financial statements of PowerChannel
Europe PLC, a 19.68% owned affiliate, the investment in which, as discussed in
Note 2 to the financial statements, is accounted for by the equity method of
accounting. The equity in net loss of PowerChannel Europe PLC was $66,522 for
the year ended 2002. The consolidated financial statements of PowerChannel
Europe PLC were audited by other auditors whose reports thereon have been
furnished to us, and our opinion insofar as it relates to the amounts included
for PowerChannel Europe PLC is based in part on the reports of other auditors.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our report.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of PowerChannel Holdings,
Inc. and Subsidiaries (a development stage company subsequently re-named
PowerChannel, Inc. (see Note 1 to the consolidated financial statements) for the
year ended December 31, 2002 and for the period from August 10, 1998 (inception)
to December 31, 2002 in conformity with U.S. generally accepted accounting
principles.
The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has no continuing source of operating revenue, and is
still in the development stage. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
New York, New York
September 30, 2003
F-17
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current Assets:
Cash ........................................................ $ 25,265
Inventories ................................................. 244,425
------------
Total Current Assets ................................. 269,690
Property and Equipment, Net ................................... 19,068
------------
$ 288,758
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Due to Affiliate ............................................ $ 3,879,748
Accounts Payable ............................................ 530,454
Accrued Liabilities ......................................... 747,754
Convertible Notes Payable ................................... 260,000
Note Payable - Other ........................................ 112,000
Deposits Payable ............................................ 45,000
------------
Total Current Liabilities ............................ 5,574,956
------------
Commitments and Contingencies
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 19,139,720 Shares .................. 191,397
Additional Paid-In Capital .................................. 8,465,701
Common Stock to be Issued, 1,504,193 Shares ................. 1,045,191
Deferred Offering Costs ..................................... (14,000)
Deferred Stock-Based Compensation ........................... (2,428,799)
Accumulated Other Comprehensive Income (Loss) ............... (625,949)
Deficit Accumulated in the Development Stage ................ (11,919,739)
------------
Total Stockholders' Deficit .......................... (5,286,198)
------------
$ 288,758
============
The accompanying notes are an integral part of the
consolidated financial statements.
F-18
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
For The Period
For The Year Ended August 10, 1998
December 31, (Inception)
-------------------------------- To
2003 2002 December 31, 2003
----------------- -------------- --------------
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 79,558 - 79,558
Activation Fees 15,525 - 15,525
----------------- -------------- --------------
Total Revenues 95,083 - 105,083
----------------- -------------- --------------
Costs and Expenses:
Cost of Sales 5,811 - 5,811
Write-Down of Inventories 443,063 - 443,063
Selling, General and Administrative Expenses 841,094 2,007,652 5,783,216
Impairment Loss on Investment 573,887 - 573,887
Settlement of Debt 111,300 - 111,300
Stock-Based Compensation 2,321,253 - 2,321,253
----------------- -------------- --------------
Total Costs and Expenses 4,296,408 2,007,652 9,238,530
----------------- -------------- --------------
Loss Before Loss From Unconsolidated Affiliate
And Other Income (Expense) (4,201,325) (2,007,652) (9,133,447)
Loss from Unconsolidated Affiliate (37,142) (66,522) (2,630,797)
Interest Expense (155,495) - (155,495)
----------------- -------------- --------------
Net Loss $(4,393,962) $(2,074,174) $(11,919,739)
================= ============ ==============
Basic and Diluted Net Loss Per Share $ (.34)
================
Weighted Average Shares Outstanding - Basic and Diluted 12,777,795
================
Pro-Forma Net Loss Per Share (Basic and Diluted) $ (.33)
================
Pro-Forma Weighted Average Shares Outstanding
(Basic and Diluted) 13,173,881
================
The accompanying notes are an integral part of the
consolidated financial statements.
F-19
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2003
Deferred
Deficit Accumulated Stock-Based
Accumulated Other Compensation
Additional In The Comprehensive and
Common Stock Paid-In Subscription Development Income Offering
Shares Amount Capital Receivable Stage (Loss) Costs Total
------------ -------- --------- ------------ ----------- ------------ ------------ ---------
Balance at Inception-
August 10, 1998 - $ - $ - $ - $ - $ - - $ -
Shares Issued at December
31, 1998 Pursuant to Initial
Capitalization 17,650,000 17,650 - (3,350) - - - 14,300
---------
14,300
---------
Comprehensive Income (Loss)
Net Loss - - - - (79,169) - - (79,169)
Other Comprehensive Income
(Loss) - - - - - - - -
---------
Comprehensive Income (Loss) - - - - - - - (79,169)
------------ -------- --------- ------------ ----------- ------------ ------------ ---------
Balance at December 31, 1998 17,650,000 17,650 - (3,350) (79,169) (64,869)
---------
Shares Issued March 30, 1999
Pursuant to Exercise of
Warrants 2,000,000 2,000 198,000 (200) - - - 199,800
Shares Issued June 7, 1999
Pursuant to Initial
Capitalization 1,019,000 1,019 - (1,019) - - - -
Distribution of Shares in
PowerChannel Limited - - - - - - - -
Shares Issued November
11, 1999 Pursuant to Private
Placement 500,000 500 249,500 - - - - 250,000
Shares Issued December
31, 1999 Pursuant to
Agreement 288,000 288 143,200 - - - - 143,488
---------
593,288
---------
Comprehensive Income (Loss)
Net Loss - - - - (801,212) - - (801,212)
Other Comprehensive Income
(Loss) - - - - - - - -
---------
Comprehensive Income (Loss) - - - - - - - (801,212)
------------ -------- --------- ------------ ----------- ------------ ------------ ---------
Balance at December 31, 1999 21,457,000 21,457 590,700 (4,569) (880,381) - - (272,793)
---------
Shares Issued March 21, 2000
Pursuant to Private Placement 200,000 200 199,800 - - - - 200,000
Shares Issued May 12, 2000 in
Consideration for Professional
Services Rendered 4,000 4 9,996 - - - - 10,000
Shares Issued June 2, 2000 in
Consideration for Professional
Services Rendered 15,261 15 38,138 - - - - 38,153
Shares Issued June 25, 2000 in
Consideration for Professional
Services Rendered 16,667 17 40,322 - - - - 40,339
Shares Issued September 30, 2000
In Consideration for Professional
Services Rendered 4,000 4 10,996 - - - - 11,000
Additional Capital Resulting from
Sale of Common Stock by
PowerChannel Europe PLC - - 3,103,764 - - - - 3,103,764
The accompanying notes are an integral part of the
consolidated financial statements.
F-20
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2003
(Continued)
Deferred
Deficit Accumulated Stock-Based
Accumulated Other Compensation
Additional In The Comprehensive and
Common Stock Paid-In Subscription Development Income Offering
Shares Amount Capital Receivable Stage (Loss) Costs Total
------------ -------- --------- ------------ ----------- ------------ ----------- ------------
Intrinsic Value of Beneficial
Conversion Feature of
Convertible Notes - - 280,000 - - - - 280,000
------------
Comprehensive Income (Loss) 3,683,256
------------
Net Loss - - - - (2,959,100) - - (2,959,100)
Other Comprehensive Income
(Loss) - Equity Adjustment
From Translation - - - - - (189,953) - (189,953)
------------
Comprehensive Income (Loss) - - - - - - - (3,149,053)
------------ -------- --------- ------------ ----------- ------------ ----------- ------------
Balance at December 31, 21,697,328 21,697 4,273,716 (4,569) (3,839,481) (189,953) - 261,410
------------
Shares Issued April 13, 2001
Pursuant to Private Placment 100,000 100 249,900 - - - - 250,000
Shares Issued July 24, 2001
Pursuant to Private Placement 26,400 26 65,974 - - - - 66,000
Shares Issued August 7, 2001
Pursuant to Private Placement 47,100 47 117,703 (46,006) - - - 71,744
Shares Issued August 14, 2001
Pursuant to Private Placement 10,000 10 24,990 - - - - 25,000
------------
Comprehensive Income (Loss) 412,744
------------
Net Loss - - - - (1,612,122) - - (1,612,122)
Other Comprehensive Income
(Loss) - Equity Adjustment
From Translation - - - - - (147,663) - (147,663)
------------
Comprehensive Income (Loss) - - - - - - - (1,759,785)
------------ -------- --------- ------------ ----------- ------------ ----------- ------------
Balance at December 31, 2002 21,880,828 21,880 4,732,283 (50,575) (5,451,603) (337,616) - (1,085,631)
------------
Comprehensive Income (Loss)
Net Loss - - - - (2,074,174) - - (2,074,174)
Other Comprehensive Income
(Loss) - Equity Adjustment
From Translation - - - - - 130,199 - 130,199
------------
Comprehensive Income (Loss) - - - - - - - (1,943,975)
------------ -------- --------- ------------ ----------- ------------ ----------- ------------
Balance at December 31, 2002 21,880,828 21,880 4,732,283 (50,575) (7,525,777) (207,417) - (3,029,606)
------------
Recapitalization Due to Reverse
Merger (10,668,776) 90,240 (107,091) - - - - (16,851)
Shares Issued in September 2003
Pursuant to Private Placement 277,777 2,778 47,222 - - - - 50,000
Shares Issued in December 2003
Pursuant to Private Placement 214,285 2,143 72,857 - - - - 75,000
Shares Issued in August 2003
for Services 466,920 4,669 292,524 - - - - 297,193
Shares Issued in August 2003 to
Related Party for Services 250,000 2,500 97,500 - - - - 100,000
Shares Issued in September 2003
for Services 270,103 2,701 137,484 - - - - 140,185
Shares Issued in September 2003
to Related Party for Services 5,000 50 1,975 - - - - 2,025
The accompanying notes are an integral part of the
consolidated financial statements.
F-21
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2003
(Continued)
Deficit Accumulated
Common Accumulated Other
Additional Stock Subscr- In The Comprehensive
Common Stock Paid-In to be iption Development Income
Shares Amount Capital Issued Receivable Stage (Loss)
---------- -------- ---------- ---------- --------- ------------- -----------
Shares Issued in October 2003
for Services 330,400 3,304 73,176 - - - -
Shares Issued in November 2003
for Services 3,216,550 32,165 716,310 - - - -
Shares Issued in December 2003
for Services 685,000 6,850 270,150 - - - -
Cancellation of Previously Issued
Shares (50,000) (500) 500 - - - -
Shares Issued in December 2003
Pursuant to Settlement
Agreement 150,000 1,500 135,000 - - - -
Shares Issued as Adjustment to a
Prior Year's Sale 86,680 867 (867) - - - -
Shares Issued in September 2003
for Services in Connection with
Private Placement 50,000 500 10,000 - - - -
Fees paid in Connection with
Private Placement - - (10,000) - - - -
Shares Issued for Services 325,000 3,250 61,750 - - - -
Write-Off of Subscription
Receivable - - (50,575) - 50,575 - -
Issuance of Common Stock
Options in November 2003
for Services - - 275,965 - - - -
Issuance of Common Stock
Options in December 2003
for Services - - 479,934 - - - -
Shares Issued for Services in
Connection with Consulting
Agreement 794,953 7,950 668,954 - - - -
Shares Issued Relating to
Consulting Agreement Upon
Erroneous Conversion of
Convertible Debt 855,000 8,550 571,150 - - - -
Shares in Connection with
Letter of Engagement - - - 1,045,191 - - -
Amortization of Deferred
Stock-Based Compensation - - - - - - -
Comprehensive Income (Loss)
Net Loss - - - - - (4,393,962) -
Other Comprehensive Income
(Loss) - Equity Adjustment
from Translation - - - - - - (418,532)
Comprehensive Income (Loss)
---------- -------- ---------- ---------- --------- ------------- -----------
Balance At December 31, 2003 19,139,720 $191,397 $8,465,701 $1,045,191 $ - $(11,919,739) $(625,949)
========== ========= ========== ========== ========= ============= ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-22
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD AUGUST 10, 1998 (INCEPTION) TO DECEMBER 31, 2003
(Continued)
Deferred
Stock-Based
Compensation
and
Offering
Costs Total
------------ ------------
Shares Issued in October 2003
for Services - 76,480
Shares Issued in November 2003
for Services (632,500) 115,975
Shares Issued in December 2003
for Services (277,000) -
Cancellation of Previously Issued
Shares - -
Shares Issued in December 2003
Pursuant to Settlement
Agreement - 136,500
Shares Issued as Adjustment to a
Prior Year's Sale - -
Shares Issued in September 2003
for Services in Connection with
Private Placement - 10,500
- (10,500)
Fees paid in Connection with
Private Placement - (10,000)
Shares Issued for Services (65,000) -
Write-Off of Subscription
Receivable - -
Issuance of Common Stock
Options in November 2003
for Services (275,965) -
Issuance of Common Stock
Options in December 2003
for Services (479,934) -
Shares Issued for Services in
Connection with Consulting
Agreement (625,000) 51,904
Shares Issued Relating to
Consulting Agreement Upon
Erroneous Conversion of
Convertible Debt - 579,700
Shares in Connection with
Letter of Engagement (1,045,191) -
Amortization of Deferred
Stock-Based Compensation 957,791 957,791
------------
2,555,902
------------
Comprehensive Income (Loss)
Net Loss - (4,393.962)
Other Comprehensive Income
(Loss) - Equity Adjustment
from Translation - (418,532)
------------
Comprehensive Income (Loss) (4,812,494)
------------ ------------
Balance At December 31, 2003 $(2,442,799) $(5,286,198)
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-23
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Period
For The Year Ended August 10, 1998
December 31, (Inception)
---------------------------------- To
2003 2002 December 31 2003
----------------- --------------- ----------------------
Cash Flow From Operating Activities:
Net Loss $(4,393,962) $(2,074,174) $(11,919,739)
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 2,321,253 - 2,420,705
Expense Recorded on Issuance of Common Stock
for Debt Settlement 111,300 - 111,300
Loss (Income) on Investment in PowerChannel
Europe PLC 37,142 135,886 2,322,471
Loss on Asset Disposal - 20,456 20,456
Write-Down of Inventories 443,063 - 443,063
Depreciation 21,449 20,243 80,317
Impairment Loss on Investment in PowerChannel
Europe PLC 573,884 - 573,884
Change in Current Operating Assets and Liabilities:
(Increase) Decrease in Inventories 5,811 (693,299) (687,488)
Decrease in Prepaid Expenses 21,501 - -
Decrease in Other Assets - 30,739
Increase (Decrease) Due to PowerChannel Europe PLC,
Relating to Operations (10,000) 698,142 688,142
Increase in Accounts Payable and Accrued Liabilities 579,742 328,476 1,283,408
Increase in Deposits Payable 45,000 -
---------------- --------------- --------------
45,000
Net Cash (Used) in Operating Activities (243,817) (1,533,531) (4,338,481)
---------------- --------------- --------------
Cash Flow From Investing Activities:
Purchase of Property and Equipment (6,425) (11,202) (119,841)
Net Liabilities Acquired in Reverse Merger, Net of Cash (16,851) - (16,851)
Advances to Related Party - - (64,935)
Repayments for Advances to Related Parties - - 64,935
Loans to Related Party - - (278,027)
Repayments from Loans to Related Parties - - 278,027
----------------- --------------- ---------------
Net Cash (Used) in Investing Activities (23,276) (11,202) (136,692)
----------------- ---------------- ---------------
The accompanying notes are an integral part of the
consolidated financial statements.
F-24
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For The Period
For The Year Ended August 10, 1998
December 31, (Inception)
------------------------------- To
2003 2002 December 31,2003
--------------- --------------- ---------------
Cash Flow From Financing Activities:
Proceeds from Issuance of Common Stock 125,000 - 1,345,364
Fees Paid on Sale of Common Stock (10,000) - (10,000)
Loans and Advances from Related Parties - 1,583,111 2,773,074
Proceeds from Note Payable 112,000 - 112,000
Proceeds from Convertible Notes - - 280,000
--------------- --------------- ---------------
Net Cash Provided By Financing Activities 227,000 1,583,111 4,500,438
--------------- --------------- --------------
Net Increase in Cash 40,093 38,378 25,265
Cash - Beginning of Period 65,358 26,980 -
-------------- ---------------- ---------------
Cash - End of Period $ 25,265 $ 65,358 $ 25,265
============== ================ ===============
Supplemental Cash Flow Information:
Cash Paid For Interest $ - $ - $
============== ================= ===============
- -
======
Cash Paid For Income Taxes $ - $ - $
============== ================= ===============
- -
=======
Non-Cash Financing Activities:
Issuances of Common Stock as Fees for
Sales of Common Stock $ 10,500 $ - $ 10,500
============= ================== ================
===============
Issuance of Common Stock on Settlement of
Convertible Note Payable and Accrued Interest $ 25,200 $ - $ 25,200
============= ================= ===============
Deferred Stock-Based Compensation $ 3,487,990 $ - $ 3,487,990
============= ================== =============
Issuance of Common Stock for Deferred Offering Costs $ 14,000 $ - $ 14,000
============= ================== ===============
Write-Off of Subscription Receivable $ 50,575 $ - $ 50,575
============= ================== ===============
The accompanying notes are an integral part of the
consolidated financial statements.
F-25
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - Organization and Basis of Presentation
PowerChannel Holdings, Inc. was incorporated under the laws of the State of
Delaware on March 26, 1999. The Company's wholly owned subsidiaries,
PowerChannel, Inc. and PowerChannel.com, Inc., were incorporated under the laws
of the State of Delaware on August 10, 1998, and April 19, 2000, respectively.
The Company is a consumer electronics marketing company. The Company's principal
product is low-cost access to the Internet. The Company offers an on-line
service that enables consumers to experience the Internet through their
televisions. It provides this service through a set-top terminal that attaches
to a television and telephone line and enables consumers to access the Company's
subscription-based on-line service. By attempting to reduce the cost and
complexity barriers to Internet access, the goal is to make the Internet
available to a wider audience than has previously been possible. The Company
provides the physical hardware that is used to deliver the Internet through the
use of the consumer's existing television. The Company's office is located in
New City, New York.
On July 21, 2003, pursuant to a Stock Purchase Agreement and Share Exchange, as
amended ("the Agreement"), between Sealant Solutions, Inc. and PowerChannel,
Inc., a Delaware corporation, PowerChannel merged into Sealant Solutions, Inc.
Pursuant to the Agreement, PowerChannel ceased to exist and Sealant Solutions,
Inc. continued as the surviving corporation. In addition, Sealant Solutions,
Inc. changed its name to PowerChannel, Inc. Under this agreement, Sealant agreed
to issue shares equal to 85% of the fully diluted outstanding shares (or
9,117,525 shares) and an additional 485,552 shares on a pro-rata basis of
Sealant Solutions, Inc. to PowerChannel, Inc. shareholders. In addition, 534,820
shares were issued in connection with the reverse merger to the former president
of Sealant. 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, PowerChannel, Inc. is the acquiring company. The merger was accounted
for as a reverse merger, which effectively is a recapitalization of the target
company and the consolidated financial statements presented are those of
PowerChannel, Inc. The merged entity Sealant Solutions, Inc. and PowerChannel,
Inc. are hereafter collectively referred to as "the Company".
In connection with the Stock Purchase and Share Exchange Agreement, Sealant
Solutions, Inc. increased its authorized common shares to 95,000,000 and
preferred shares to 5,000,000 having a par value of $.01.
F-26
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - Organization and Basis of Presentation (Continued)
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the Company is a development
stage company that has a working capital deficit at December 31, 2003 of
$5,305,266 and for the period August 10, 1998 (inception) to December 31, 2003
has incurred net losses aggregating $11,919,739. 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 (1) consummation of
the contemplated financings, (2) achieving sufficiently profitable operations
(3) subsequently maintaining adequate financing arrangements and (4) its exiting
the development stage. The achievement and/or success of the Company's planned
measures, however, cannot be determined at this time. These financial statements
do not reflect any adjustments relating to the recoverability and classification
of assets carrying amounts and classification of liabilities should the Company
be unable to continue as a going concern.
NOTE 2 - Summary of Significant Accounting Policies
Principals of Consolidation
The consolidated financial statements include the accounts of PowerChannel, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. The Company has recognized a loss of $443,063 during the year ended
December 31, 2003 related to the valuation of its inventories.
Investment in PowerChannel Europe PLC
The investment in an unconsolidated affiliate, PowerChannel Europe PLC, over
which the Company exercises significant influence but not control, is accounted
for by the equity method. As of December 31, 2003 the Company has recognized an
other than temporary loss in value of this investment and accordingly has
reduced the carrying amount down to zero.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements and betterments are capitalized, while maintenance and repairs,
which do not extend the useful lives of these assets, are expensed as incurred.
Depreciation is provided over the estimated useful lives of the assets (five to
seven years) using the straight-line and accelerated methods. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the balance sheet, and a gain or loss is reflected in earnings.
F-27
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Deferred Offering Costs
Deferred offering costs represent costs incurred in connection with a proposed
offering of the Company's securities. Upon successful completion of the proposed
offering such costs will be charged to additional paid-in capital. These
deferred offering costs represent the issuance of 35,000 shares of common stock
valued at $14,000. Accordingly, deferred offering costs are reported as a
component of stockholders' deficit.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable, notes payable and other current
liabilities approximates fair value because of the immediate or short-term
maturity of these financial instruments.
Revenue Recognition
Revenues from the sale of set-top boxes are recognized at time of shipment to
customer. Access fees are deferred and amortized over the life of the
subscription.
Foreign Currency Translation
Receivables of the Company's unconsolidated UK Affiliate is translated to US
dollars using the current exchange rate for assets and liabilities. Gains or
losses resulting from foreign currency translation are included as a component
of other comprehensive income (loss).
Comprehensive Income (Loss)
Comprehensive income (loss) which is reported on the accompanying consolidated
statement of stockholders' deficit as a component of accumulated other
comprehensive income (loss) consists of accumulated foreign translation gains
and losses.
Income Taxes
The Company records deferred income taxes using the asset and liability method
as prescribed under the provisions of SFAS No. 109. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and income tax bases of the Company's assets and liabilities. An
allowance is recorded, based upon currently available information, when it is
more likely than not that any or all of the deferred tax assets will not be
realized. The provision for income taxes includes taxes currently payable, if
any, plus the net change during the year in deferred tax assets and liabilities
recorded by the Company.
F-28
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - Summary of Significant Accounting Policies (Continued)
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 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.
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.
F-29
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
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").
F-30
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
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.
NOTE 3 - Property and Equipment
Property and equipment are summarized as follows:
Office Equipment $ 72,247
Furniture and Fixtures 21,275
---------
93,522
Less: Accumulated Depreciation 74,454
---------
19,068
NOTE 4 - Investment in Unconsolidated Affiliate
Prior to November 1999, the Company beneficially owned 100% of PowerChannel
Limited, which, at the time was an inactive company, with no assets and no
revenues. In November 1999, the Board passed a resolution distributing eight
(80%) percent of its shareholding in PowerChannel Limited to the Company's
shareholders.
In January 2000, PowerChannel Limited changed its name to PowerChannel Europe
Limited and in April 2000 to PowerChannel Europe PLC ("PCE"). The Company
currently owns 19.68% of the outstanding ordinary shares of PCE. PCE holds the
European rights to the PowerChannel patent-pending business model and know-how,
owned and developed by the Company. A new company with the name PowerChannel
Limited has been incorporated as a subsidiary of PCE to roll out the
PowerChannel model in the UK and Ireland. PowerChannel Limited had entered into
a strategic partnership with Granada Media Group ("Granada").
Under the alliance, the strategic partner was allotted a five (5%) percent
equity investment in PowerChannel Limited convertible into shares in PCE for nil
consideration. PowerChannel Limited was to finance the procurement of set-top
boxes.
In April 2000, the strategic partner converted its shares in PowerChannel
Limited into shares of PCE and invested approximately (pound) 13 million
(approximately $21 million) for new shares in PCE. As a result of the conversion
and the cash investment, the strategic partner owned 23.5% of the fully diluted
share capital of PCE.
The strategic partnership with Granada terminated in February 2001. As a result,
the shares of PCE owned by Granada were returned to PCE, which, in turn were
distributed to its remaining shareholders.
F-31
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 4 - Investment in Unconsolidated Affiliate (Continued)
In accordance with accounting for the investment in PCE under the equity method,
the Company is required to record capital transactions of PCE as if the investee
were a consolidated subsidiary. Pursuant to this requirement, the Company, in
2002, recorded an increase of $3,103,764 in their investment in PCE and a
corresponding increase in additional capital.
For the years ended December 2003 and 2002, the Company has recorded its
pro-rata share of PCE's (loss) income amounting to $(37,142) and $(66,522),
respectively.
Additionally, PCE's consolidated financial statements, which were audited by
auditors, were issued as a going concern since the majority of PCE's assets and
liabilities are to be transferred to the Company.
The following table provides condensed consolidated financial information about
PCE as of December 31, 2003 and 2002 and for the years then ended:
December 31,
2003 2002
--------------- ---------------
Current Assets $ 3 881,314 $ 3,475,844
Total Assets $ 3,881,314 $ 3,475,844
Current Liabilities $ 454,642 371,043
Total Liabilities $ 454,642 $ 371,043
Equity $ 3,881,314 $ 3,104,801
Revenues $ - $ 773,145
Net (Loss) $ (188,723) $ (338,018)
The current assets included in the above table includes receivable from the
Company aggregating approximately $3.9 million and $3.4 million in 2003 and
2002, respectively.
As of December 31, 2003 the Company has determined that there was an other than
temporary decline in value of its investment in PCE. Accordingly, the Company
has 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.
NOTE 5 - Convertible Notes Payable
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 (see Note 9).
F-32
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 6 - 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.
NOTE 7 - Related Party Transactions
Long Distance Direct Holding, Inc.
In August 1998, the Company entered into an agreement with Long Distance Direct
Holding, Inc. ("LDDI") (an affiliate), which stipulates that LDDI will make
certain employees available to the Company as needed to assist the Company in
conducting its business. This agreement expired in August 1999. In
consideration, the Company issued LDDI the right to purchase 2,000,000 shares at
$.10 per share of the Company's stock. In august 1999, LDDI exercised its right.
During 2000, the Company loaned LDDI approximately $278,000 pursuant to a
promissory note. The note requires interest to be paid at 7.5% per annum, with
principal and all accrued interest due on June 30, 2001. If LDDI fails to repay
the note in full at the maturity date, it shall deliver to the Company in
satisfaction of the note, the number of shares of the Company's common stock
based on each share being valued at $1 per shares. In April 2001, the maturity
date of the note was extended to December 31, 2001 for additional consideration
of $10,000. The note was repaid in 2001.
On January 7, 2000, the Securities and Exchange Commission filed an action in
federal court against Long Distance Direct Holdings, Inc., alleging violations
of the Securities and Exchange Act of 1934 for failing to file, or filing late,
a number of the annual reports required to be filed on Form 10-K and some
quarterly reports required to be filed on Form 10-Q from 1995 through 1999. Long
Distance Direct Holdings, Inc. subsequently entered into a final judgment with
the Commission, which was filed with the Court on March 7, 2000, enjoining Long
Distance Direct Holdings, Inc. from failing to file accurate and complete
reports required to be filed with the Commission. The final judgments\ further
ordered that on or before April 30, 2000, Long Distance Holdings, Inc. file:
o a complete and accurate annual report on Form 10-K for fiscal 1998;
o Complete and accurate quarterly reports on Form 10-Q for the second through
fourth quarters of 1999; and
o Such other periodic reports which may become due prior to entry of the
judgment.
The final judgment further provided the filing of a notification with the Court
of the filing of its delinquent reports, and also that a copy of the Final
Judgment be delivered to any incoming chief executive officer or president of
Long Distance Direct Holding, Inc.
F-33
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 7 - Related Party Transactions (Continued)
Long Distance Direct Holding, Inc. (Continued)
Long Distance Direct, Inc., a wholly owned subsidiary of Long Distance Holdings,
Inc., is subject to an order of the Federal Communications Commission dated
February 9, 2000, for willfully or repeatedly violating section 258 of the
Communications Act of 1934.
LDDI has not complied with the terms of the final judgment concerning the Form
10-K and Form 10-Q filings. Long Distance Direct, Inc. filed for bankruptcy in
January 2002.
PowerChannel Europe PLC
In 2002, the Company bought its entire inventory of set-top boxes from PCE. At
December 31, 2002, the amounts due to PCE consisted of approximately $690,000
related to the aforementioned inventory purchase and approximately $2.8 million
of loans and advances, which are due on demand and are not interest bearing. As
of December 31, 2003, the amounts owed to PCE was $3,879,748 after giving effect
to foreign currency translation.
NOTE 8 - 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, 2001 $( 337,616)
Equity Adjustments from Foreign
Currency Translation 130,199
------------
Balance - December 31, 2002 ( 207,417)
Equity Adjustments from Foreign
Currency Translation ( 418,532)
------------
Balance - December 31, 2003 $( 625,949)
============
NOTE 9 - Stockholders' Equity (Deficit)
------------------------------
Reverse Merger
On July 21, 2003, pursuant to a Stock Purchase Agreement and
Share Exchange, as amended ("the Agreement"), between Sealant Solutions, Inc.
and PowerChannel, Inc., a Delaware corporation, PowerChannel merged into Sealant
Solutions, Inc. Pursuant to the Agreement, PowerChannel ceased to exist and
Sealant Solutions, Inc. continued as the surviving corporation. In addition,
Sealant Solutions, Inc. changed its name to PowerChannel, Inc. Under this
agreement, Sealant agreed to issue shares equal to 85% of the fully diluted
outstanding shares (or 9,117,525 shares) and an additional 485,552 shares on a
pro-rata basis of Sealant Solutions, Inc. to PowerChannel, Inc. shareholders. In
addition, 534,820 shares were issued in connection with the reverse merger to
the former president of Sealant. 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, PowerChannel, Inc. is the acquiring company.
The merger was accounted for as a reverse merger, which effectively is a
recapitalization of the target company and the consolidated financial statements
presented are those of PowerChannel, Inc. The merged entity Sealant Solutions,
Inc. and PowerChannel, Inc. are hereafter collectively referred to as "the
Company".
F-34
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 9 - Stockholders' Equity (Deficit) (Continued)
Reverse Merger (Continued)
In connection with the Stock Purchase and Share Exchange Agreement, Sealant
Solutions, Inc. increased its authorized common shares to 95,000,000 and
preferred shares to 5,000,000 having a par value of $.01.
Stock Option Plan
During 2001, the Company adopted the 2001 Stock Option Plan (the "2001 Plan").
The aggregate number of common shares that may be issued is 2,500,000. Any key
employee shall be eligible to be granted options as determined by the Company's
stock option committee. The price of the shares subject to each option shall not
be less than 100% of the fair market value of such shares on the date such
option is granted. Under this plan, options to purchase shares in the stock of
PowerChannel Holdings, Inc. were as follows: 600,000 to James Gambrel, 250,000
to Michael Preston and 250,000 shares to Steven Lampert. The exercise price is
$1.00 per share. This 2001 Plan and the outstanding options thereunder were
cancelled during July 2003.
Stock Incentive Plan
In July 2003, the Company created a 2003 Stock Incentive Plan (the "2003 Plan")
which permits the Company to make awards of stock options, stock appreciations
rights, warrants, dividend equivalents, stock awards, restricted stock, phantom
stock, performance shares or other securities or rights. All employees of the
Company and affiliates are eligible to participate. The number of shares that
may be delivered or purchased under the plan are up to 3,000,000 shares at a par
value of $.01.
During the year ended December 31, 2003 the Company issued an aggregate of
2,885,823 shares of common stock under the 2003 Plan. Such shares were issued to
employees, officers and directors, consultants and other professionals for
services. A summary of common stock issued under the 2003 Plan follows:
Shares Fair Market Value
Employees 556,870 $ 153,418
Officers and Directors 255,000 102,025
Consultants and Other Professionals 2,073,953 1,321,255
----------- ------------
2,885,823 $ 1,576,698
=========== ============
F-35
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 9 - Stockholders' Equity (Deficit) (Continued)
Issuances of Common Stock and Stock Options in Connection with Consulting
Agreements
On July 31, 2003, the Company entered into a Consulting Agreement (the
"Consulting Agreement") with Churchill Investments, Inc. ("Churchill"), pursuant
to which the Company engaged Churchill to provide certain advisory services for
a one-year term, for an aggregate fee of $250,000, which Churchill agreed to
accept in the form of a non-recourse assignment (the "Non-recourse Assignment")
of $280,000 Series A Notes (see Note 5). Following the execution and delivery of
the Non-recourse Assignment, Churchill or its assignees, converted $110,539 of
the Notes into 855,000 shares of common stock. The value of such shares in the
amount of $579,700 has been charged to operations during the year ended December
31, 2003. The issuance of the shares of common stock in connection with the
conversion of the Series A Notes may not have been in compliance with certain
state and federal securities laws. The Company is currently unable to determine
the amount of damages, if any, that it may incur as a result of this issuance,
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.
In connection with a one year consulting agreement entered into in June 2003,
the Company issued 325,000 shares of common stock valued at $65,000. The value
of the stock is being amortized over the life of the agreement. Amortization
reported as stock based compensation amounted to $34,014 for the year ended
December 31, 2003.
In connection with a one year consulting agreement entered into on November 24,
2003, the Company issued 750,000 shares of common stock valued at $172,500. The
value of the stock is being amortized over the life of the agreement.
Amortization reported as stock based compensation amounted to $17,486 for the
year ended December 31, 2003. This consulting agreement was amended on January
20, 2004 (see Note 13).
In connection with a one year consulting agreement entered into on November 24,
2003, the Company issued 750,000 shares of common stock valued at $172,500. The
value of the stock is being amortized over the life of the agreement.
Amortization reported as stock based compensation amounted to $17,486 for the
year ended December 31, 2003. This consulting agreement was amended on January
20, 2004 (see Note 13) and this consultant was also appointed in January 2004 as
a director of the Company.
In connection with a one year consulting agreement entered into on November 24,
2003, the Company issued 1,250,000 shares of common stock valued at $287,500.
The value of the stock is being amortized over the life of the agreement.
Amortization reported as stock based compensation amounted to $29,143 for the
year ended December 31, 2003. The Company also granted to the consultant common
stock options having piggyback registration rights to purchase 1,200,000 shares
to be exercisable over a 5 year period at $.20 per share. The Company estimated
the fair value of these options to be $275,965, 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 5 years. Such amount is being
amortized over 12 months. Amortization amounted to $27,975 for the year ended
December 31, 2003. This consulting agreement was amended in February and April
2004 (see Note 13).1
F-36
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 9 - Stockholders' Equity (Deficit) (Continued)
Issuances of Common Stock and Stock Options in Connection with Consulting
Agreements
(Continued)
In connection with a one year consulting agreement entered into on December 5,
2003, the Company issued 150,000 shares of common stock valued at $63,000. The
value of the stock is being amortized over the life of the agreement.
Amortization reported as stock based compensation amounted to $12,898 for the
year ended December 31, 2003. This consulting agreement was amended on February
6, 2004 (see Note 13).
In connection with a one year consulting agreement entered into on December 12,
2003, the Company issued 450,000 shares of common stock valued at $180,000. The
value of the stock is being amortized over the life of the agreement.
Amortization reported as stock based compensation amounted to $9,863 for the
year ended December 31, 2003. The Company also granted to the consultant common
stock options having piggyback registration rights to purchase 1,200,000 shares
to be exercisable over a 5 year period at $.40 per share. The Company estimated
the fair value of these options to be $479,934, 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 5 years. Such amount is being
amortized over 12 months. Amortization amounted to $26,298 for the year ended
December 31, 2003. The consultant is the nephew of the wife of the Company's
president.
In December 2003 the Company agreed to issue 85,000 shares of common stock
valued at $34,000 pursuant to a retainer agreement. Amortization reported as
stock based compensation amount to $4,396 for the year ended December 31, 2003.
In December 2003, the Company entered into a settlement agreement with Ronald
Adams, one of the Original Holders of the Series A Notes, whereby Adams agreed
to cancel his Series A Note in consideration for the issuance of 150,000 shares
valued at $136,500. Accordingly, a charge of $111,300 has been recognized during
the year ended December 31, 2003.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
Authorized Common Stock
PowerChannel, Inc. shareholders exchanged all of their shares of stock for an
equal number of shares in PowerChannel Holdings, Inc. during 1999. Warrants for
the purchase of 300,000 shares of common stock were outstanding at December 31,
2002 and 2001. These warrants were subsequently cancelled during July 2003.
F-37
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 9 - Stockholders' Equity (Deficit) (Continued)
Preferred Stock
PowerChannel's certificate of incorporation authorizes the issuance of "blank
check" preferred stock with whatever designation, rights and preferences as may
be determined by the Board of Directors. Accordingly, the Board is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation conversion, voting, or other rights, which could adversely affect
the voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of PowerChannel. The
Company does not currently intend to issue any shares of preferred stock,
however there can be no assurance that it will not do so.
NOTE 10 - Income Taxes
For income tax purposes, the Company had available net operating loss
carryforwards ("NOL") at December 31, 2003 of approximately $19,000,000 to
reduce future federal taxable income, if any. The NOL's expire at various dates
from 2004 through 2023. The Company is not current with respect to its corporate
income tax filings. There are certain limitations as to the future annual use of
the NOLs due to certain changes in the Company's ownership pursuant to Internal
Revenue Code Section 382. The amount of these limitations have not been
determined as of December 31, 2003.
The Company had deferred tax assets of approximately $6,460,000 at December 31,
2003 resulting primarily from net operating loss carryforwards. The deferred tax
assets have been fully offset by a valuation allowance resulting from the
uncertainty surrounding their future realization. The difference between the
federal statutory rate of 34% and the Company's effective tax rate of 0% is due
to an increase in the valuation allowance of $1,268,000 and $659,000 in 2003 and
2002, respectively.
NOTE 11 - Commitments and Contingencies
Lease Commitments
The Company conducts its operations in office space owned by the Company's
president under a two year operating lease expiring December 31, 2004. The lease
provides for annual rent of $30,000.
Rent expense was approximately $46,000 and $87,500 for the years ended December
31, 2003 and 2002, respectively.
Employment Agreements
The Company entered into employment agreements with James Gambrell, Michael
Preston and Steven Lampert on March 1, 2000. The agreements expired on February
28, 2003 and provided annual salaries of $250,000 for Mr. Gambrell and $200,000
each for Mr. Preston and Mr. Lampert. Additionally, the agreements provide for
certain fringe benefits and stock options. Amounts paid to Messrs. Preston and
Lampert aggregated to $390,000 for the year ended December 31, 2002. The
aforementioned employment agreements were cancelled in July 2003. All
corresponding liabilities owed to these employees under these agreements in
excess of the amounts already paid have been waived.
F-38
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 11 - Commitments and Contingencies (Continued)
Exclusive Agency Agreement
On August 1, 2001 the Company entered into an Exclusive Aging Agreement whereby
the agent was appointed as exclusive sales representative to sell the Company's
products throughout the United States Military resale market, commissary and
exchange system, or other military resale markets worldwide. This exclusive
agency agreement is for a five year term and has certain termination clauses.
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. 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. Such 1,504,193 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. Amortization reported as stock based compensation
amounted to $778,232 for the year ended December 31, 2003. 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.
F-39
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 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.
Lack of Insurance
The Company, at December 31, 2003, did not maintain any liability insurance,
workers' compensation, or other forms of general insurance. Although the Company
is not aware of any claims resulting from absence of coverage, there is no
assurance that none exist. Management plans to obtain coverage as soon as
possible.
Accrued Liabilities
Included in accrued liabilities are federal payroll taxes payable of
approximately $150,000 under federal tax liens.
NOTE 12 - Licensing Agreements
The Company entered into an Intellectual Property License Agreement in 2000 with
PCE (see Note 4). The Company is the owner of certain inventions, technology,
expertise, know-how and intellectual property, which PCE wishes to use. Pursuant
to the terms of the agreement, the Company has granted PCE a non-transferable
exclusive use of the technology in Europe. In consideration PCE has agreed to
pay the Company an initial payment of $10,000 as well as monthly costs incurred
by the Company for development work. During the period August 10, 1998
(inception) through December 31, 2003, PCE paid the Company $1,894,348, pursuant
to this agreement, of which $1,884,348 is recorded in the financial statements
as license fees. There were no amounts paid for the years ended December 31,
2003 and 2002.
F-40
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 12 - Licensing Agreements
On August 12, 1998, PowerChannel, Inc. entered into a licensing agreement with
America Interactive Media, Inc. (AIM) to offer free Internet access to
consumers, utilizing AIM supplied set-top appliances and AIM provided Internet
service provider (Web Passport Network). This licensing agreement was superseded
by a new agreement dated May 19, 1999. The new agreement granted to
PowerChannel, Inc. an exclusive worldwide license with the right to sublicense
the "WebPassport System", the "WebPassport Intellectual Property" and the
"WebPassport Technology". PowerChannel, Inc. signed a convertible promissory
note in the amount of $1,090,000 at an interest rate of 3% above the prime rate,
which was scheduled to mature on December 31, 2000. This note represented
$90,000 in set-top appliances and $1,000,000 in prepaid license fees. During
1999, AIM sent PowerChannel, Inc. notification that is was terminating the
license agreement and requested payment in full of the underlying note.
PowerChannel, Inc. disputed the termination notice with AIM and entered into
discussions to settle the dispute. On June 30, 2000, the parties entered into a
termination agreement, which rescinded all previous agreements. Pursuant to this
termination agreement, PowerChannel Holdings, Inc. issued AIM 288,000 shares of
its common stock as payment in full for PowerChannel, Inc. retaining possession
of the set-top appliance (costing $90,000) and as settlement for the $53,000
which was owed to AIM as reimbursement of certain operating costs as called for
under the May 19th agreement. Additionally, the Company issued AIM 50,000
warrants for shares at $2.50 per share, which are exercisable for 3 years. These
warrants were cancelled in July 2003. AIM and PowerChannel, Inc. agreed to
release each other from all other liabilities associated with their
relationship.
NOTE 13 - Subsequent Events
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.
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.
F-41
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 13 - Subsequent Events (Continued)
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.
Consulting Agreements
On January 20, 2004 the Company agreed to issue an additional 260,943 shares of
common stock 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.
On January 20, 2004 the Company agreed to issued an additional 270,943 shares of
common stock to a consultant in lieu of additional compensation bonuses relating
to a one year consulting agreement originally entered into on November 24, 2003.
This consultant was also appointed in January 2004 as a director of the Company.
Consulting Agreements (Continued)
On February 6, 2004 the Company agreed to issue an additional 50,000 shares of
common stock 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.
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 860,943 shares of common stock and payment of $202,000 to the
consultant. 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.
Series A Notes
In January 2004, the Company paid an aggregate of $215,695 principal and $84,121
accrued interest to four of the remaining Original Holders of the Series A Notes
in full and final satisfaction for the Company's remaining obligations due under
their Series A Notes.
F-42
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 13 - Subsequent Events (Continued)
Other
In May 2004, the Company and 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.
In addition, in May 2004, the Company paid off the balance owed in connection
with the June 2003 Note. Simultaneously with such 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.
F-43
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from the
information contained in this prospectus. This document
may only be used where it is legal to sell the
securities. The information in this document may only
be accurate on the date of this document. 17,645,365 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 6
Use Of Proceeds 12 PowerChannel, Inc.
Market For Common Equity And Related Stockholder
Matters 12
Management's Discussion And Analysis Or Plan Of
Operation 14
Business 24
Management 40
Certain Relationships And Related Transactions 46 ________________
Security Ownership Of Certain Beneficial Owners
And Management 48 PROSPECTUS
________________
Description Of Securities 50
Plan Of Distribution 52
Selling Stockholders 55
Legal Matters 58
Experts 58
Available Information 59
Index To Financial Statements F-1 ______________, 2004
47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,056.75
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $ 51,056.75*
===========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In January 2001, the Company issued 1,381,500 pre-split shares of common stock
to the sole officer of the Company in exchange for the cancellation of $13,815
of indebtedness.
In April 2001, the Company issued 354,548 pre-split shares of common stock at
$.05 per share to the sole officer of the Company in exchange for $4,284 of
indebtedness and $16,250 of services rendered to the Company. Also, the Company
issued 222,977 pre-split shares to its six creditors in cancellation of debt. In
May 2001, the Company issued another 10,366 pre-split shares for legal services.
There was 2,625,000 pre-split shares at $.04 per share issued pursuant to a
placement memorandum for $105,000.
In September 2001, the Company issued 400,000 pre-split shares of common stock
at $.10 per share to the Company's board of directors.
In October 2001, the Company issued 150,000 shares of common stock at $.17 per
share for services rendered.
In November 2001, the Company issued 50,000 shares of common stock pursuant to a
private placement memorandum.
In January 2002, the Company issued 4,360,467 pre-split restricted shares of
common stock to the sole officer of the Company in exchange for the cancellation
of $87,209 of indebtedness.
In February 2002, the Company sold 12,500,000 pre-split shares of its restricted
common stock at $.02 per share to an accredited investor pursuant to a private
placement which shares were subsequently purchased by the sole officer of the
Company.
In April 2002, the Company issued 50,000 pre-split restricted shares of common
stock to a non-affiliate in consideration of a full release of all claims
against the Company in connection with the Lady Ole cosmetics business.
In November 2002, the Company issued 750,000 pre-split restricted shares of
common stock to two (2) non-affiliates in full settlement of pending litigation.
In December 2002, the Company effectuated a 1-for-50 reverse stock split of the
Company's common stock.
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.
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.
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. 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 from the final
closing of the offering.
On November 24, 2003, the Company entered into a consulting agreement with James
D. Davidson, a director of the Company, pursuant to which Mr. Davidson has
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agreed to provide certain corporate planning and financial restructuring advice
to the Company for a period of one year. Thereafter, on January 20, 2004, the
Company and Mr. Davidson entered into an amended and restated consulting
agreement. Pursuant to the consulting agreement, as amended, as partial
consideration the Company issued Mr. Davidson an aggregate of 1,020,943 shares
of common stock with piggyback registration rights.
On November 24, 2003, the Company entered into a consulting agreement with
Salvatore Russo pursuant to which Mr. Russo has agreed to provide certain
corporate planning and financial restructuring advice to the Company for a
period of one year, which was extended for an additional year. This agreement
was amended on January 20, 2004 and again on February 9, 2004. As partial
consideration for services provided, Mr. Russo received (i) 750,000 shares of
common stock, (ii) stock options with a term of five years to purchase 1,200,000
shares of common stock at $.20 per share and (iii) stock options with a term of
five years to purchase 2,000,000 shares of common stock at $1.00 per share.
On November 24, 2003, the Company entered into a consulting agreement with G.
Robert Tatum pursuant to which Mr. Tatum has agreed to provide certain corporate
planning and financial restructuring advice to the Company for a period of one
year. Thereafter, on January 20, 2004, the Company and Mr. Tatum entered into an
amended and restated consulting agreement. Pursuant to the consulting agreement,
as amended, the Company issued Mr. Tatum 1,010,943 shares of common stock with
piggyback registration rights.
On December 12, 2003, the Company entered into a consulting agreement with Barry
Honig pursuant which Mr. Honig agreed to provide certain business advice to the
Company for a period of one year. In consideration for entering into the
agreement, the Company issued 1,200,000 shares of common stock at an exercise
price of $.40 per share. The options are exercisable for a period of five years
and vest in increments of 250,000 on the first day of each month.
In December 2003, the Company entered into a settlement agreement with Ronald
Adams, a note holder, whereby Mr. Adams agreed to cancel his Series A Note in
consideration for the issuance of 150,000 shares.
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.
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.
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.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean PowerChannel, Inc., a Delaware
corporation.
Exhibit No. Name of Exhibit
3.1 Certificate of Incorporation(1)
3.2 Bylaws(2)
3.3 Certificate of Amendment to the Certificate of Incorporation(2)
3.4 Certificate of Amendment to the Certificate of Incorporation(4)
3.5 First Amended Plan of Reorganization(2)
3.6 Order confirming Debtor's First Amended Plan of Reorganization(2)
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent(4)
10.1 Stock Purchase Agreement and Share Exchange entered between Sealant
Solutions, Inc. and PowerChannel, Inc. (3)
10.2 Amendment No. 1 to Stock Purchase Agreement and Share Exchange entered
between Sealant Solutions, Inc. and PowerChannel, Inc. (3)
10.3 Employment Agreement entered between the Company and Steven Lampert(4)
10.4 V-ISP/Proxy Hourly Rate Service Agreement dated January 19, 2004
between the Company and Critical Hub Networks Corp., d/b/a
Caribe.Net(5)
10.5 Amended and Restated Consulting Agreement dated January 24, 2004
entered between Salvatore Russo and the Company (5)
10.6 Consulting Agreement dated December 12, 2003 entered between Barry
Honig and the Company(5)
10.7 Amended and Restated Consulting Agreement dated January 20, 2004
entered between James D. Davidson and the Company(5)
10.8 Amended and Restated Consulting Agreement dated January 20, 2004
entered between G. Robert Tatum and the Company(5)
10.9 Amendment No. 1 to the Amended and Restated Consulting Agreement
between Salvatore Russo and the Company dated April 9, 2004(5)
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10.10 Amendment No. 2 to the Amended and Restated Consulting Agreement
between Salvatore Russo and the Company dated May 10, 2004(5)
10.11 Form of Warrant issued in connection with December 2003 Private
Placement(5)
21.1 Subsidiaries of the Registrant.(6)
23.1 Consent of Yohalem Gillman & Company LLP Independent Certified Public
Accountant.
23.2 Consent of Wolinetz, Lafazan & Company, P.C. Independent Registered
Public Accountant.
23.3 Consent of legal counsel (see Exhibit 5.1).
_______________________
(1) Filed as an exhibit to the Company's registration statement of Form
S-18 .
(2) Filed as an exhibit to the Company's annual report on Form 10-KSB
for the year ended December 31, 1999.
(3) Filed as an exhibit to the Company's Form 8-K Current Report filed
July 27, 2003. (4) Filed as an exhibit to the Company's Form SB-2
Registration Statement filed February 12, 2004) (5) Filed as an exhibit
to the Company's Form SB-2/A Registration Statement filed June 29,
2004)
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ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of New
City, State of New York, on December 2, 2004.
POWERCHANNEL, INC.
By: /s/ Steven Lampert
-------------------
Name: Steven Lampert
Title: CEO, President, CFO,
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Name Title Date
CEO, President, CFO and Chairman December 2, 2004
/s/Steven Lampert of the Board
- -----------------
Steven Lampert
/s/James Davidson Director December 2, 2004
James Davidson
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