U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
POWERCHANNEL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0952186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 North Main Street, Suite 395
New City, New York 10956
(Address of Principal Executive Offices)
(845) 634-7979
(Issuer's telephone number)
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No []
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 18, 2005: 26,669,829 shares of common stock outstanding, $0.01
par value.
ITEM 1. FINANCIAL INFORMATION
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(Unaudited)
ASSETS
Current Assets:
Inventories $ 63,608
Prepaid Expenses 350
Prepaid Consulting Fees 65,837
----------------
Total Current Assets 129,795
Property and Equipment, Net 19,947
----------------
$ 149,742
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 591,002
Accrued Liabilities 1,098,368
Convertible Notes Payable 44,305
Deposits Payable 70,000
Loan Payable - Other 35,000
Advances From Related Party 1,913
----------------
Total Current Liabilities 1,840,588
----------------
Commitments and Contingencies
Minority Interest 633,357
----------------
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 15,156,341
Common Stock to be Issued, 2,370,156 Shares 1,827,756
Deferred Stock-Based Compensation (881,841)
Accumulated Other Comprehensive Income 609,061
Deficit Accumulated in the Development Stage (19,302,218)
----------------
Total Stockholders' Deficit (2,324,203)
----------------
$ 149,742
================
The accompanying notes are an integral part of the financial statements.
2
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three For The Period
Months Ended August 10, 1998
March 31, (Inception)
---------------------------------- To
2005 2004 March 31, 2005
---------------- ---------------- ----------------
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 3,305 187,500 277,724
Activation Fees - - 15,525
---------------- ---------------- ----------------
Total Revenues 3,305 187,500 303,249
---------------- ---------------- ----------------
Costs and Expenses:
Cost of Sales 260 187,500 167,709
Write-Down of Inventories - - 510,706
Selling, General and Administrative Expenses 132,922 529,342 7,878,640
Impairment Loss on Investment - - 573,887
Settlement of Debt - - 111,300
Equity-Based Compensation 333,470 1,841,821 8,034,237
Reversal of Equity Based Compensation Due to
Cancellation and Nullification of Contract - - (479,934)
---------------- ---------------- ----------------
Total Costs and Expenses 466,652 2,558,663 16,796,545
---------------- ---------------- ----------------
Loss Before Loss From Unconsolidated Affiliate
And Other Income (Expense) (463,347) (2,371,163) (16,493,296)
Loss from Unconsolidated Affiliate - - (2,636,913)
Minority Interest in Net Loss of Subsidiary - - 5,655
Interest Expense (2,017) (4,042) (177,664)
---------------- ---------------- ----------------
Net Loss $ (465,364) $(2,375,205) $ (19,302,218)
================ ================ ================
Basic and Diluted Net Loss Per Share $ (.02) $ (.10)
================ ================
Weighted Average Shares Outstanding - Basic and Diluted 26,669,829 22,897,640
================ ================
Pro-Forma Net Loss Per Share (Basic and Diluted) $ (.02) $ (.10)
================ ================
Pro-Forma Weighted Average Shares Outstanding
(Basic and Diluted) 29,039,985 24,833,993
================ ================
The accompanying notes are an integral part of the financial statements.
3
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three For The Period
Months Ended August 10, 1998
March 31, (Inception)
---------------------------------- To
2005 2004 March 31,2005
---------------- ---------------- ----------------
Cash Flow From Operating Activities:
Net Loss $ (465,364) $ (2,375,205) $ (19,302,218)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Intrinsic Value of Beneficial Conversion Feature
of Convertible Notes - - 280,000
Equity-Based Compensation 333,470 1,841,821 7,653.755
Expense Recorded on Issuance of Common Stock
for Debt Settlement - - 111,300
Loss on Investment in PowerChannel Europe PLC - - 2,328,587
Minority Interest in Net Loss of Subsidiary - - (5,655)
Reserve for Bad Debts - 93,750 110,831
Loss on Asset Disposal - - 20,456
Write-Down of Inventories - - 510,706
Depreciation 2,127 4,531 106,486
Impairment Loss on Investment in PowerChannel
Europe PLC - - 573,884
Change in Current Operating Assets and Liabilities:
(Increase) in Accounts Receivable - (187,500) (110,831)
(Increase) Decrease in Inventories 261 187,500 (574,314)
(Increase) Decrease in Prepaid Expenses 27,800 (118,752) (66,187)
(Increase) in Other Assets - (70,924) -
Increase (Decrease) Due to PowerChannel Europe PLC,
Relating to Operations - (10,000) 639,632
Increase (Decrease) in Accounts Payable and Accrued
Liabilities 56,283 (61,184) 1,424,951
Increase in Deposits Payable - - 45,000
Other - - 13,509
---------------- ---------------- ----------------
Net Cash (Used) in Operating Activities (45,423) (695,963) (6,240,108)
---------------- ---------------- ----------------
Cash Flow From Investing Activities:
Purchase of Property and Equipment - (14,216) (146,890)
Net Liabilities Acquired in Reverse Merger, Net of Cash - - (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
Payments for PCE Stock - -
---------------- ---------------- ----------------
Net Cash Provided by (Used) in Investing Activities - (14,216) (203,741)
---------------- ---------------- ----------------
The accompanying notes are an integral part of the financial statements.
4
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For the Three For The Period
Months Ended August 10, 1998
March 31, (Inception)
--------------------------------- To
2005 2004 March 31, 2005
---------------- ---------------- ----------------
Cash Flow From Financing Activities:
Proceeds from Issuance of Common Stock - 2,187,500 3,832,864
Fees Paid on Sale of Common Stock - (265,000) (275,000)
Loans and Advances from Related Parties 3,248 - 2,776,322
Advances to Related Party - (56,607) (56,607)
Repayments of Advances to Related Party - 43,300 43,300
Repayments of Loans and Advances from Related Parties (1,335) - (1,335)
Proceeds from Note Payable - - 112,000
Proceeds from Convertible Notes - - 280,000
Proceeds from Deposits Payable - 25,000 25,000
Proceeds from Loan Payable 35,000 - 35,000
Payments of Convertible Notes - (215,695) (215,695)
Payment of Note Payable - - (112,000)
---------------- ---------------- ----------------
Net Cash Provided By Financing Activities 36,913 1,718,498 6,443,849
---------------- ---------------- ----------------
Net Increase (Decrease) in Cash (8,510) 1,008,319 -
Cash - Beginning of Period 8,510 25,265 -
---------------- ---------------- ----------------
Cash - End of Period $ - $ 1,033,584 $ -
================ ================ ================
Supplemental Cash Flow Information:
Cash Paid For Interest $ 2,017 $ 84,769 $ 96,770
================ ================ ================
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 $ - $ 3,764,917 $ 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 $ 187,060
================ ================ ================
Repayment of Advances to Related Party by Applying Accrued
Salaries $ - $ 13,307 $ 13,307
================ ================ ================
The accompanying notes are an integral part of the financial statements.
5
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For The Period
For the Three Months Ended August 10, 1998
March 31, (Inception)
---------------------------------- To
2005 2004 March 31,2005
---------------- ---------------- ----------------
Issuance of 120,000 Shares of Common Stock as Payment for
Accrued Liabilities $ - $ - $ 75,600
================ ================ ================
Issuance of 286,687 Shares of Common Stock as Consideration
for Purchase of PCE Shares from Related Parties $ - $ - $ 77,455
================ ================ ================
Cancellation of 286,687 Shares of Common Stock by
Related Parties $ - $ - $ 2,869
================ ================ ================
Additional Paid-In Capital Arising from Acquisition of PCE $ - $ - $ 1,407,300
================ ================ ================
Payable on Purchase of PCE Stock $ - $ - $ 14,898
================ ================ ================
Penalties Accrued and Charged Against Additional Paid-In
Capital Pursuant to Private Placement $ - $ - $ 298,500
================ ================ ================
Minority Interest $ - $ - $ 639,012
================ ================ ================
The accompanying notes are an integral part of the financial statements.
6
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
Certain items in these condensed consolidated financial statements have
been reclassified to conform to the current period presentation,
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 $ 85,949
Furniture and Fixtures 26,622
Leasehold Improvements 8,000
-----------------
120,571
Less: Accumulated Depreciation 100,624
-----------------
$ 19,947
Depreciation expense amounted to $2,127 and $4,531 for the three months
ended March 31, 2005 and 2004, respectively.
7
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - 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 and $84,121 accrued interest to four note holders. At March
31, 2005, the remaining balance due on these notes was $44,305.
NOTE 4 - Advances from Related Party
Advances from related party represents funds advanced to the Company by its
President. Such advances are non-interest bearing and have no specific repayment
terms.
NOTE 5 - Commitments and Contingencies
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.
A stockholder has demanded the return of his $100,000 investment. The
Company intends to respond to this complaint shortly in the Supreme Court of the
State of New York, New York County.
Antidilution Agreement
Steven Lampert, the Company's President, 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 in order for 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 March 31, 2005, 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.
Unaudited Financial Statements
We are unable to obtain an audit report on our financial statements for the
period August 10, 1998 (inception) to December 31, 2002 from our predecessor
auditors. The Company has corresponded with the Securities and Exchange
Commission regarding this issue and has been advised by the Commission that they
would not object to the Company presenting such information on an unaudited
basis in the Company's Form 10-KSB for the year ended December 31, 2004. As a
result, all required development stage company financial statements and
disclosures included in this Form 10-KSB, pursuant to SFAS 7, covering the
cumulative period from August 10, 1998 (inception) through December 31, 2004 has
been provided on an unaudited basis.
No assurance can be given that the Commission will not object in the future
to the presentation of such information on an unaudited basis. Should such
information be required to be presented in future filings on an audited basis,
the failure to so provide such information may result in the Company failing to
maintain its status as a current reporting issuer which could result in the
Company's securities being delisted from the Over The Counter Bulletin Board
and/or the imposition of fines, sanctions and/or penalties.
8
POWERCHANNEL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - Commitments and Contingencies (Continued)
Accrued Liabilities
Included in accrued liabilities at March 31, 2005 are payroll taxes payable
of approximately $207,000 of which approximately $150,000 are under federal tax
liens. Such liens can result in enforcement action by the Federal government to
satisfy those liens.
Settlement Agreement
On December 17, 2004 the Company entered into a settlement agreement with a
former consultant and other individuals. The settlement agreement calls for,
among other things, (1) the termination of certain consulting agreements entered
into between the Company and the former consultant on August 18, 2003 and
December 12, 2003; (2) the termination of options for 1.5 million shares; (3)
the cancellation of 449,672 shares of common stock; (4) mutual general releases;
and (5) the cancellation of 699,672 shares of common stock.
Accordingly, the Company recorded a credit on the statement of operations
of $26,298 attributable to 2003 and $453,636 attributable to 2004 pertaining to
the part of the consulting agreement relating to the stock option cancellation
for the year ended December 31, 2004.
Since the 449,672 and 699,672 shares of common stock have not yet been
returned to the Company for cancellation by the transfer agent, the effect of
the transaction has not been recognized for financial reporting purposes.
NOTE 6 - Subsequent Events
In July 2004 the Company 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. AKW Holdings, LLC is seeking unpaid rents of approximately
$160,000 and attorneys' fees and interest. On April 19, 2005 an order and
judgment was filed in the Supreme Court of the State of New York - County of
Rockland against the Company in the amount of $199,676. The Company believes
this judgment is baseless and without merit and intends to vigorously defend
this lawsuit.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 $6,116 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
Three Months Ended March 31, 2005 compared to Three Months Ended March 31, 2004
Revenues
During the three months ended March 31, 2005 we had net sales of $3,305. During
the three months ended March 31, 2004, we had sales in the amount of $187,500.
The decrease in the revenues resulted from the decrease in market demand for our
products.
Costs and Expenses
Cost and expenses incurred for the three months ended March 31, 2005, aggregated
$466,652 as compared to $2,558,663 for the three months ended March 31, 2004.
Cost and expenses decreased by $2,092,011 for the three months ended March 31,
2005 when compared to the comparable period of the prior year. This decrease
resulted from the following:
o cost of sales of $260 during the three months ended March 31, 2005 as
compared to $187,500 for the three months ended March 31, 2004, which
represents a decrease of $187,240;
o selling, general and administrative expenses for the three months
ended March 31, 2005 of $132,922, as compared to $529,342 during the
three months ended March 31, 2004, which represents a decrease of
$396,420; and
o stock based compensation in the amount of $333,470 during the three
months ended March 31, 2005 as compared to $1,841,821 during the three
months ended March 31, 2004, which represents a decrease of
$1,508,351.
10
Net Loss
The net loss was $465,364 for the three months ended March 31, 2005, as compared
to a net loss of $2,375,205 for the three months ended March 31, 2004. The net
loss decreased by $1,909,841 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 three months ending March 31,
2005.
Liquidity and Capital Resources
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 March 31, 2005, we had total current assets of $129,795 and total current
liabilities of $1,840,588 resulting in a working capital deficit of $1,710,793.
In addition, we had a stockholders deficit of $2,324,203 at March 31, 2005.
We are a development stage company that has a working capital deficit at March
31, 2005 of $1,710,793 and for the period August 10, 1998 (inception) to March
31, 2005 has incurred net losses aggregating $19,302,218. 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 (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.
11
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.
Since the merger in July 2003 through March 2005, our investors have provided
funding, net of expenses, of approximately $2,338,000 in cash, and various
parties have provided services valued at approximately $7,554,000, in
consideration for the issuance of securities issued or to be issued. The Company
needs to raise an additional $2,000,000 during the next 12 months to effectively
institute its business plan to market and distribute its products. The Company
is currently negotiating debt and/or equity financing arrangements to provide an
alternative source for its future capital needs. However, there can be no
assurance that it will be able to obtain this capital on acceptable terms, if at
all. In such an event, this may have a materially adverse effect on our
business, operating results and financial condition.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These estimates form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. We base our estimates and judgments
on historical experience and all available information. However, future events
are subject to change, and the best estimates and judgments routinely require
adjustment. US GAAP requires us to make estimates and judgments in several
areas, including those related to recording bad debt allowances, various
accruals (such as incentive compensation and restructuring costs), income taxes,
the useful lives of long-lived assets, such as property and equipment and
intangible assets, and potential losses from contingencies and litigation. We
believe the policies discussed below are the most critical to our consolidated
financial statements because they are affected significantly by management's
judgments, assumptions and estimates.
Accounts Receivable
Management determines the allowance for bad debts based on known troubled
accounts, historical experience, and other currently available evidence. The
Company has an allowance for bad debts of $110,831 at March 31, 2005.
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.
12
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.
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 Task 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
Solutions 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
2,370,156 and 1,504,193 common shares at March 31, 2005 and March 31, 2004,
respectively, reserved to be issued pending potential litigation (see Note 11 to
Consolidated Financial Statements).
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 December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R ("SFAS 123R") "Share Based Payment," a revision of Statements
No. 123, "Accounting for Stock Based Compensation." This standard requires the
Company to measure the cost of employee services received in exchange for equity
awards based on grant date fair value of the awards. The Company is required to
adopt SFAS 123R effective January 1, 2006. The standard provides for a
prospective application. Under this method, the Company will begin recognizing
compensation cost for equity based compensation for all new or modified grants
after the date of adoption. In addition, the Company will recognize the unvested
portion of the grant date fair value of awards issued prior to the adoption
abased on the fair values previously calculated for disclosure purposes. At
December 31, 2004, the Company had no unvested options.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of Accounting Research Bulletin
No. 51" ("FIN No. 46"). This interpretation provides guidance related to
identifying variable interest entities (previously known generally as special
purpose entities or SPEs) and determining whether such entities should be
consolidated. Certain disclosures are required when FIN No. 46 becomes effective
if it is reasonably possible that a company will consolidate or disclose
information about a variable interest entity when it initially applies FIN No.
46. This interpretation must be applied immediately to variable interest
entities created or obtained after January 31, 2003. For those variable interest
entities created or obtained on or before January 31, 2003, the Company must
apply the provisions of FIN No. 46 for the year ended December 31, 2003. FIN No.
46 did not have a significant impact on the Company's consolidated financial
position or results of operations.
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On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how financial instruments that have characteristics of
both liabilities and equity instruments should be classified on the balance
sheet. The requirements of SFAS No. 150 generally outline those financial
instruments that give the issuer a choice of settling an obligation with a
variable number of securities or settling an obligation with a transfer of
assets or any mandatory redeemable security should be classified as a liability
on the balance sheet. At December 31, 2004, the Company does not have any
instruments that are within the scope of SFAS No. 150.
Risk Factors
Risks Related to Our Business
If we are unable to merge with a new business, our stockholders will lose their
entire investment
Due to the decrease in business activity associated with our Intenet access
business, we will attempt to locate and negotiate with a business entity for the
merger of that target business into our company. In certain instances, a target
business may wish to become a subsidiary of our company or may wish to
contribute assets to our company rather than merge. No assurances can be given
that our company will be successful in locating or negotiating with any target
business. If we are unsuccessful in merging or acquiring the assets of a
business entity we may cease all operations and all shareholders will lose their
investment in our stock.
We have a history of losses since our inception and expect to incur losses for
the foreseeable future.
We incurred net losses for the three months ended March 31, 2004 of $2,375,205
and for the three months ended March 31, 2005 we incurred losses of $465,364.
During the three months ended March 31, 2005 we had net sales of $3,177. 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.
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, 2004, our independent auditors stated that our
financial statements for the year ended December 31, 2004 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.
In connection with the filing of our Form 10-KSB for the year ended December 31,
2004, we were unable to obtain an audit report on our financial Statements for
the period covering August 10, 1998 (inception) to December 31, 2002, and the
inability to obtain such report may affect the Company' ability to provide the
necessary financial information required to maintain its status as a current
reporting issuer which could result in the Company's securities being delisted
from the Over The Counter Bulletin Board.
In connection with the filing of our Form 10-KSB for the year ended December 31,
2004, we were unable to obtain an audit report on our financial Statements for
the period covering August 10, 1998 (inception) to December 2002 from our
predecessor auditors, Yohalem Gillman & Company, LLP. The Company had previously
included such report in its prior filings, including its annual report on Form
10-KSB for the year ended December 31, 2003, as well as its registration
statement, as amended, on Form SB-2 (SEC file No. 333-112784). The Company
corresponded with the Securities and Exchange Commission regarding this issue
and was advised by the Commission that they would not object to the Company
presenting such information on an unaudited basis in its Form 10-KSB for the
year ended December 31, 2004. As a result, all required development stage
company financial statements and disclosures included in the Form 10-KSB,
pursuant to SFAS 7, covering the cumulative period from August 10, 1998
(inception) through December 31, 2004 was provided on an unaudited basis.
14
No assurance can be given that the Company will Commission will not object in
the future to the presentation of such information on an unaudited basis. Should
such information be required to be presented in future filings on an audited
basis, the failure to so provide such information may result in the Company
failing to maintain its status as a current reporting issuer which could result
in the Company's securities being delisted from the Over The Counter Bulletin
Board and/or the imposition of fines, sanctions and/or penalties.
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.
Risks Related To Our 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.
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.
15
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.
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, 2004 which states that, due to
recurring losses from operations since inception of our company, there is
substantial doubt about our ability to continue as a going concern. Our
financial statements for the three months ended March 31, 2005 do not include
16
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.
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.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer (collectively the
"Certifying Officers") maintain a system of disclosure controls and procedures
that is designed to provide reasonable assurance that information, which is
required to be disclosed, is accumulated and communicated to management timely.
Under the supervision and with the participation of management, the Certifying
Officers evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule [13a-14(c)/15d-14(c)]
under the Exchange Act) as of March 31, 2005. Based upon that evaluation, the
Certifying Officers concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relative to our
company required to be disclosed in our periodic filings with the SEC.
(b) Changes in internal controls.
Our Certifying Officers have indicated that there were no significant changes in
our internal controls or other factors that could significantly affect such
controls subsequent to the date of their evaluation, and there were no such
control actions with regard to significant deficiencies and material weaknesses.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Except for the following, we are currently not a party to any material legal
proceedings.
o In October 2003, a stockholder alleging investment fraud filed a claim
in the Civil Court of the City of New York seeking damages in the
amount of approximately $50,000;
o In April 2003, a stockholder alleging investment fraud filed a claim
in the Supreme Court of Nassau County seeking damages in the amount of
$25,000 plus interest. The plaintiff has withdrawn his claim but may
commence this action at a future point in time;
o In December 2004, a stockholder alleging investment fraud filed a
claim in the Supreme Court of the State of New York, County of New
York seeking damages in the amount of approximately $100,000;
o On July 20, 2004, the Company filed a complaint In the Circuit Court
of the 11th Judicial Circuit in and for Miami-Dade County, Florida
against Knightsbridge Holdings, LLC, Advantage Fund I, LLC, Triple
Crown Consulting Co., Phoenix Capital Partners, LLC, Churchill
Investments, Inc., Alyce B. Schreiber, Robert Press, Benjamin Kaplan,
Newbridge Securities Corporation and Anslow & Jacklin, LLP, the
Company's former attorneys. The Company is seeking relief deemed
appropriate by the court and to establish a constructive trust over
all securities held by the defendants and all proceeds from the sale
of such securities. The Company is also seeking to rescind the Letter
Agreement entered with Knightsbridge Holdings, LLC. In its complaint,
the Company alleged fraudulent inducement, breach of contract,
conspiracy and breach of fiduciary duty.
o In July 2004 the Company 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. AKW Holdings, LLC is seeking
unpaid rents of approximately $160,000 and attorneys' fees and
interest. On April 19, 2005 an order and judgment was filed in the
Supreme Court of the State of New York - County of Rockland against
the Company in the amount of $199,676. The Company believes this
judgment 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.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security None Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
Exhibit Number Description
31.1 Certification of CEO and CFO Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
32.1 Certification of CEO and CFO Pursuant to section 906 of the
Sarbanes Oxley Sarbanes Oxley Act of 2002
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized, on November 19, 2004.
POWERCHANNEL, INC.
Date: June 6, 2005 By: /s/ Steven Lampert
-------------------------
Steven Lampert
Chairman and President
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