SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended April 30, 2006
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to____________
COMMISSION FILE NUMBER: 0-50062
CELL POWER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Florida 59-1082273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1428 36TH STREET, SUITE 205,
BROOKLYN, NEW YORK 11218
(Address of principal executive offices, including zip code)
(718) 436-7931
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by a check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|.
As of July 13, 2006, there were 5,999,593 shares of the small business
issuer's common stock outstanding, after giving effect to the reverse stock
split that effected as of April 10, 2006.
Transitional Small Business disclosure format (check one) Yes |_| No |X|
INDEX PAGE
PART I -- FINANCIAL INFORMATION
Page
Number
Forward Looking Statements (i)
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at April 30, 2006 (unaudited) 1-2
Condensed Consolidated Statements of Operations for the six and three
months ended April 30, 2006 and 2005 and for the period from
September 22, 2003 (inception) to April 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the six and three
months ended April 30, 2006 and 2005 and for the period from
September 22, 2003 (inception) to April 30, 2006 (unaudited) 4-5
Notes to the Condensed Consolidated Financial Statements 6-13
Item 2 - Management's Discussion and Analysis or Plan of Operation 14
Item 3 - Controls and Procedures 19
PART II--OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3 - Defaults upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits 20
Signatures 21
FORWARD LOOKING STATEMENTS
The following discussion and explanations should be read in conjunction with the
financial statements and related notes contained elsewhere in this Form 10-QSB.
Certain statements made in this discussion are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by terminology such as "may",
"will", "should", "expects", "intends", "anticipates", "believes", "estimates",
"predicts", or "continue" or the negative of these terms or other comparable
terminology. Because forward-looking statements involve risks and uncertainties,
there are important factors that could cause actual results to differ materially
from those expressed or implied by these forward-looking statements. Although
Cell Power believes that expectations reflected in the forward-looking
statements are reasonable, it cannot guarantee future results, performance or
achievements. Moreover, neither Cell Power nor any other person assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Cell Power is under no duty to update any forward-looking statements
after the date of this report to conform such statements to actual results.
(i)
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
April 30, 2006
ASSETS
CURRENT ASSETS
Cash $ 658
Prepaid expenses 9,474
-------
TOTAL ASSETS $10,132
=======
See Notes to Condensed Consolidated Financial Statements.
1
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
April 30, 2006
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 121,394
Accrued interest 3,048
Accrued expense 132,595
Note payable, net of unamortized discount of $5,699 104,301
Convertible notes payable 456,000
-----------
TOTAL CURRENT LIABILITIES 817,338
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock, no par value, 100,000,000 shares authorized;
5,359,593 shares issued and 5,258,260 outstanding 2,531,644
Paid-in capital deficiency (359,399)
Deficit accumulated during the development stage (2,523,451)
-----------
(351,206)
Less: treasury stock, 101,333 shares (at cost) (456,000)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (807,206)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 10,132
===========
See Notes to Condensed Consolidated Financial Statements.
2
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Period from
September
22, For the For the
For the Six For the Six 2003 Three Three
Months Months (Inception) Months Months
Ended Ended to Ended Ended
April 30, April 30, April 30, April 30, April 30,
2006 2005 2006 2006 2005
----------- ----------- ----------- ----------- -----------
REVENUE
Product sales $ -- $ 164,445 $ 195,695 $ -- $ 164,445
Royalties 14,098 29,910 175,684 -- 6,210
----------- ----------- ----------- ----------- -----------
TOTAL REVENUE 14,098 194,355 371,379 -- 170,655
----------- ----------- ----------- ----------- -----------
COST OF GOODS SOLD
Product costs -- 151,420 172,685 -- 150,020
Amortization of intangibles 15,000 15,000 77,500 7,500 7,500
----------- ----------- ----------- ----------- -----------
TOTAL COST OF GOODS SOLD 15,000 166,420 250,185 7,500 157,520
----------- ----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (902) 27,935 121,194 (7,500) 13,135
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Bad debt expense 35,104 -- 35,104 35,104 --
Impairment loss on intangible asset 202,510 -- 202,510 202,510 --
Consulting fees -- 323,967 1,421,249 -- 112,000
Professional fees 76,099 154,142 504,576 47,609 77,378
Officer's salary -- 20,000 139,160 -- --
Marketing and other 26,127 45,370 171,614 15,332 16,340
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 339,840 543,479 2,474,213 300,555 205,718
----------- ----------- ----------- ----------- -----------
OPERATING LOSS (340,742) (515,544) (2,353,019) (308,055) (192,583)
----------- ----------- ----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest expense - related parties -- -- 62,974 -- --
Interest expense 40,980 -- 71,750 16,532 --
Late filing penalty on common stock
registration -- -- 132,595 -- --
Interest income -- (1,107) (1,117) -- (417)
----------- ----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES (INCOME) 40,980 (1,107) 266,202 16,532 (417)
----------- ----------- ----------- ----------- -----------
NET LOSS $ (381,722) $ (514,437) $(2,619,221) $ (324,587) $ (192,166)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common share $ (0.07) $ (0.10) $ (0.06) $ (0.04)
=========== =========== =========== ===========
Weighted-average common shares outstanding 5,346,157 5,359,593 5,332,268 5,359,593
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Period from
September 22,
For the Six 2003
For the Six Months (Inception)
Months Ended Ended to
April 30, April 30, April 30,
2006 2005 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (381,722) $ (514,437) $(2,619,221)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred consulting fees -- 145,467 440,000
Stock issued for services -- -- 6,600
Stock options issued for services -- -- 10,999
Amortization of discount on note payable 38,335 -- 47,703
Amortization of intangibles 15,000 15,000 77,500
Impairment loss on intangible asset 202,510 -- 202,510
Write off of accounts receivable 35,104 -- 35,104
Changes in operating assets and liabilities:
Increase in accounts receivable (14,098) (188,145) (35,104)
Decrease (increase) in prepaid expenses 572 (17,500) (9,474)
Increase in accounts payable 58,657 24,424 120,144
Increase in accrued interest 2,646 -- 3,048
Increase in accrued expenses 1,250 -- 133,845
Decrease in deferred revenue -- -- (30,000)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (41,746) (535,191) (1,616,346)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of intangible assets -- -- (100,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of stock redemption liability -- -- (300,000)
Advances from related parties -- -- 300,000
Repayment of advances from related parties -- -- (300,000)
Proceeds from notes payable - related parties -- -- 600,000
Repayment of notes payable -related parties -- -- (600,000)
Proceeds from notes payable 40,000 -- 110,000
Repayment of notes payable assumed -- -- (150,000)
Proceeds from issuance of common stock (net of
stock issue costs of $203,116) -- -- 2,056,778
Collection of stock subscription receivable -- -- 226
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 40,000 $ -- $ 1,717,004
----------- ----------- -----------
See Notes to Condensed Consolidated Financial Statements.
4
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Period from
September 22,
For the Six 2003
For the Six Months (Inception)
Months Ended Ended to
April 30, April 30, April 30,
2006 2005 2006
------------- ------------- -------------
NET DECREASE IN CASH $ (1,746) $ (535,191) $ 658
CASH - Beginning of period 2,404 553,475 --
------------- ------------- -------------
CASH - End of period $ 658 $ 18,284 $ 658
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ -- $ -- $ 83,975
Non-cash investing and financing activities:
Issuance of common stock warrants in connection
with note payable $ 21,541 $ -- $ 53,402
Repurchase of common stock and warrants with
convertible notes payable $ 456,000 $ -- $ 456,000
See Notes to Condensed Consolidated Financial Statements.
5
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - THE COMPANY
ORGANIZATION
Pursuant to the terms and conditions of an exchange agreement effective November
3, 2003 (the "Exchange Agreement"), e-The Movie Network, Inc. ("ETMV"), now
known as Cell Power Technologies, Inc., a Florida Corporation ("Cell Power" or
the "Company"), acquired all the outstanding membership interests of Cell Power
Technologies LLC ("Cell Power LLC"), a Delaware limited liability company
engaged in the marketing and distribution of portable cell phone batteries.
Immediately prior to the consummation of the Exchange Agreement, ETMV was an
inactive public shell. Pursuant to the Exchange Agreement, ETMV repurchased
3,333,333 shares of its common stock for $300,000 and accounted for them as
treasury stock. The shares were cancelled and EMTV then issued 3,933,333 shares
of common stock in exchange for 100% of the outstanding membership units of Cell
Power LLC. Each membership unit of Cell Power LLC was exchanged for 16,667
shares of ETMV common stock. As a result of this exchange, the members of Cell
Power LLC gained voting control of ETMV and, thus, the exchange was accounted
for as a reverse acquisition and Cell Power LLC became a wholly-owned subsidiary
of ETMV.
On April 29, 2004, ETMV changed its name to Cell Power Technologies, Inc.
DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
The Company acquired certain revenue/royalty rights, product purchasing rights
and exclusive sub-distribution rights, in certain markets in the western
hemisphere, to "Cellboost" for a period of ten years (see Note 6). Cellboost is
a compact, non-rechargeable, and disposable cellular telephone battery. A
substantial amount of the Company's time and capital recourses are being devoted
to developing its plan to distribute Cellboost. On March 17, 2006, the Company
entered into the merger agreement discussed in further detail in Note 9 below.
As a development stage enterprise, the Company is subject to all of the risks
and uncertainties that are associated with starting a new business (see Note 2).
1-for-6 REVERSE STOCK SPLIT
Unless otherwise indicated, all share numbers set forth in this Form 10-QSB,
including corresponding per share exercise prices and conversion prices, as
applicable, have been provided on a post-split basis so as to reflect the effect
of the 1-for-6 reverse stock split (See Note 9). As used in this Form 10-QSB,
the terms "reverse split" and "reverse stock split" refer to the 1-for-6 reverse
stock split of the Company's outstanding shares of common stock, which was
effected on April 10, 2006.
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The Company's consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As of April 30, 2006, the Company has
incurred accumulated net losses of $2,619,221 since its inception and has
negative working capital and stockholders' deficiency of $807,206. The Company
has limited capital resources and believes its existing cash resources will not
be sufficient to maintain operations through the third fiscal quarter of 2006.
Accordingly, the Company will require additional funding in order to maintain
its operations, market its products and execute its overall business plan. The
Company expects to incur additional losses in the foreseeable future. There is
no assurance that the Company will generate revenue or raise the funds that it
needs to maintain its operation. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.
The Company's ability to continue to operate as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan and secure funding sufficient to provide for the working
capital needs of the business. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Management
is currently in the process of executing its business plan. There can be no
assurance that management will be successful in implementing its business plan
or that the successful implementation of such business plan will actually
improve the Company's operating results. On March 17, 2006, the Company entered
into the merger agreement discussed in further detail in Note 9.
6
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements contained herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements, the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, these
financial statements do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for
annual financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make the financial
position of the Company at April 30, 2006, and its results of operations and
cash flows for the six months ended April 30, 2006 not misleading. Operating
results for the six months ended April 30, 2006 are not necessarily indicative
of the results that may be expected for the fiscal year ending October 31, 2006.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Cell Power and its wholly owned subsidiary Cell Power LLC. All
significant intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company generates revenue from two specific sources; (a) royalties on the
sale of individual Cellboost units generated by other entities in certain
markets; and (b) Cellboost product sales generated by the Company. Revenues
generated from either royalty rights or Company product sales are recognized
when persuasive evidence of an arrangement exists pursuant to which units are
shipped, the fee is fixed or determinable and collectibility is reasonably
assured. Revenues from royalties of Cellboost units were $14,098 and $29,910 for
the six months ended April 30, 2006 and 2005, respectively. Revenues from the
distribution of the Cellboost product were $0 and $164,445 for the six months
ended April 30, 2006 and 2005, respectively.
7
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
EMPLOYEE STOCK OPTIONS
As permitted under Statement of Financial Accounting Standard ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure," which
amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation,"
the Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements, as defined by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees," and related interpretations including Financial Accounting
Standards Board Interpretations No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB No. 25.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the six and three months ended April 30,
2006 and 2005, respectively:
Six Months Ended Three Months Ended
April 30, April 30,
2006 2005 2006 2005
--------- --------- --------- ---------
Net loss as reported $(381,722) $(514,437) $(324,587) $(192,166)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (2,755) (4,514) (1,377) (2,257)
--------- --------- --------- ---------
Pro forma net loss $(384,477) $(518,951) $(325,964) $(194,423)
========= ========= ========= =========
Net loss per share, basic and diluted
as reported $ (0.07) $ (0.10) $ (0.06) $ (0.04)
========= ========= ========= =========
Pro forma net loss per share,
basic and diluted $ (0.07) $ (0.10) $ (0.06) $ (0.04)
========= ========= ========= =========
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share Based Payment". This statement is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS No. 123R addresses all forms of share based payment ("SBP")
awards including shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights. Under SFAS No. 123R,
SBP awards result in a cost that will be measured at fair value on the awards'
grant date, based on the estimated number of awards that are expected to vest
and will be reflected as compensation expense in the financial statements. This
statement is effective for public entities that file as small business issuers
as of the beginning of the first annual reporting period that begins after
December 15, 2005. Upon adoption of this pronouncement the Company anticipates
using the modified prospective method. The impact of this statement will require
the Company to record a charge for the fair value of stock options granted on a
prospective basis over the vesting period.
8
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets". This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
provisions of this Statement should be applied prospectively. The adoption of
this pronouncement did not have a material effect on the Company's financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements." This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS No. 154 will
have a material effect on its financial statements.
In September 2005, the FASB ratified EITF 05-7, "Accounting for Modifications to
Conversion Options Embedded in Debt Instruments and Related Issues", which
addresses whether a modification to a conversion option that changes its fair
value affects the recognition of interest expense for the associated debt
instrument after the modification, and whether a borrower should recognize a
beneficial conversion feature, not a debt extinguishment, if a debt modification
increases the intrinsic value of the debt (for example, the modification reduces
the conversion price of the debt). The Company does not believe that the
adoption of EITF Issue No. 05-7 will have a material effect on its financial
statements.
In September 2005, the FASB also ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in the shareholder's equity for book purposes, but as a liability for
income tax purposes), and, if so, whether that basis difference is a temporary
difference under SFAS No. 109, "Accounting for Income Taxes." This Issue should
be applied by retrospective application pursuant to SFAS No. 154 to all
instruments with a beneficial conversion feature accounted for under EITF Issue
00-27 included in financial statements for annual reporting periods beginning
after December 15, 2005. The Company does not believe that the adoption of SFAS
No. 154 will have a material effect on its financial statements
9
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss applicable to common
shares by the number of weighted-average of common shares outstanding during the
period. Common stock equivalents have been excluded from the weighted-average
shares for the six and three months ended April 30, 2006 and 2005, as inclusion
is antidilutive. Potentially dilutive securities included an aggregate 895,003
and 698,336 stock options and warrants for the purchase of common stock at April
30, 2006 and 2005, respectively.
NOTE 5 - SIGNIFICANT CUSTOMERS
During the six months ended April 30, 2006 and 2005 the Company's royalty
revenue was generated entirely from royalties received from E&S International
Enterprises, Inc. ("E&S").
NOTE 6 - INTANGIBLE ASSETS AND IMPAIRMENT
The Company acquired certain revenue/royalty rights, product purchasing rights
and exclusive sub-distribution rights, in certain markets, for Cellboost. These
rights had been recorded as an intangible asset on the Company's books and
amortized using the straight-line method over the term of the agreement, which
is 112 months..
The Company reviews the carrying value of its intangible assets when specific
events and circumstances would indicate that their carrying amounts may not be
recoverable. The Company considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of the intangible
assets can be recovered. If it is determined that the carrying value of the
intangible assets will not be recovered from the undiscounted future cash flows,
the carrying value of the assets would be considered impaired. An impairment
charge is measured as the excess of the carrying amount of an intangible asset
over its estimated fair value. The Company, based on its most recent evaluation
which included the current status of the complaint against E&S, determined that
its intangible assets were impaired at April 30, 2006 and as such recorded an
impairment charge of $202,510 for the six and three months ended April 30, 2006
in the accompanying condensed consolidated statement of operations which
resulted in a value to the intangible assets of $0.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
CONSULTING SERVICES CONTRACTS
In October 2003, the Company entered into a consulting services contract with an
entity that was considered to be a related party prior to the Exchange
Agreement. The original terms of the agreement required monthly payments of
$35,000 for five years. In December 2004, the Company and the consultant amended
the consulting services contract to reduce the required monthly payments to
$17,500 commencing in January 2005. The Company and the consultant agreed that
the consultant would waive the amounts due for November and December 2005 and
January 2006. The Company did not incur fees under this contract during the six
and three months ended April 30, 2006, respectively, and $140,000 and $52,500
for the six and three months ended April 30, 2005, respectively.
10
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
EMPLOYMENT AGREEMENT
The Company entered into a three-year employment agreement, effective November
1, 2003, with its Chief Executive Officer and President. The Agreement
originally provided for a salary of $120,000 per annum incentive bonuses and
options to purchase 83,333 shares of the Company's common stock, pursuant to
terms in the Agreement. In December 2004, the Company and its Chief Executive
Officer entered into an amendment to the employment agreement pursuant to which,
beginning in January 2005 and continuing through the term of the Agreement, the
Chief Executive Officer is not entitled to a salary. There was no compensation
expense under this agreement for the six and three months ended April 30, 2006,
respectively, and $20,000 and $0 for the six and three months ended April 30,
2005, respectively, and is presented as officer's salary in the accompanying
condensed consolidated statements of operations.
COMPLAINT AGAINST E&S
In September 2005, the Company filed a complaint in the Superior Court of the
State of California in Los Angeles County against E&S and certain other
defendants alleging, among other things, that E&S has purported to grant a third
party the exclusive right to distribute Cellboost units Latin America without
the Company's consent in violation of the royalty and sub-distribution agreement
and asset purchase agreement and has falsified sales reports to reduce the
reported number of Cellboost units sold and otherwise withheld information from
the Company in an effort to deprive royalties contractually owed under the
royalty and sub-distribution and the asset purchase agreements. In December
2005, the defendants filed a demurrer with respect to certain causes of action
and defendants for failure to state a claim on which relief can be granted. In
February 2006, the defendants' demurrer was granted with respect to certain
causes of action and defendants, and the Company was granted leave to amend its
original complaint. The Company cannot currently estimate the damages that have
been incurred as a result of these actions and are seeking an open book
accounting to do so. The Company cannot guarantee success on any of the claims
set forth in the complaint. A determination of the claims, or any material part
of them, that is adverse to the Company could have a material adverse effect on
the Company's business, operating results and financial condition.
AGREEMENT WITH GLOBAL LINK TECHNOLOGIES, INC.
In January 2005, the Company received a letter from or on behalf of Global Link
Technologies, Inc. ("GBLK") together with a document titled First Amendment to
the Amended and Restated Asset Purchase Agreement (the "First Amendment"). The
First Amendment, which the Company believes was inappropriately obtained by GBLK
and, as a result, is not valid, provides that the royalty fees payable to GBLK
are payable in perpetuity. The Company does not believe that the First Amendment
is enforceable and intends to vigorously defend itself against any claim GBLK
may initiate regarding the payment of royalties after 2005. GBLK has also
communicated to the Company that GBLK may have retained certain rights under the
Amended Agreement with respect to Latin and South America and that through
certain of Company's actions or inactions the Company may be in breach of such
agreement. The Company believes that GBLK's contentions are without merit. GBLK
has not initiated any formal claims to date with respect to these assertions
however; the Company cannot guarantee that it would be successful in its defense
against any claims GBLK may initiate with respect to these contentions.
In December 2005, the defendants named in the complaint filed by the Company in
September 2005 in the Superior Court of the State of California in Los Angeles
County (see text above under the caption "Complaint against E&S") filed a
demurrer with respect to some of the causes of action set forth and some of the
defendants named in the complaint on the grounds that the complaint failed to
state a claim on which relief can be granted. In February 2006, the defendants'
demurrer was granted with respect to certain causes of action and defendants,
and the Company was granted leave to amend its original complaint.
In December 2005, the Company received a letter from GBLK in which GBLK alleged
that the Company has breached the Global Link Agreement by failing to use its
best efforts to enter the Latin American market. The Company believes that
GBLK's contentions are without merit. GBLK has not initiated any formal claims
to date with respect to these assertions. The Company cannot guarantee that it
would be successful in its defense against any claims GBLK may initiate with
respect to these contentions.
11
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - NOTES PAYABLE
On September 23, 2005, the Company entered into a loan agreement with Yeshiva
Rabbi Solomon Kluger (the "Lender") pursuant to which the Lender made an initial
loan evidenced by a promissory note payable by the Company in the principal
amount of $60,000. The loan bears interest at the annual rate of 6.0% and
repayment of the principal amount of the loan and interest accrued thereon is
due on the 120th day after the closing under the loan agreement. If the Company
fails to timely repay the loan, then for each 30 day period for which the loan
remains outstanding the Company shall issue to the Lender a warrant to purchase
the number of shares of the Company's common stock equal to (subject to reverse
split) the amount outstanding under the loan and otherwise having terms and
conditions identical to the warrant issued at the closing described below. The
initial loan became due on January 21, 2006, subject to a 90-day grace period
that ended on April 21, 2006. The Company did not repay the note on January 21,
2006 (see Note 10). In consideration of the Lender making the initial loan to
the Company, the Company issued to the Lender a warrant to purchase 83,333
shares of the Company's common stock, exercisable for two years, at an exercise
price of $0.78 per share. The loan agreement provides that, at any time until
the initial loan becomes due, the Lender may make additional loans to the
Company on terms and subject to conditions identical to those of the initial
loan and in amounts to be agreed upon by the Company and the Lender. In
consideration of making any such additional loan, the Company shall issue to the
Lender a warrant to purchase the number of shares of the Company's common stock
equal to 1.67 times the principal amount of that additional loan and otherwise
having terms and conditions identical to the initial warrant.
During October 2005, the Lender made additional loans to the Company in the
principal amount of $10,000, in consideration of which Company issued to the
Lender a warrant to purchase 16,667 shares of the Company's common stock,
otherwise having terms and conditions identical to the initial warrant. This
additional loan became due in February 2006, subject to a 90-day grace period
that ended in May 2006. The Company did not repay the note in May 2006 (see Note
10).
In November and December 2005 and January 2006, the Company borrowed an
aggregate $20,000 in additional loans from the Lender under the loan agreement.
In consideration of these additional loans, the Company issued the Lender
warrants to purchase an aggregate of 33,333 shares of the Company's common
stock, having terms and conditions identical to those of the initial warrant
issued to the Lender. These additional loans became due in March, April, and May
2006, respectively, subject to a 90-day grace period that ended/ends in June,
July, and August 2006, respectively. The Company did not repay the note due in
June 2006 (see Note 10).
In February 2006, the Company and the Lender amended the terms of the loan
agreement to extend the maturity of the initial loan for an additional 90 days.
In consideration of that extension, the Company issued the Lender a warrant to
purchase 30,000 shares of the Company's common stock, exercisable for two years
at an exercise price of $0.30 per share, and reduced the exercise price of each
warrant previously issued to the Lender under the loan agreement to $0.30.
In February and March 2006, the Company borrowed an aggregate $20,000 in
additional loans from the Lender under the loan agreement. These additional
loans are due in June and July 2006, respectively, subject to a 90-day grace
period that ends in September and October 2006, respectively. In consideration
of these additional loans, the Company issued the Lender warrants to purchase an
aggregate of 33,333 shares of the Company's common stock, having terms and
conditions identical to those of the initial warrant issued to the Lender.
At April 30, 2006, the aggregate amount outstanding under the loan agreement was
$110,000.
In connection with the Exchange Offer discussed below, the Company issued
promissory notes in the aggregate principal amount of $456,000 in consideration
for the purchase of 608,000 pre-split shares of common stock and cancellation of
warrants to purchase 608,000 pre-split shares of the Company's common stock that
were issued in connection with the 2004 Private Placement referred to in Note 9
below. By their terms, the notes automatically convert into the Company Series A
convertible preferred stock ("Series A") at a rate equal to one share of Series
A for each $1 in note principal. The notes further provides that if the Company
does not obtain authority to issue Series A by June 30, 2006, then the notes are
to convert into the number of shares of common stock that provided the
consideration for the note (See Note 10).
The holders of these notes are not subject to the reverse split referred to in
Note 9 below.
12
CELL POWER TECHNOLOGIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 - MERGER AGREEMENT
The Company entered into an Agreement and Plan of Merger dated as of March 17,
2006 (the "Merger Agreement") with Portagy Acquisition Corp., a Florida
corporation and wholly-owned subsidiary of the Company (the "Acquisition Sub"),
and Portagy Corp., a Delaware corporation ("Portagy"), pursuant to which the
Acquisition Sub will merge into Portagy. In consideration of the Merger, the
Company will issue up to (i) 15,706,157 shares of its Common Stock in exchange
for all of the issued and outstanding shares of Portagy, and (ii) 13,323,818
warrants to purchase its Common Stock in exchange for all of the outstanding
options and warrants of Portagy. The number of shares of Common Stock and
warrants to be issued assumes that Portagy will sell all $500,000 of securities
it is currently offering. The Merger Agreement provides that consummation of the
Merger is conditional upon the satisfaction of a number of conditions including
(i) the cancellation of 1,500,000 shares of the Company's common stock currently
outstanding and (ii) the reverse split of each outstanding share of the
Company's common stock on a 1-for-6 basis. The reverse split was effected on
April 10, 2006.
In connection with the proposed Merger, the Company offered to the participants
of the Company's private placement in 2004 (the "2004 Private Placement") to
exchange its promissory notes for up to 2,945,560 pre-split shares of its common
stock as well as warrants to purchase an equivalent amount of shares issued to
participants in the 2004 Private Placement (the "Exchange Offer"). The Exchange
Offer terms provide that the holders of the units that were purchased in the
2004 Private Placement, where each unit was comprised of 24,000 shares of common
stock and warrants to purchase an additional 24,000 shares, could exchange each
such unit for the Company's convertible note in the principal amount of $24,000.
By their terms, the notes automatically convert into the Company's Series A
convertible preferred stock at a rate equal to one share of Series A for each $1
in note principal if the Company is able to amend its articles of incorporation
to provide for the authority to issue such preferred stock within 12 months of
the note's issuance. Upon acceptance of the exchange offer, the warrants issued
in the 2004 Private Placement are cancelled.
As of April 30, 2006, the holders of only 608,000 pre-splitshares of common
stock that were purchased in the 2004 Private Placement accepted the Exchange
Offer. As a result, the 608,000 pre-split warrants held by these 2004 Private
Placement investors were also cancelled and the remaining shares and warrants
held by 2004 investors who did not participate in the exchange offer were
subject to the reverse split. The Company and Portagy have extended the period
for the exchange offer to enable other investors in the 2004 Private Placement
to participate. Upon the effectiveness of the Merger, Portagy will become a
wholly-owned subsidiary of the Company and the current shareholders of Portagy
will own approximately 78% of the Company's common stock then outstanding and
approximately 75% of the Company's common stock on a fully diluted basis. The
Merger is expected to be treated for accounting purposes as a reverse
acquisition. These percentages assume all $500,000 is raised by Portagy as
referred to in the above paragraph.
The Merger Agreement may be terminated by the Company or Portagy at any time
before the effective date of the Merger upon the occurrence of certain events
specified in the Merger Agreement. The Merger Agreement originally provided that
it could be terminated by either party if the effective date of the Merger did
not occur on or before March 31, 2006, unless the Company and Portagy agreed to
extend that date. The Company, the Acquisition Sub and Portagy entered into an
amendment to the Merger Agreement extending the effective time to July 15, 2006
and thereafter into a subsequent amendment extending the effective date to July
31, 2006.
NOTE 10 - SUBSEQUENT EVENTS
Notes Payable
In June 2006, at the request of the Company, the Lender agreed to extend the
maturity of the initial and subsequent loans for an additional 90 days.
In May-June 2006, the Company borrowed an aggregate $10,000 in additional loan
from the Lender under the loan agreement (see Note 8). These additional notes
payable are due in July-September 2006, respectively. In consideration of these
additional loans, the Company issued the Lender warrants to purchase an
aggregate of 16,667 shares of the Company's common stock, having terms and
conditions identical to those of the initial warrant issued to the Lender.
In May and June 2006, holders of an additional 496,003 pre-split shares that
were purchased in the 2004 Private Placement accepted the Exchange Offer,
resulting in the cancellation of warrants to purchase 496,003 pre-split shares
of the Company's common stock that were issued in such private placement.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following analysis of the financial condition of the Cell Power
Technologies, Inc. should be read in conjunction with the condensed consolidated
financial statements included elsewhere herein. All statements in this Form
10-QSB related to Cell Power Technologies, Inc. and Subsidiaries ongoing
financial operations and expected future results constitute forward-looking
statements. The actual results may differ materially from those anticipated or
expressed in such statements.
OVERVIEW AND HISTORY
Pursuant to an exclusive license agreement entered into between the patent
holder of the "Cellboost" battery and an exclusive distributor and a sub-license
agreement entered into between such exclusive distributor and a succeeding
sub-licensee with whom Cell Power Technologies, Inc. (the "Company" or "we")
entered into acquisition and license agreements, we currently hold royalty
rights on all sales of Cellboost units in North America, Mexico, Puerto Rico,
the US Virgin Islands, the Caribbean and Israel. In addition, we have exclusive
sub-distribution rights of Cellboost in Latin and South America, which is
defined as all countries south of Mexico and north of Tierra Del Fuego,
Argentina.
We were incorporated in the State of Florida in January 2001 under the
name "e-The Movie Network, Inc." to sell movie videos over the Internet. In
November 2003, we entered into an agreement with the holders of the membership
interests in Cell Power Technologies LLC, a Delaware limited liability company,
pursuant to which we issued shares of our common stock in exchange for all
outstanding membership interests in Cell Power Technologies LLC. Following the
transaction, Cell Power Technologies LLC became a wholly owned subsidiary of our
company. In April 2004, we changed our name to Cell Power Technologies, Inc.
Recent Developments
On March 17, 2006, we entered into an agreement and plan of merger (the
"Merger Agreement") with Portagy Acquisition Corp, a Florida corporation and our
wholly owned subsidiary ("Acquisition Sub"), and Portagy Corp., a Delaware
corporation ("Portagy"), pursuant to which the Acquisition Sub will merge into
Portagy. The Merger Agreement provides that consummation of the Merger is
conditional upon the satisfaction of a number of conditions including (i) the
cancellation of 1,500,000 shares of our common stock currently outstanding and
(ii) the reverse split of each remaining outstanding share of our common stock
on a 1-for-6 basis. The reverse split was effected as of April 10, 2006.
Following the reverse split, we have 5,359,593 shares of common stock issued and
5,258,260 shares of common stock outstanding.
In connection with the proposed Merger, the Company offered to the
participants of the Company's private placement in 2004 (the "2004 Private
Placement") to exchange its promissory notes for up to 2,945,560 pre-split
shares of its common stock as well as warrants to purchase an equivalent amount
of shares issued to participants in the 2004 Private Placement (the "Exchange
Offer"). The Exchange Offer terms provide that the holders of the units that
were purchased in the 2004 Private Placement, where each unit was comprised of
24,000 shares of common stock and warrants to purchase an additional 24,000
shares, could exchange each such unit for the Company's convertible note in the
principal amount of $24,000. By their terms, the notes automatically convert
into the Company's Series A convertible preferred stock at a rate equal to one
share of Series A for each $1 in note principal if the Company is able to amend
its articles of incorporation to provide for the authority to issue such
preferred stock within 12 months of the note's issuance. Upon acceptance of the
exchange offer, the warrants issued in the 2004 Private Placement are cancelled.
The notes further provide that if the Company does not obtain authority to issue
Series A by June 30, 2006, then the notes are to convert into the number of
shares of common stock that provided the consideration for the note. As of April
30, 2006, only the holders of 608,000 pre-split shares of common stock
participated and received convertible notes. In May and June 2006, holders of an
additional 496,003 pre-split shares that were purchased in the 2004 Private
Placement accepted the Exchange Offer, resulting in the cancellation of warrants
to purchase 496,003 pre-split shares of the Company's common stock that were
issued in such private placement. Because we did not have authority to issue
preferred stock by June 30, 2006, these notes converted back into 1,104,003
shares of common stock. Upon the effectiveness of the Merger, Portagy will
become our wholly-owned subsidiary and the current shareholders of Portagy will
own approximately 78% of our common stock then outstanding. This percentage
assumes that Portagy will sell all $500,000 of securities it is currently
offering.
CELLBOOST PRODUCT
Cellboost is a patented simple disposable power source encased in a hard
shell of plastic with a phone specific plug providing instant talk time to dead
phone batteries as well as serving as a charging device for cellular phones. The
device attaches to the charger port of a cell phone and delivers enough energy
to the phone to enable up to 60 minutes of extra talk time. Cellboost is
intended to supply a needed energy source for built in phone batteries, thereby
avoiding the "dead" cell phone phenomenon. Smaller than a matchbook, Cellboost
comes in phone specific models to fit most cellphones and includes a portable
battery with a non-degenerating three-year shelf life. Cellboost is currently
available in ten different models that are compatible with Nokia, Motorola, Sony
Erickson, Samsung, LG, Sanyo and Siemens cell phones. Each Cellboost has a
plastic cap which makes their storage in pocketbooks or pockets convenient. The
caps are color-coded to indicate the brand of phone that the Cellboost model
works with.
14
Cellboost was developed by Jumpit AS ("Jumpit"), a private company based
in Oslo, Norway. In December 2001, Jumpit applied for patent protection for the
backup battery for a rechargeable phone. In March 2004, the United States Patent
Office granted the patent. Patent applications are pending in other parts of the
world, including South and Latin America.
OUR RIGHTS TO CELLBOOST PRODUCT
In February 2003, E&S International Enterprises, Inc. ("E&S"), a
California-based electronics distributor, entered into a worldwide exclusive
license agreement, as subsequently amended, with Jumpit for the distribution of
the Cellboost battery. E&S subsequently trademarked the name Cellboost. Under
the license agreement, E&S must meet certain performance targets on an annual
basis in order to maintain exclusive distribution rights in its agreement with
Jumpit. The license continues through February 2013, and contains a provision in
which six months prior to its scheduled expiration date of the license, the
parties can agree to consider, in good faith, the basis for an extension of the
agreement.
In February 2003, E&S entered into an agreement with Global Link
Technologies, Inc. ("Global Link"), pursuant to which E&S agreed to pay Global
Link a royalty for all sales in the territories below of the Cellboost units in
consideration of Global Link's termination of an agreement that it then had with
Jumpit. Under such agreement, E&S is required to pay Global Link the following
royalties:
o $.10 on net sales made to retailers in the United States, Mexico,
Canada and Israel;
o $.05 on net sales made to distributors in the United States, Mexico,
Canada and Israel; and
o $.075 on all pre-approved net sales made by E&S in South America,
which is defined as south of Mexico and north of Tierra Del Fuego,
Argentina including the Caribbean but not Puerto Rico or the U.S.
Virgin Islands).
E&S also granted Global Link the right to serve as exclusive
sub-distributor in Latin America and as a distributor for the United States,
Mexico and Canada. Sales by E&S in Latin America must be pre-approved by Global
Link. Global Link's license agreement expires in February 2013, subject to any
extension in the original license agreement between E&S and Jumpit.
In October 2003, Cell Power Technologies LLC, our wholly owned subsidiary,
prior to entering into the Share Exchange Agreement with our company, entered
into an asset purchase agreement with Global Link wherein Cell Power LLC
purchased Global Link's royalty rights with respect to sales in North and
Central America, Mexico, the Caribbean and Israel entitling our company to
receive royalties on the net number of units sold by E&S in those territories.
The royalty payments are divided between two categories, sales to retailers and
sales to distributors. Royalty rates per unit payable to our company with
respect to sales by E&S to retailers and distributors are $0.10 and $0.05,
respectively. These rights expire on February 12, 2013, subject to any extension
in the underlying agreement between Jumpit and E&S.
In December 2003, Cell Power Technologies LLC entered into an amended and
restated amendment agreement with Global Link (the "Global Link Agreement") for
exclusive sub-distribution rights in Latin and South America, comprised of
Global Link's rights under the license agreement as they relate to the sale and
distribution of the Cellboost product in Latin and/or South America (which is
defined as those countries and territories south of Mexico and north of Tierra
Del Fuego). Pursuant to this agreement, we are required to remit royalties to
Global Link through 2005, based on units sold, and to E&S, equal to 50% of gross
profit on units sold by us as an exclusive sub-distributor. The royalty fees due
Global Link can be paid, at our sole discretion, either in the form of cash or
unregistered shares of common stock with a market value equal to the amount of
the obligation.
In January 2005, we received a letter from (or on behalf of) Global Link
together with a document titled "First Amendment to the Amended and Restated
Asset Purchase Agreement" (the "First Amendment"). The Global Link Agreement
currently provides that royalty fees are payable through the end of 2005. The
First Amendment, which we believe was inappropriately obtained by Global Link
and therefore is not valid, provides for the payment of royalties to Global Link
in perpetuity. Although the First Amendment was executed by our Chief Executive
Officer, it was never delivered to Global Link by our Company. We do not believe
that the First Amendment is enforceable and intend to vigorously defend our
Company against any claim initiated by Global Link with respect to this matter.
However, we cannot assure you that we would necessarily be successful in our
efforts to defend our Company against a formal claim, if such a claim were
initiated by Global Link.
15
Additionally, since December 2004, Global Link has communicated to the
Company in a series of letters that it may have retained certain rights under
the Global Link Agreement to distribute Cellboost in Latin and South America and
that through certain of our actions or inactions we are in breach of such
agreement. We do not believe that these contentions have any merit. Global Link
has not initiated a formal claim to date with respect to any matter involving
the agreement with them; however, we cannot assure you that we would be
successful in our efforts to defend our Company against such a formal claim if
Global Link were to initiate such a claim.
If the license agreement entered between E&S and Jumpit were to be
terminated for any reason, our rights acquired from Global Link would also be
terminated. The termination of this agreement or a material change in its terms
could have a material adverse effect on our business.
COMPLAINT AGAINST E&S
In September 2005, we filed a complaint in the Superior Court of the State
of California in Los Angeles County against E&S and certain other defendants
alleging, among other things, that E&S has purported to grant a third party the
exclusive right to distribute Cellboost units Latin America without our consent
in violation of the royalty and sub-distribution agreement and asset purchase
agreement and has falsified sales reports to reduce the reported number of
Cellboost units sold and otherwise withheld information from us in an effort to
deprive us of the royalties we are contractually owed under the royalty and
sub-distribution and the asset purchase agreements. In December 2005, the
defendants filed a demurrer with respect to some of our causes of action and
defendants for failure to state a claim on which relief can be granted. In
February 2006, the defendants' demurrer was granted with respect to certain
causes of action and defendants, and the Company was granted leave to amend its
original complaint. We cannot currently estimate the damages that we have
incurred as a result of these actions and are seeking an open book accounting to
permit us to do so. We cannot assure you that we will prevail on any of the
claims set forth in the complaint. A determination of the claims, or any
material part of them, that is adverse to us could have a material adverse
effect on our business, operating results and financial condition.
CRITICAL ACCOUNTING POLICIES
The Company's unaudited condensed consolidated financial statements and
accompanying notes have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company's management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The Company continually evaluates the
accounting policies and estimates it uses to prepare the unaudited condensed
consolidated financial statements. The Company bases its estimates on historical
experiences and assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from these estimates made
by management.
We do not participate in, nor have we created, any off-balance sheet
special purpose entities or other off-balance sheet financing. In addition, we
do not enter into any derivative financial instruments for speculative purposes.
Intangible assets are carried at cost less accumulated amortization.
Amortization is computed on the straight-line method over the ten-year estimated
useful life of the assets.
We review the carrying value of our intangible assets to determine whether
impairment may exist. We consider relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of the intangible
assets can be recovered. If it is determined that the carrying value of the
intangible assets will not be recovered from the undiscounted future cash flows,
the carrying value of the assets would be considered impaired. An impairment
charge is measured as any deficiency in the amount of estimated fair value of
the intangible assets over carrying value.
RESULTS OF OPERATIONS
We are considered a development stage company and have a limited operating
history upon which an evaluation of our prospects can be made. Our prospects
must therefore be evaluated in light of the problems, expenses, delays and
complications associated with a development stage company. As of April 30, 2006,
we had an accumulated deficit of $2,523,451.
REVENUES. We currently generate revenues from the collection of royalties
payable to us based on the net number of Cellboost units sold by E&S in North
America, Mexico, Puerto Rico, the US Virgin Islands, the Caribbean and Israel.
These royalty payments are divided between two categories, sales to retailers
and sales to distributors. Royalty rates per unit payable to us with respect to
sales by E&S to retailers and distributors are $0.10 and $0.05, respectively.
Revenues from royalties were $14,098 and $29,910 for the six months ended April
30, 2006 and 2005, respectively. The decrease was primarily attributable to a
reduction of new Cellboost units sold by E&S. Revenues from the distribution of
the Cellboost product were $0 and $164,445 for the six months ended April 30,
2006 and 2005, respectively. The decrease was attributable to a reduction of
Cellboost units sold by the Company.
16
COST OF GOODS SOLD. Costs of goods sold, consisting of production costs
and amortization of intangibles, were $15,000 and $166,420 for the six months
ended April 30, 2006 and 2005, respectively. This decrease was attributable to a
decrease in product costs resulting from zero units sold by the Company.
OPERATING EXPENSES. Our operating expenses for the six months ended April
30, 2006 and 2005 amounted to $339,840 and $543,479, respectively. For the six
months ended April 30, 2005, the Company's operating expenses principally
comprised of consulting fees, professional fees, and officer's salary. For the
same period in 2006, the Company's operating expenses included approximately
$102,000 of consulting and marketing costs and an impairment charge of $202,510.
The decrease is primarily attributable to the amendment of our employment
agreement with our President and Chief Executive Officer pursuant to which,
beginning in January 2005 and through the term of the agreement, he is not
entitled to a salary and to our consultants agreeing to waive their consulting
fee for the six months ended April 30, 2006.
OTHER (INCOME) EXPENSES. Other (income) expenses, consisting of interest
expense (income), were $40,980 and $(1,107) for the six months ended April 30,
2006 and 2005, respectively. This increase in other net expenses was primarily
attributable to interest expense incurred as a result of the issuances of note
payables, write off of accounts receivable, and impairment of intangible assets.
NET LOSS. Net loss for the six months ended April 30, 2006 and 2005 was
$381,722 and $514,437, respectively. This decrease in the net loss was primarily
attributable to a reduction in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $658 as of April 30, 2006 compared to $2,404 as of
October 31, 2005.
Net cash used in operating activities was $49,374 for the six months ended
April 30 2006 compared to $535,191for the corresponding period in 2005. The
decrease in cash used in operations is primarily attributable to a reduction in
operating expenses achieved as a reduction in fess paid to our consultants and
other operating expenses.
Net cash used in investing activities was $0 for the six months ended
April 30, 2006 and 2005.
Net cash provided by financing activities was $40,000 for the six months
ended April 30, 2006 and $0 for the corresponding period in 2005. Cash provided
by financing activities during these periods primarily consisted of proceeds
from notes payable.
To date, we have funded our operations primarily through the sales of our
securities and loans from others.
In September 2005, we entered into a loan agreement with Yeshiva Rabbi
Solomon Kluger (the "Lender") pursuant to which the Lender made an initial loan
evidenced by a promissory note payable by us in the principal amount of $60,000.
The loan bears interest at the annual rate of 6.0% and repayment of the
principal amount of the loan and interest accrued thereon is due on the 120th
day after the closing under the loan agreement. In consideration of the Lender
making the initial loan to us, we issued to the Lender a warrant to purchase
83,333 shares of our common stock, exercisable for two years, at an exercise
price of $0.78 per share. If we fail to timely repay the loan, then for each 30
day period for which the loan remains outstanding we are obligated to issue to
the Lender a warrant to purchase the number of shares of our common stock equal
to (subject to the reverse split) the amount outstanding under the loan and
otherwise having terms and conditions identical to the warrant issued at the
closing. At any time until the initial loan becomes due, the Lender may make
additional loans to us on terms and subject to conditions identical to those of
the initial loan and in amounts to be agreed upon. In consideration of making
any such additional loan, we are obligated to issue to the Lender a warrant to
purchase the number of shares of the our common stock equal to 1.67 times the
principal amount of that additional loan and otherwise having terms and
conditions identical to the initial warrant. Between November 2005 and January
2006, we raised an additional in aggregate $20,000 from the Lender. Those
additional loans are due in March, April and May 2006. In February 2006, the
loan agreement was amended to extend the maturity of the initial loan for an
additional 90 days. In consideration of that extension, we issued the Lender a
warrant to purchase 30,000 shares of our common stock, exercisable for two years
at an exercise price of $0.30 per share, and reduced the exercise price of each
warrant previously issued to the Lender under the loan agreement to $0.30. In
February and March 2006, we borrowed an additional $20,000 from the Lender under
the loan agreement. These additional notes payable are due in June and July 2006
respectively. In consideration of these additional loans, we issued the Lender
warrants to purchase an aggregate of 33,333 shares of our common stock, having
terms and conditions identical to those of the initial warrant issued to the
Lender. The additional note in the principal amount of $2,500 due in March 2006
was not repaid when due. In June 2006, at the request of the Company the Lender
agreed to extend the initial and subsequent loans for an additional 90 days.
Additionally in May-June 2006, we borrowed in aggregate an additional $10,000
from the Lender, which notes will become due in July-September 2006. In
consideration of these additional loans, we issued the Lender warrants to
purchase an aggregate of 16,667 shares of our common stock, having terms and
conditions identical to those of the initial warrant issued to the Lender.
17
Pursuant to a private placement commenced in May 2004 and completed in
October 2004, we raised aggregate gross proceeds of approximately $2,210,000
($2,007,000 net of offering costs) from the sale of 92.08 units of our
securities, with each unit comprised of 5,333 shares of common stock and three
year warrants for an additional 5,333 shares of common stock with a per share
exercise price of $7.50.The investors in this offering were subject to the
exchange offer referred to above and in Note 9 to the financial statements. We
also raised an additional $50,000 during fiscal 2004 from the sale of other
securities.
Our existing cash resources are nil. We require additional funds to
continue to meet our liquidity needs and satisfy our current business plan. We
will need to raise additional funds to pay existing current liabilities as they
come due, as well as to meet our operating requirements, prior to the receipt of
revenues from operations. Management is currently focusing on closing on the
Merger Agreement with Portagy. If the Company is unable to close the Merger
Agreement, the Company will need to raise additional funds through financings or
other avenues such as loans, the sale and issuance of additional debt and/or
equity securities, or other financing arrangements to reactivate its business.
We have no commitments for any additional funding and we cannot assure you that
we will be able to raise additional funds on commercially acceptable terms or at
all. Unless we can raise needed capital or experience a significant increase in
royalty income payable to us by E&S, we will need to cancel or further delay our
efforts to establish and expand a marketing presence for Cellboost in South and
Latin America.
Our continuation as a going concern is dependent upon, among other things,
our ability to obtain additional financing when and as needed, and to generate
sufficient cash flow to meet our obligations on a timely basis. No assurance can
be given that we will be able to obtain such financing on acceptable terms.
These circumstances could complicate our ability to raise additional capital.
Our financial statements do not include any adjustments to the carrying amounts
of our assets and liabilities that might result from the outcome of this
uncertainty.
In addition, any future capital raise by our company is likely to
result in substantial dilution to existing stockholders.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 123R "Share Based Payment". This statement is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS No. 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
No. 123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest and will be reflected as compensation expense in the financial statements.
This statement is effective for public entities that file as small business
issuers as of the beginning of the first annual reporting period that begins
after December 15, 2005. Upon adoption of this pronouncement the Company
anticipates using the modified prospective method and may need to record
additional stock compensation expense. The Company does not believe that the
adoption of SFAS No. 123R will have a significant effect on its financial
statements.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets". This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of this
Statement should be applied prospectively. The adoption of this pronouncement
did not have a material effect on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements." This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this pronouncement did not have a material effect on
the Company's financial statements. The Company does not believe that the
adoption of SFAS No. 154 will have a material effect on its financial
statements.
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In September 2005, the FASB ratified EITF 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues", which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishment, if a debt
modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt). The adoption of this
pronouncement did not have a material effect on the Company's financial
statements.
In September 2005, the FASB also ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
treated recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes), and, if so, whether that basis difference is
a temporary difference under SFAS No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to SFAS No. 154 to
all instruments with a beneficial conversion feature accounted for under EITF
Issue 00-27 included in financial statements for annual reporting periods
beginning after December 15, 2005. The adoption of this pronouncement did not
have a material effect on the Company's financial statements. The Company does
not believe that the adoption of EITF Issue No. 05-8 will have a significant
effect on its financial statements.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13-d-15(e) and
15d-15(e)). Based upon that evaluation and management's assessment of the
potential effect of the material weakness described below, our Chief Executive
Officer (and Principal Accounting Officer) concluded that as of the end of the
period covered by this Quarterly Report on Form 10-QSB our disclosure controls
and procedures were effective to enable us to record, process, summarize and
report information required to be included in our periodic SEC filings within
the required time period.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this quarterly
report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure Controls are also designed
with the objective of ensuring that such information is accumulated and
communicated, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized, recorded and reported; and (2) our financial statements are
presented in conformity with generally accepted accounting principles.
Our company is not an accelerated filer (as defined in the Securities
Exchange Act) and is currently not required to deliver management's report on
our internal control over financial reporting until our fiscal year ended
October 31, 2006.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal controls over financial reporting
that occurred during the quarter ended April 30, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following paragraphs set forth certain information with respect to all
securities sold by us within the three months ended April 30, 2006 without
registration under the Securities Act.
Pursuant to the exchange offer, we issued convertible notes to the
investors in our 2004 private placement who accepted the exchange offer and
cancelled 608,000 pre-split shares of common stock and 608,000 pre-split
warrants. The notes were to be convertible into shares of preferred stock if we
had authority to issue preferred stock by June 30, 2006. Because we did not
obtain the authority, on July 1, 2006 the notes converted into 608,000 pre-split
shares of common stock. The warrants exchanged were not reissued.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 under such
Securities Act. The recipients of securities in each such transaction acquired
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof. Appropriate legends were affixed to
the notes and will be placed on the share certificates issued in the above
transaction. We believe the recipients were all "accredited investors" within
the meaning of Rule 501(a) of Regulation D under the Securities Act. All
recipients had adequate access to information about our company. None of the
transactions described above involved general solicitation or advertising.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
10.1 Agreement and Plan of Merger dated as of March 17, 2006 with Portagy
Acquisition Corp., a Florida corporation and the wholly-owned subsidiary of the
Company, and Portagy Corp., a Delaware corporation, .
10.2 Exchange Offer
10.3 Form of Convertible Note
31. Rule 13a-14(a) / 15d-14(a) Certification
32. Section 1350 Certification
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SIGNATURES
In accordance with the requirements of the Exchange Act the registrant caused
this report to be signed by the undersigned thereunto duly authorized.
DATE: July 18, 2006 CELL POWER TECHNOLOGIES, INC.
/s/ JACOB HERSKOVITS
-----------------------------
JACOB HERSKOVITS
CHIEF EXECUTIVE OFFICER
(AND PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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