Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10 – Q
[mark
one]
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the quarterly period ended: June 30,
2011
|
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from___________to_____________
Commission
File Number 000-53488
PROPELL
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
26-1856569
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
305
San Anselmo Avenue, Suite 300, San Anselmo, CA 94960
(Address
of principal executive offices including zip code)
(415)
747-8775
(Registrant’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 check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every interactive data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes xNo
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated
filer” and “smaller reporting
company” in Rule 12b-2
of the
Exchange Act. (Check one):
|
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company x
|
Number of
shares outstanding of the issuer’s common stock as
of the latest practicable date: 24,736,069 shares of common stock, $.001 par
value per share, as of August 14, 2011.
PROPELL
CORPORATION
Index
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Page
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PART I. FINANCIAL INFORMATION
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Item
1.
|
Consolidated
Financial Statements
|
|
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|
Balance
Sheets (unaudited) as of June 30, 2011 and December 31,
2010
|
F-1
|
|
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|
|
Statements
of Operations for the three and six months ended June 30, 2011 and 2010
(unaudited)
|
F-2
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|
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|
Statement
of Stockholders’ Deficit as of June 30, 2011 (unaudited)
|
F-3
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|
|
|
|
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Statements
of Cash Flows for the six months ended June 30, 2011 and 2010
(unaudited)
|
F-4
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|
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Notes
to Consolidated Financial Statements
|
F-5-F-10
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Item
2.
|
Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations
|
F-11
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Item
4.
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Controls
and Procedures
|
F-14
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PART
II. OTHER INFORMATION
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Item
1.
|
Legal
Proceedings
|
F-15
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Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
F-15
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Item
3.
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Defaults
Upon Senior Securities
|
F-15
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Item
4.
|
Removed
and Reserved
|
F-14
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Item
5.
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Other
Information
|
F-15
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Item
6.
|
Exhibits
|
F-15
|
PART
I.—FINANCIAL INFORMATION
Propell
Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
As of June 30, 2011 and December 31, 2010
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$ |
3,540 |
|
|
$ |
56,639 |
|
|
Accounts
receivable (net of allowances)
|
|
|
6,793 |
|
|
|
4,590 |
|
|
Prepaid
expenses
|
|
|
46,141 |
|
|
|
5,053 |
|
|
Due
from others
|
|
|
2,509 |
|
|
|
1,360 |
|
|
Inventory
|
|
|
933 |
|
|
|
521 |
|
|
Deposits
- current
|
|
|
1,848 |
|
|
|
1,499 |
|
|
Total
Current Assets
|
|
|
61,764 |
|
|
|
69,662 |
|
| |
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
632 |
|
|
|
1,772 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
Website
URL, net
|
|
|
3,200 |
|
|
|
4,000 |
|
|
Total
Other Assets
|
|
|
3,200 |
|
|
|
4,000 |
|
| |
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
65,596 |
|
|
$ |
75,434 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
234,305 |
|
|
$ |
185,758 |
|
|
Accrued
liabilities
|
|
|
37,826 |
|
|
|
34,124 |
|
|
Accrued
interest – related parties
|
|
|
230,608 |
|
|
|
138,879 |
|
|
Notes
payable – related parties
|
|
|
318,000 |
|
|
|
203,000 |
|
|
Convertible
notes payable – related party
|
|
|
1,248,125 |
|
|
|
1,067,500 |
|
|
Liabilities
from Discontinued Operations
|
|
|
1,221,008 |
|
|
|
1,221,008 |
|
|
Total
Liabilities
|
|
|
3,289,872 |
|
|
|
2,850,269 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 75,000,000 shares authorized,
23,382,575 issued and outstanding; (22,757,575 issued and
outstanding – 2010)
|
|
|
23,382 |
|
|
|
22,757 |
|
|
Additional
paid-in capital
|
|
|
1,865,806 |
|
|
|
1,762,059 |
|
|
Accumulated
deficit
|
|
|
(5,113,464 |
) |
|
|
(4,559,651 |
) |
|
Total
Stockholders' Deficit
|
|
|
(3,224,276 |
) |
|
|
(2,774,835 |
) |
| |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficit
|
|
$ |
65,596 |
|
|
$ |
75,434 |
|
The
accompanying notes are an integral part of the financial
statements.
Propell
Corporation and Subsidiaries
Consolidated Statements of Operations
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
|
June 30,
|
|
|
June
30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net
Revenues
|
|
$ |
35,977 |
|
|
$ |
35,719 |
|
|
$ |
59,693 |
|
|
$ |
46,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
24,864 |
|
|
|
28,117 |
|
|
|
41,976 |
|
|
|
36,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
11,113 |
|
|
|
7,602 |
|
|
|
17,717 |
|
|
|
10,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
313,552 |
|
|
|
394,182 |
|
|
|
571,530 |
|
|
|
672,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
|
(302,439 |
) |
|
|
(386,580 |
) |
|
|
(553,813 |
) |
|
|
(661,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Discontinued Operations
|
|
|
- |
|
|
|
(103,282 |
) |
|
|
- |
|
|
|
(93,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(302,439 |
) |
|
$ |
(489,862 |
) |
|
$ |
(553,813 |
) |
|
$ |
(754,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Share - Basic and Diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding - Basic and Diluted
|
|
|
23,089,993 |
|
|
|
21,889,140 |
|
|
|
22,924,704 |
|
|
|
22,184,218 |
|
The
accompanying notes are an integral part of the financial
statements.
Propell
Corporation and Subsidiaries
Consolidated
Statements of Stockholders' Deficit (Unaudited)
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Distributions
|
|
|
|
|
|
Total
|
|
|
|
|
$0.001 Par Value
|
|
|
Paid-in
|
|
|
to
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Affiliates
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Balance,
December 31, 2009
|
|
|
22,482,575 |
|
|
|
22,482 |
|
|
|
1,694,614 |
|
|
|
- |
|
|
|
(2,889,202 |
) |
|
|
(1,172,106 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with services rendered
|
|
|
275,000 |
|
|
|
275 |
|
|
|
43,725 |
|
|
|
|
|
|
|
|
|
|
|
44,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of stock based compensation in connection with stock option
grants
|
|
|
|
|
|
|
|
|
|
|
23,720 |
|
|
|
|
|
|
|
|
|
|
|
23,720 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,670,449 |
) |
|
|
(1,670,449 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2010
|
|
|
22,757,575 |
|
|
|
22,757 |
|
|
|
1,762,059 |
|
|
|
- |
|
|
|
(4,559,651 |
) |
|
|
(2,774,835 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with services rendered
|
|
|
500,000 |
|
|
|
500 |
|
|
|
59,500 |
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with conversion of debt to equity
|
|
|
125,000 |
|
|
|
125 |
|
|
|
9,250 |
|
|
|
|
|
|
|
|
|
|
|
9,375 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of stock based compensation in connection with stock option
grants
|
|
|
|
|
|
|
|
|
|
|
34,997 |
|
|
|
|
|
|
|
|
|
|
|
34,997 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the six months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(553,813 |
) |
|
|
(553,813 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2011
|
|
|
23,382,575 |
|
|
$ |
23,382 |
|
|
$ |
1,865,806 |
|
|
$ |
– |
|
|
$ |
(5,113,464 |
) |
|
$ |
(3,224,276 |
) |
The
accompanying notes are an integral part of the financial
statements.
Propell
Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For
the Six months ended June 30, 2011 and 2010
|
|
|
2011
|
|
|
2010
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$ |
(553,813 |
) |
|
$ |
(754,675 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,140 |
|
|
|
541 |
|
|
Amortization
|
|
|
800 |
|
|
|
50,919 |
|
|
Issuance
of stock options in connection with employment services
|
|
|
34,997 |
|
|
|
1,019 |
|
| Stock
issued for services rendered |
|
|
20,000 |
|
|
|
41,250 |
|
|
Changes
in Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,203 |
) |
|
|
(12,648 |
) |
|
Due
from others
|
|
|
(1,149 |
) |
|
|
- |
|
|
Deposits
|
|
|
(349 |
) |
|
|
- |
|
|
Prepaid
expenses
|
|
|
(1,088 |
) |
|
|
2,801 |
|
|
Inventory
|
|
|
(412 |
) |
|
|
- |
|
|
Accounts
payable
|
|
|
48,547 |
|
|
|
5,484 |
|
|
Accrued
liabilities
|
|
|
3,702 |
|
|
|
640 |
|
|
Accrued
interest – related parties
|
|
|
91,729 |
|
|
|
50,322 |
|
|
Cash
Used In Operating Activities from Continuing Operations
|
|
|
(358,099 |
) |
|
|
(614,347 |
) |
|
Cash
Provided by (Used In) Operating Activities from Discontinued
Operations
|
|
|
- |
|
|
|
92,600 |
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(358,099 |
) |
|
|
(521,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
140,000 |
|
|
|
100,000 |
|
|
Proceeds
from convertible note – related party
|
|
|
165,000 |
|
|
|
475,000 |
) |
|
Repurchase
of common stock
|
|
|
- |
|
|
|
(45,000 |
) |
|
Results
Provided by Financing Activities from Continuing
Operations
|
|
|
305,000 |
|
|
|
530,000 |
|
| |
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities from Discontinued
Operations
|
|
|
- |
|
|
|
- |
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
305,000 |
|
|
|
530,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(53,099 |
) |
|
|
8,253 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
56,639 |
|
|
|
95,484 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
3,540 |
|
|
$ |
103,737 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Cash paid for income taxes
|
|
$ |
1,600 |
|
|
|
0 |
|
|
Shares
issued for services
|
|
$ |
60,000 |
|
|
|
0 |
|
|
Debt
converted to equity
|
|
$ |
9,375 |
|
|
|
0 |
|
The
accompanying notes are an integral part of the financial statements.
Propell
Corporation and Subsidiaries
Notes
to the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies
(A)
Description of the Business
Propell
Corporation, a Delaware corporation (“Propell” or the “Company”) is an
e-commerce and fulfillment provider of image-based personalized products and
services.
(B)
Basis of Presentation & Principles of Consolidation
The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules and regulations of the United States Securities and Exchange
Commission for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes necessary for a comprehensive presentation of
financial position, results of operations, or cash flows. It is management's
opinion, however, that all material adjustments (consisting of normal recurring
adjustments) have been made which are necessary for a fair financial statement
presentation. The results for the interim period are not necessarily indicative
of the results to be expected for the full year.
The
unaudited interim financial statements should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which
contains the audited financial statements and notes thereto, together with the
Management’s Discussion and Analysis of Financial Condition and
Results of Operation, for the period ended December 31, 2010. The interim
results for the period ended June 30, 2011 are not necessarily indicative of
results for the full fiscal year.
All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(C)
Use of Estimates
The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Such estimates and assumptions impact, among
others, the following: the amount allocated to goodwill and other intangible
assets, the estimated useful lives for amortizable intangible assets
and property, plant and equipment, the fair value of warrants and
stock options granted for services or compensation, respectively, estimates of
the probability and potential magnitude of contingent liabilities and the
valuation allowance for deferred tax assets due to continuing operating
losses.
Making
estimates requires management to exercise significant judgment. It is at least
reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the consolidated financial
statements, which management considered in formulating its estimate could change
in the near term due to one or more future confirming events. Accordingly, the
actual results could differ significantly from our estimates.
(D)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts
receivable are reported at realizable value, net of allowances for doubtful
accounts, which is estimated and recorded in the period the related revenue is
recorded. The Company has a standardized approach to estimate and review the
collectability of its receivables based on a number of factors, including the
period they have been outstanding. Historical collection and payer reimbursement
experience is an integral part of the estimation process related to allowances
for doubtful accounts. In addition, the Company regularly assesses the state of
its billing operations in order to identify issues, which may impact the
collectability of these receivables or reserve estimates. Revisions to the
allowances for doubtful accounts estimates are recorded as an adjustment to bad
debt expense. Receivables deemed uncollectible are charged against the allowance
for doubtful accounts at the time such receivables are written-off. Recoveries
of receivables previously written-off are recorded as credits to the allowance
for doubtful accounts. There were no recoveries during the three or six months
ended June 30, 2011.
(E)
Revenue Recognition
The
Company records revenue when all of the following have occurred: (1) persuasive
evidence of an arrangement exists, (2) the service is completed without further
obligation, (3) the sales price to the customer is fixed or determinable, and
(4) collectability is reasonably assured.
The
Company primarily recognizes revenue for services rendered upon completion of
the order.
Propell
Corporation and Subsidiaries
Notes to
the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
(F)
Risks and Uncertainties
The
Company's operations will be subject to significant risk and uncertainties
including financial, operational, regulatory and other risks associated,
including the potential risk of business failure. The recent global economic
crisis has caused a general tightening in the credit markets, lower levels of
liquidity, increases in the rates of default and bankruptcy, and extreme
volatility in credit, equity and fixed income markets. These conditions not only
limit our access to capital, but also make it difficult for our customers, our
vendors and us to accurately forecast and plan future business
activities.
(G)
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents. At June 30, 2011 and December 31, 2010, respectively,
the Company had no cash equivalents.
The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may
exceed federally insured limits. At
June 30, 2011 and December 31,
2010, the balance exceeded the federally insured limit by $0 and $0,
respectively.
(H)
Property and Equipment
Property
and equipment is stated at cost, less
accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Items of
property and equipment with costs greater than $1,000 are capitalized and
depreciated on a straight-line basis over the estimated useful lives, as
follows:
|
Description
|
|
Estimated Useful Life
|
|
Office
equipment and furniture
|
|
2
to 5 years
|
|
Leasehold improvements and fixtures
|
|
Lesser of estimated useful life or life of lease
|
(I)
Inventory
Inventory
is stated at cost using the FIFO (first in, first out) method.
(J)
Long Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
(K)
Net Loss per Share
Basic
earnings (loss) per share is computed by dividing the net income (loss) less
preferred dividends for the period by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed by
dividing net income (loss) less preferred dividends by the weighted average
number of common shares outstanding including the effect of share
equivalents. The Company’s share equivalents consist of 4,029,000
stock options and 4,700,434 warrants. Since the Company reported a
net loss for the six months ended June 30, 2011 and the year ended December 31,
2010, all common stock equivalents would be anti-dilutive; as such there is no
separate computation for diluted earnings per share.
(L)
Fair Value of Financial Instruments
The
carrying amounts of the Company’s short-term financial instruments, (including
accounts receivable, accounts payable and accrued liabilities) approximate fair
value due to the relatively short period to maturity for these
instruments.
(M)
Share-Based Payment Arrangements
Generally,
all forms of share-based payments, including stock option grants, restricted
stock grants and stock appreciation rights are measured at their fair value on
the awards’ grant date, based on the estimated number of awards that are
ultimately expected to vest. Share-based compensation awards issued to
non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is
more readily determinable. The expense resulting from share- based payments are
recorded in cost of goods sold or general and administrative expense in the
consolidated statement of operations, depending on the nature of the services
provided.
Propell
Corporation and Subsidiaries
Notes
to the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
(N)
Recent Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued guidance now
codified as FASB Accounting Standards Codification (ASC) Topic 105, “Generally Accepted Accounting Principles,” as the single source of
authoritative non-governmental U.S. GAAP. FASB ASC Topic 105 does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all authoritative literature related to a particular
topic in one place. All existing accounting standard documents will be
superseded and all other accounting literature not included in the FASB
Codification will be considered non- authoritative.
These
provisions of FASB ASC Topic 105 were effective for interim and annual periods
ending after September 15, 2009 and, accordingly, were effective for the current
fiscal reporting period. The adoption of this pronouncement did not have an
impact on our business, financial condition or results of operations, but will
impact our financial reporting process by eliminating all references to
pre-codification standards. On the effective date of FASB ASC Topic 105, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting
literature not included in the Codification became
non-authoritative.
In
January 2010, the Financial Accounting Standards Board ("FASB") issued updated
guidance to amend the disclosure requirements related to recurring and
nonrecurring fair value measurements. This update requires new disclosures on
significant transfers of assets and liabilities between Level 1 and Level 2 of
the fair value hierarchy (including the reasons for these transfers) and the
reasons for any transfers in or out of Level 3. This update also requires a
reconciliation of recurring Level 3 measurements about purchases, sales,
issuances and settlements on a gross basis. In addition to these new disclosure
requirements, this update clarifies certain existing disclosure
requirements. For example, this update clarifies that reporting entities are
required to provide fair value measurement disclosures for each class of assets
and liabilities rather than each major category of assets and liabilities. This
update also clarifies the requirement for entities to disclose information about
both the valuation techniques and inputs used in estimating Level 2 and Level 3
fair value measurements. This update became effective for the interim and annual
reporting period beginning January 1, 2010, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will become effective for the interim and annual reporting
period beginning January 1, 2011. We will not be required to provide the amended
disclosures for any previous periods presented for comparative purposes. Other
than requiring additional disclosures, adoption of this update does not have a
material effect on our consolidated financial statements.
In June
2011, the FASB updated the accounting guidance on Topic 220, entitled
“Comprehensive Income”, relating to presentation of comprehensive income. This
guidance requires companies to present total comprehensive income, the
components of net income and the components of other comprehensive income, or
OCI, either in a single continuous statement of comprehensive income or in two
but consecutive statements. Additionally, companies are required to present on
the face of the financial statements the reclassification adjustments that are
reclassified from OCI to net income, where the components of net income and the
components of OCI are presented. This guidance is effective beginning 2012. The
adoption of this guidance is not expected to have a material impact on the
Company’s financial position or results of operations.
In June
2011, the FASB updated the accounting guidance on alignment of disclosures for
GAAP and the International Financial Reporting Standards, or IFRS, by updating
Topic 820 entitled “Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS”, relating to presentation of fair
value measurements reported in financial statements. The updated guidance
requires companies to align fair value measurement and disclosure requirements
between GAAP and IFRS. The updated guidance is effective beginning in 2012 year
and earlier adoption is not permitted. The adoption of this guidance is not
expected to have a material impact on the Company’s financial position or
results of operations.
Note 2 - Property and Equipment
Property
and Equipment consisted of the following at June 30, 2011 and December 31,
2010.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Furniture
and fixtures
|
|
$ |
500 |
|
|
$ |
500 |
|
|
Computer
and equipment
|
|
|
4,486 |
|
|
|
4,486 |
|
|
Total
|
|
|
4,986 |
|
|
|
4,986 |
|
|
Less
accumulated depreciation/amortization
|
|
|
(4,354 |
) |
|
|
(3,214 |
) |
|
Property
and equipment, net
|
|
$ |
632 |
|
|
$ |
1,772 |
|
Propell
Corporation and Subsidiaries
Notes
to the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 3 - Prepaid Expenses
Prepaid
expenses consisted of the following at June 30, 2011 and December 31,
2010.
|
|
|
June
30, 2011
|
|
|
December
31, 2010
|
|
|
Prepaid
insurance
|
|
$ |
2,021 |
|
|
$ |
5,053 |
|
|
Prepaid
investor relations costs
|
|
|
40,000 |
|
|
|
- |
|
|
Prepaid
marketing costs
|
|
|
4,120 |
|
|
|
- |
|
|
Prepaid expenses
|
|
$ |
46,141 |
|
|
$ |
5,053 |
|
Note 4 - Inventory
At June
30, 2011 and December 31, 2010 inventory of $933 and $521, respectively,
consisted of customized product which was complete but had not yet shipped to
customers for specific orders.
Note 5 – Accrued Liabilities
At June
30, 2011 and December 31, 2010 accrued expenses and taxes consisted of the
following:
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Payroll
|
|
$ |
31,667 |
|
|
$ |
27,167 |
|
|
Taxes
|
|
|
1,307 |
|
|
|
632 |
|
|
Deferred revenue
|
|
|
747 |
|
|
|
- |
|
|
Other
|
|
|
4,105 |
|
|
|
6,325 |
|
|
Total
|
|
$ |
37,826 |
|
|
$ |
34,124 |
|
Note 6 - Notes and Convertible Notes Payable
In 2009
and 2010 the Company borrowed $1,067,500 under the terms of a convertible note
payable. During the six months ended June 30, 2011 the Company
borrowed an additional $100,000 under the same note. This note is convertible
into shares of the Company’s common stock at the lenders option at the lower of
$0.27 per share or a twenty-five percent (25%) discount from the next issuance
of common stock by the Company. The original note was due on February 28,
2010. In March 2010, the note was amended to change the due date to
June 30, 2010 and the maximum amount of the Note was increased to $1 Million. In
July, 2010, the Note holder notified the Company of its intention to convert the
Note, upon the Company completing a financing of at least $1.5
million. In February 2011, the Note was amended to increase the maximum amount
to $2.0 million and to change the due date to August 31, 2011 and to allow the
Company to convert the Note at its option once it has raised $500,000
in new equity.
In June
2010, the Company borrowed $100,000 under a one year unsecured note from a
shareholder. Interest accrues on the note at the rate of 8% per annum. The note
has no financial covenants. In December 2010, the shareholder loaned
us an additional $100,000 under similar terms, except that the interest rate on
this note is 12% per annum, with a due date of December 15, 2011. On February
10, 2011, the
shareholder loaned us an additional $100,000 which is due February 10,
2012. This loan accrues interest at the rate of 12% per annum and has
no financial covenants.
In June
2011, the shareholder sold his interest in $50,000 of the June 2010 note to a
third party. The Company subsequently renegotiated the terms of this note by
reducing the interest rate to 6% per annum payable in Company stock; extending
the due date to June 23, 2012; and adding a conversion feature whereby the
holder may convert the note to shares in the Company at a price equal to 65% of
the lowest closing bid price for any of the five trading days before the date of
conversion. On June 28, 2011, the Holder exercised his right to convert $9,375
of the Note for 125,000 shares.
In June
2011, the Company borrowed $40,000 under a one year unsecured note with another
third party. Interest accrues on the note at the rate of 6% per annum payable in
common stock of the Company. This note is convertible by the holder into common
stock of the Company any time after December 7, 2011 at a price equal to 65% of
the lowest closing bid price for any of the five trading days before the date of
conversion. The note has no financial covenants.
Note 7 Notes Payable – Discontinued Operations
The
Company’s Crystal Magic subsidiary has four (4) notes all of which are either
guaranteed or funded by the United States Small Business Administration (SBA).
At June 30, 2011, the notes total an aggregate of approximately
$838,542. Crystal Magic is in default on all of these notes. In
September 2010, the bank managing the loans for the SBA seized substantially all
of the assets of CMI and subsequently sold these assets.
Propell
Corporation and Subsidiaries
Notes
to the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 8 - Stockholders’ Deficit
(A) Common Stock Issuances of Issuer
For
the six months ended June 30, 2011
On
May 1, 2011, the Company issued 500,000 shares of common stock to
Undiscovered Equities pursuant to an Investor Relations Consulting Agreement
dated May 1, 2011. The Investor Relations Consulting Agreement is for a term of
six months commencing May 4, 2011 (unless earlier terminated), and provides for
the Company’s issuance of 500,000 shares of restricted common stock and 100,000
warrants with an exercise price of $0.25 per share which expire on May 4,
2014. The Company recorded $20,284 in compensation expense for the
six months ended June 30, 2011.
As
discussed previously, the Company issued 125,000 shares of common stock in
conjunction with the conversion of $9,375 from a convertible note.
(B)
Stock Option Plan
In 2008
the Company’s Board of Directors approved the Company’s 2008 Stock Option Plan
(the “Stock Plan”) for the issuance of up to five (5) million shares of common
stock to be granted through incentive stock options, nonqualified stock options,
stock appreciation rights, dividend equivalent rights, restricted stock,
restricted stock units and other stock-based awards to officers, other
employees, directors and consultants of the Company and its subsidiaries. The
exercise price of stock options under the Stock Plan is determined by the
compensation committee of the Board of Directors, and may be equal to or greater
than the fair market value of the Company’s common stock on the date the option
is granted. Options become exercisable over various periods from the date of
grant, and generally expire ten years after the grant date. At June 30, 2011 and
December 31, 2010, there were 4,029,000 and 1,499,000 options issued and
outstanding, respectively, under the Stock Plan.
In the
event of termination, the Company will cease to recognize compensation expense.
There is no deferred compensation recorded upon initial grant date, instead, the
fair value of the share-based payment is recognized ratably over the stated
vesting period.
The
Company has applied fair value accounting for all share based payment awards
since inception. The fair value of each option or warrant granted is estimated
on the date of grant using the Black-Scholes option-pricing model. No shares
were issued during the six months ended June 30, 2011 to employees and
consultants.
The
Company records stock based compensation based upon the stated vested provisions
in the related agreements, with recognition of expense recorded on the straight
line basis over the term of the related agreement. The vesting provisions for
these agreements have various terms as follows:
|
|
·
|
Annually over one,
two or three years
|
|
|
·
|
Monthly over one or
three years
|
Note 8 - Stockholders’ Deficit (continued)
During
2010, the Company granted 675,000 options to employees and consultants having a
fair value of $80,265 based upon the Black-Scholes
option pricing model. During the six months ended June 30, 2011, the Company
granted 2,555,000 options to employees having a fair value of $199,327, based
upon the Black-Scholes option pricing model.
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
Balance
– December 31, 2009
|
|
|
1,499,000 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Granted
|
|
|
675,000 |
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
200,000 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
Balance
December 31, 2010
|
|
|
1,974,000 |
|
|
|
0.37 |
|
|
|
8.03 |
|
|
|
|
|
|
Granted
|
|
|
2,555,000 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
500,000 |
|
|
|
0.50 |
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2011 - outstanding
|
|
|
4,029,000 |
|
|
|
0.26 |
|
|
|
9.20 |
|
|
|
- |
|
|
Balance
June 30, 2011 – exercisable
|
|
|
1,564,417 |
|
|
|
0.21 |
|
|
|
8.59 |
|
|
|
- |
|
Propell
Corporation and Subsidiaries
Notes
to the Consolidated
Financial Statements
June
30, 2011
(Unaudited)
Note 9 Subsequent Event
The
Company has evaluated for subsequent events between the balance sheet date of
June 30, 2011 and August 15, 2011, the date the financial statements were
issued.
On July
25, 2011, the Company entered into a Consulting Agreement with an investor
relations firm whereby they will provide consulting services to the Company for
six months in exchange for 500,000 shares of Propell common stock.
On August
3, 2011, the Company entered into a convertible promissory note with a third
party to borrow $53,000. Interest accrues on the note at the rate of
8% per annum, is due in nine months and has no financial covenants. The note is
convertible by the holder into common stock of the Company any time after six
months until maturity. The conversion price would be 65 percent of
the average of the lowest three trading prices of the Company’s common stock
during the ten trading days immediately preceding the
conversion.
On August
8, 2011, the Company converted a loan and interest due a
shareholder totalling $58,279 into 728,493 shares of common
stock.
In the
period from July 1, 2011 through August 15, 2011, the Company has received an
additional $55,000 in bridge financing from a shareholder.
Note 10 - Going Concern
The
Company has negative working capital, has incurred operating losses since
inception, and its operating activities to date have required financing from
outside institutions and related parties. The accompanying financial statements
have been prepared assuming that the Company will continue as a going
concern. The Company will continue to need outside financing to
support its internal growth. Management continues to seek funding to pursue its
business plans.
Item
2. Management’s Discussion and Analysis of Plan of Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with the notes hereto and our audited financial
statements and notes thereto for the fiscal year ended December 31, 2010. In
addition to historical information, the following discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Where possible, we have tried to identify these forward looking statements by
using words such as “anticipate,” “believe,” “intends,” or similar expressions.
Our actual results could differ materially from those anticipated by the
forward-looking statements due to important factors and risks including, but not
limited to, those set forth under “Risk Factors” in Part I, Item 1A of our
financial statements and notes for the fiscal year ended December 31,
2010.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand our
results of operations and financial condition.
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements as of June 30, 2011 and June
30, 2010, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of any contingent liabilities at the
financial statement date and reported amounts of revenue and expenses during the
reporting period. On an on-going basis we review our estimates and assumptions.
Our estimates are based on our historical experience and other assumptions that
we believe to be reasonable under the circumstances. Actual results are likely
to differ from those estimates under different assumptions or conditions. Our
critical accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments are outlined below in “Critical Accounting
Policies.”
FORWARD
LOOKING STATEMENTS
Certain
statements made in this report may constitute “forward-looking statements on our current expectations and projections about future events.” These forward-looking
statements involve known or unknown risks, uncertainties and other factors that
may cause our actual results, performance, or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. In some cases you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions.
These statements are based on our current beliefs, expectations, and assumptions
and are subject to a number of risks and uncertainties. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. These forward-looking statements are made as of the date of this
report, and we assume no obligation to update these forward-looking statements
whether as a result of new information, future events, or otherwise, other than
as required by law. In light of these assumptions, risks, and uncertainties, the
forward-looking events discussed in this report might not occur and actual
results and events may vary significantly from those discussed in the forward-
looking statements.
Company
Overview
Propell
Corporation is a Delaware corporation originally formed on January 29, 2008 as
CA Photo Acquisition Corp. On April 10, 2008 Crystal Magic, Inc. (“CMI”), a
Florida corporation, merged with an acquisition subsidiary of
Propell’s, which was formed solely for the purpose of the merger of CMI with and
into Propell. As part of this transaction, the Company issued an aggregate of
5,400,000 shares to the former shareholders of CMI.
On May 6,
2008, the Company acquired both Mountain Capital, LLC (d/b/a Arrow Media
Solutions) (“AMS”) and Auleron 2005, LLC (d/b/a Auleron Technologies) (“AUL”)
and made each a wholly owned subsidiary. A total of 2,094,864 shares of the
Company’s common stock were issued to the members of AMS and a total of 136,088
shares of the Company’s common stock were issued to the members of
AUL.
The
mergers were completed in order to form a consolidated enterprise with
subsidiaries that each have experience in complementary parts of the imaging and
personalized products industries, and to expand their capabilities both online
and at retail.
In
mid-2009, management decided to concentrate its efforts and assets on its
e-commerce business. Shortly thereafter, AUL and AMS began to wind down
operations. In January 2010, AUL was dissolved. In late 2009, AMS
assigned its warranty responsibilities and its inventory to a third party and
ceased operations. We dissolved AMS in late 2010. In furthering this decision to
concentrate on e- commerce, we closed CMI’s operations in July 2010. In
September 2010, CMI’s assets were foreclosed upon by its largest creditor and
these assets were liquidated.
OUR
PLAN OF OPERATIONS
Our
Company
We are a
Delaware corporation providing e-commerce and fulfillment for image-based
personalized products and services via custom websites for schools, nonprofits,
the military, media companies and other organizations. Through our proprietary
online system, we allow partners to create “instant” e-commerce web sites
(marketed as PropellShops®). This system provides a special web site at which a
customer — whether a business, group, or individual — can design and set up a
web store featuring its own logos, photos or other artwork. That web store
can then be embedded into, or linked from, the customer’s own web site. We then
operate that store for the customer, taking orders, manufacturing and shipping
product and paying a share of our revenue to the customer.
All of
our current operations are conducted through Propell. We ceased operations of
CMI in 2010 due to poor performance and insufficient capital. In 2009 we also
ceased doing business through our AMS subsidiary. We assigned inventory and our
warranty responsibilities and interaction with customers to a third party. We
dissolved AMS in late 2010. Our third subsidiary, Auleron 2005, LLC,
discontinued its operations in 2008; in November 2009, the decision was made to
liquidate Auleron since it had no operations and management determined its
resources were better focused on its Internet business. Auleron
was formally liquidated in January 2010. Prior to our formation in January 2008,
each subsidiary was independently owned.
Our
current customers include eChalk, the Los Angeles Times, the Army Air Force
Exchange Service, and numerous K-12 schools and universities, through e-commerce
web sites. In addition, our management has a long track record of
delivering a variety of consumer and photo products, services and
logistics to partners, including Wal-Mart, Walgreens, CVS and
Rite-Aid.
Our
principal offices are located at 305 San Anselmo Avenue, Suite 300, San Anselmo,
CA 94960. Our telephone number is (415) 747-8775.
Our fiscal year end is December 31.
Critical
Accounting Policies
Management
believes that the critical accounting policies and estimates discussed below
involve the most complex management judgments due to the sensitivity of the
methods and assumptions necessary in determining the related asset, liability,
revenue and expense amounts. Specific risks associated with these critical
accounting policies are discussed throughout this MD&A, where such policies
have a material effect on reported and expected financial results. For a
detailed discussion of the application of these and other accounting policies,
refer to the individual Notes to the Financial Statements for the three months
ended June 30, 2011.
Revenue
Recognition
The
Company recognizes revenues when products are shipped or services are delivered
to customers, pricing is fixed or determinable, and collection is reasonably
assured. Net revenues include product sales net of returns and
allowances.
Use
of estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Estimates are based on historical experience, management expectations for future
performance, and other assumptions as appropriate. Key areas affected by
estimates include the assessment of the recoverability of long-lived assets,
which is based on such factors as estimated future cash flows. We
re-evaluate estimates on an ongoing basis; therefore, actual results may vary
from those estimates.
Fair
Values of Financial Instruments
The
carrying values of cash, accounts receivable, accounts payable and accrued
expenses approximate the fair values of these instruments due to their
short-term nature. The carrying amount for borrowings under the financing
agreement approximates fair value because of the variable market interest rates
charged for these borrowings. We adopted FASB ASC Topic 820, Fair Value Measurements & Disclosures, for financial
assets and financial liabilities in the first quarter of fiscal 2009, which did
not have an impact on our financial statements.
Concentration
of Credit Risk
Financial
instruments, which potentially subject us to concentrations of credit risk,
consist of cash and cash equivalents and accounts receivable. We place our cash
with high quality financial institutions and at times may exceed the FDIC
insurance limit. We extend credit based on an evaluation of the customer’s
financial condition, generally without collateral. Exposure to losses on
receivables is principally dependent on each customer’s financial condition. We
monitor our exposure for credit losses and maintain allowances for anticipated
losses, as required.
Recently
Issued Accounting Standards
For a
discussion of the adoption and potential impacts of recently issued accounting
standards, refer to the “Recent Accounting Pronouncements” section of Note 1,
“Reorganization and Summary of Significant Accounting Policies,” in the Notes to
Financial Statements.
Consolidated
Results of Operations for the three months ended June 30, 2011 and June 30,
2010
For the
three months ended June 30, 2011 as compared to the three months ended June 30,
2010, net revenues increased $258 or approximately 1%. Revenue for the three
months ended June 30, 2010 included several bulk orders which were not repeated
in 2011. For the three months ended June 30, 2011, as compared to the three
months ended March 31, 2011, revenue increased 51.7% as our core online business
continues to grow.
For the
three months ended June 30, 2011 as compared to the three months ended June 30,
2010 cost of goods decreased approximately 12% and our gross margin
increased to approximately 31% from 21% in the comparable quarter last
year. The increased gross margin reflects higher margins in our core
online business as compared to the bulk order business.
Operating
expenses during this period decreased $80,630 or nearly 21%. This
decrease was the result of staff and consulting decreases which reduced payroll
and related costs by approximately $70,000. In addition, we wrote-off of our
website asset in the fourth quarter of 2010, so that there was no amortization
in the second quarter of 2011 as compared to $25,000 of amortization in the
second quarter of 2010. Accounting and legal costs decreased when comparing the
second quarter of 2011 to the second quarter of 2010 by approximately $22,000 as
we incurred additional costs in the second quarter of 2010 related to a
potential acquisition which was not completed. These reductions were partially
offset by interest expense increasing $21,000 as a result of our increased debt
load.
Propell’s
primary use of cash for the three months ended June 30, 2011, was to fund our
losses from continuing operations, offset by an influx of $180,000 in cash from
notes payable and convertible notes payable. Net cash used in
operating activities from continuing operations was $198,365 for the three
months ended June 30, 2011 up from $159,734 for the quarter ended March 31,
2011.
Consolidated
Results of Operations for the six months ended June 30, 2011 and June 30,
2010
For the
six months ended June 30, 2011 as compared to the six months ended June 30,
2010, net revenues increased $12,757 or approximately 27% as a result of
continued growth in our customer base as a result of our engaging new sales
consulting which is bringing in new customers. In mid-2010 we completed an
agreement with the Army Air Force Exchange (AAFES) whereby we offer ecommerce
websites, that are integrated into AAFES’s retail web site at www.aafes.com or www.shopmyexchange.com. These
ecommerce sites target service members and their friends and families, and offer
a wide range of apparel and other gift items that are printed or embroidered
with insignia or other artwork representing military units or other subjects of
interest to military members and their families or friends, that can then be
further customized with the shopper’s artwork or text, such as the service
member’s name. Through the first half of 2011, we have launched over 70 web
shops within AAFES featuring Army, Navy, Marines, Air Force and other military
themes or artwork.
For the
six months ended June 30, 2011 as compared to the six months ended June 30,
2010, cost of goods also increased approximately $5,741 or 16% and our gross
profit increased $7,016 or nearly 66%. Gross margin increased from 23% to 30%
the same as the increase in the comparable quarter last year. This
increased gross margin amount and higher gross margin percent result from less
bulk sales as a percent of total revenue and getting better economies of
scale.
Operating
expenses during the six months ended June 30, 2011 as compared to the six months
ended June 30, 2010 decreased $100,735 or 15%. This decrease was the
result of staff and consulting decreases which reduced payroll and related costs
by approximately $107,000 while the write-off of our website asset in the fourth
quarter of 2010 accounted for another $50,000 of decreased expenses in the first
half of 2011. These reductions were partially offset by interest expense
increasing $41,000 as a result of our increased debt load and accounting, legal
and public filing costs increasing approximately $13,000 related to required
refilings with the SEC.
Propell’s
primary use of cash for the six months ended June 30, 2011, was to fund our
losses from continuing operations, offset by an influx of $305,000 in cash from
notes payable and convertible notes payable. Net cash used in
operating activities from continuing operations was $358,099 for the six months
ended June 30, 2011 up from $234,872 for the comparable six month
period last year.
Our
ability to continue to execute on our plan of operations is contingent on our
ability to raise additional capital to further develop our Internet initiatives
and expand our marketing of our existing product line.
Liquidity and Capital Resources.
To date,
our primary sources of cash have been funds raised from the sale of our
securities, including the issuance of convertible and non- convertible
debt.
We have incurred an accumulated deficit of $5,113,464 through June 30, 2011. We
have incurred negative cash flow from operations since we started our business.
We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development effort. Based on our current plans, we believe that our cash
will not be sufficient to enable us to meet our planned operating needs in the
next 12 months.
The
Company has a convertible note payable in the amount of $1,167,500 which is due
August 31, 2011. The note holder has notified the Company of its intention to
convert the note upon the Company completing a financing of at least
$500,000. The Company is in discussions with the note holder to,
among other things, extend the note’s due date.
In July
2011, a shareholder provided $20,000 in short-term bridge financing to the
Company which is not interest bearing and is not evidenced by a
note.
On August
3, 2011, the Company entered into a convertible promissory note with a third
party to borrow $53,000. Interest accrues on the note at the rate of
8% per annum, is due in nine months and has no financial covenants. The note is
convertible by the holder into common stock of the Company any time after six
months until maturity. The conversion price would be 65 percent of
the average of the lowest three trading prices of the Company’s common stock
during the ten trading days immediately preceding the conversion.
Off
Balance Sheet Arrangements
There are
no off balance sheet arrangements.
Item
4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”), who also
serves as our principal financial and accounting officer, of the effectiveness
of the Company’s disclosure controls and procedures (as defined under Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Company’s CEO concluded that the
Company’s disclosure controls and procedures as of June 30, 2011 were effective
to ensure that information required to be disclosed by the Company in the
reports that the Company files or submits under the Exchange Act, was recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to the Company’s management, including the Company’s CEO, as appropriate, to
allow timely decisions regarding required disclosure.
(b)
Changes in Internal Control over Financial Reporting
There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
fiscal quarter ended June 30, 2011 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
May 1, 2011, the Company issued 500,000 shares of common stock to
Undiscovered Equities pursuant to an Investor Relations Consulting Agreement
dated May 1, 2011. The Investor Relations Consulting Agreement is for a term of
six months (unless earlier terminated) commencing May 4, 2011, and provides for
the Company’s issuance of 500,000 shares of restricted common stock and 100,000
warrants with an exercise price of $0.25 per share which expire on May 4,
2014. The Company recorded $20,284 in compensation expense for the
six months ended June 30, 2011. The shares of Company common stock are
restricted securities, and may not be sold, transferred or otherwise disposed
without registration under the Securities Act of 1933, as amended (the “Act”),
or an exemption thereunder. The securities were offered and sold in reliance on
the exemption from registration under Section 4(2) of the Act. The offering was
not conducted in connection with a public offering, and no public solicitation
or advertisement was made or relied upon by the individual in connection with
the offering.
In June
2011, the Company entered into an Agreement whereby an investor purchased
$50,000 of the debt due by the Company to a shareholder. The Company
subsequently renegotiated the terms of this note by reducing the interest rate
to 6% per annum payable in Company stock; extending the due date to June 23,
2012; and adding a conversion feature whereby the holder may convert the note to
shares in Propell at a price equal to 65% of the lowest closing bid price for
any of the five trading days before the date of conversion. On June 28, 2011,
the Holder exercised his right to convert $9,375 of the Note for 125,000 shares.
The securities were offered and sold in reliance on the exemption from
registration under Section 4(2) of the Act. The offering was not conducted in
connection with a public offering, and no public solicitation or advertisement
was made or relied upon by the individual in connection with the
offering.
On June 30, 2011, the Company and
Edward L. Bernstein, entered into a new Employment Agreement. Pursuant to the
terms of the agreement, Mr. Bernstein was granted as of June 30, 2011 an option
to purchase 1,500,000 share of common stock of the Company at the fair market
value of the stock on June 30, 2011, of which 500,000 shares were exercisable
immediately, an additional 27,778 vested the next month and the
remaining 972,222 vest 1/36th per month for the remaining 36 months
of the agreement. The securities were offered and sold in reliance
on the exemption from registration under Section 4(2) of the Act. The offering
was not conducted in connection with a public offering, and no public
solicitation or advertisement was made or relied upon by the individual in
connection with the offering.
On July
25, 2011, the Company entered into a Consulting Agreement with an investor
relations firm whereby they will provide consulting services to the Company for
six months in exchange for 500,000 shares of Propell common stock. The
securities were offered and sold in reliance on the exemption from registration
under Section 4(2) of the Act. The offering was not conducted in connection with
a public offering, and no public solicitation or advertisement was made or
relied upon by the individual in connection with the
offering.
On August
3, 2011, the Company entered into a convertible promissory note with a third
party to borrow $53,000. Interest accrues on the note at the rate of
8% per annum, is due in nine months and has no financial covenants. The note is
convertible by the holder into common stock of the Company any time after six
months until maturity. The conversion price would be 65 percent of
the average of the lowest three trading prices of the Company’s common stock
during the ten trading days immediately preceding the conversion. The securities
were offered and sold in reliance on the exemption from registration under
Section 4(2) of the Act. The offering was not conducted in connection with a
public offering, and no public solicitation or advertisement was made or relied
upon by the individual in connection with the offering.
On
August 8, 2011, the Company converted a loan and interest due a
shareholder totalling $58,279 into 728,493 shares of common stock. The
securities were offered and sold in reliance on the exemption from registration
under Section 4(2) of the Act. The offering was not conducted in connection with
a public offering, and no public solicitation or advertisement was made or
relied upon by the individual in connection with the
offering.
Item
3. Defaults upon senior Securities
Our CMI
subsidiary is in default on four separate loans which in the aggregate is
approximately $848,916, and which are either made or guaranteed by the U.S.
Small Business Administration (SBA). As a result, the SBA informed CMI of
its plans to seize CMI’s assets which were pledged to secure the
loans.
Item
4. Removed and Reserved
None.
Item
5. Other Information
None.
Item
6. Exhibits
|
Regulation
|
|
|
|
Number
|
|
Exhibit
|
|
31.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer, Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
of the Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act
|
| 10.45 |
|
6%
Convertible Redeemable Note Due June 7, 2012 |
| 10.46 |
|
6%
Convertible Redeemable Note Due June 23, 2012 |
| 10.47 |
|
Convertible
Promissing Note, Issue Date August 3, 2012 |
| 10.48 |
|
Consulting
Agreement dated July 25, 2011 |
| 10.49 |
|
Agreement
to Exchange Note for Stock |
| 10.50 |
|
Consulting
Agreement dated May 1, 2011 |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DATE:
August 15, 2011
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PROPELL
CORPORATION
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|
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(Registrant)
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|
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|
|
|
|
By:
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/s/Edward
L. Bernstein
|
|
|
|
Edward
L. Bernstein President and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer and Principal Financial
Officer)
|