PROPELL 10-Q 09-30-10

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________


FORM 10 - Q

_______________________________


[mark one]


 

 

ý

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

For the quarterly period ended: September 30, 2010

 

 

 

o

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                     to                        

 

Commission File Number 333-139354

_____________________________________________________________


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 ý  No o


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 o    No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o    No ý

 

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 o  

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company ý

 

Number of shares outstanding of the issuer’s common stock as of the latest practicable date: 20,846,132 shares of common stock, $.001 par value per share, as of November 11, 2010.





 

PROPELL CORPORATION


Index


 

 

 

PART I. FINANCIAL INFORMATION

 

 Page

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009

 

1

 

 

 

 

 

 

 

Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)

 

2

 

 

 

 

 

 

 

Statement of Stockholders’ Deficit as of September 30, 2010 (unaudited)

 

3

 

 

 

 

 

 

 

Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)

 

4

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

11

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

14

 

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

15

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

15

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

15

 

 

 

 

 

Item 4.

 

Removed and Reserved

 

15

 

 

 

 

 

Item 5.

 

Other Information

 

15

 

 

 

 

 

Item 6.

 

Exhibits

 

15






PART I.—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets

Propell Corporation and Subsidiaries
Consolidated Balance Sheets

        September 30, 2010
    December 31, 2009
        (unaudited)     (audited)
Assets
                                     
Current Assets
                                     
Cash
              $ 67,261          $ 121,689   
Accounts receivable
                 2,455             4,176   
Prepaid expenses
                 1,320             4,587   
Inventory
                 736              95,144   
Deposits — current
                 1,499             1,499   
Total Current Assets
                 73,271             227,095   
 
Property and Equipment, net
                 6,795             3,821   
 
Other Assets
                                     
Intangible assets, net
                              9,314   
Website URL, net
                              5,600   
Website assets, net
                 501,202             501,201   
Deposits — long term
                              7,401   
Total Other Assets
                 501,202             523,516   
 
Assets from Discontinued Operations
                 288                 
 
Total Assets
              $ 581,556          $ 754,432   
 
Liabilities and Stockholders’ Deficit
                                     
 
Current Liabilities:
                                      
Accounts payable
              $ 174,966          $ 511,167   
Accrued liabilities
                 147,524             6,648   
Deferred revenue
                 11,991                
Due to related parties
                 103,000             51,714   
Convertible notes payable
                 942,500             420,462   
Notes payable — current portion
                 100,000             104,400   
Total Current Liabilities
                 1,479,981             1,094,391   
 
Long Term Liabilities
                                     
Notes payable
                              734,542   
Total Long Term Liabilities
                              734,542   
 
Liabilities from Discontinued Operations
                 1,220,284                
 
Total Liabilities
                 2,700,265             1,828,933   
 
Stockholders’ Deficit
                                     
Common stock, $0.001 par value; 100,000,000 shares authorized,
                                       
22,732,575 issued and 20,846,132 outstanding and 22,482,575 issued and outstanding
                 20,846             22,482   
Additional paid-in capital
                 1,693,518             1,694,614   
Accumulated deficit
                 (3,833,073 )            (2,791,597 )  
Total Stockholders’ Deficit
                 (2,118,709 )            (1,074,501 )  
 
Total Liabilities and Stockholders’ Deficit
              $ 581,556          $ 754,432   

 

See accompanying notes to unaudited consolidated financial statements

 

1

 





 

Consolidated Statements of Operations

 

Propell Corporation and Subsidiaries
Consolidated Statements of Operations
(unaudited)

        For the three months ended
September 30,
    For the nine months ended
September 30,
   
        2010
    2009
    2010
    2009
Net Revenues:
              $ 15,081          $ 305,212          $ 62,013          $ 669,661   
 
Cost of Goods Sold:
                 10,675             53,727             46,910             160,152   
 
Gross Profit:
                 4,406             251,485             15,103             509,509   
 
Operating Expenses:
                 341,147             545,519             963,292             1,445,334   
 
Loss from Operations
                 (336,741 )            (294,034 )            (948,189 )            (935,825 )  
 
Other Income (Expense):
                 10              (74 )            (14,986 )            107,450   
 
Loss from Continuing Operations
                 (336,731 )            (294,108 )            (963,175 )            (828,375 )  
 
Loss from Discontinued Operations
                 (191 )                         (78,301 )               
 
Net Loss
              $ (336,922 )         $ (294,108 )         $ (1,041,476 )         $ (828,375 )  
 
Net Loss Per Share — Basic and Diluted
              $ (0.02 )         $ (0.01 )         $ (0.05 )         $ (0.04 )  
 
Weighted average number of shares outstanding
during the period — basic and diluted
                 20,846,132             21,740,909             21,733,288             18,706,435   

 

 

See accompanying notes to unaudited consolidated financial statements

 

2

 



Consolidated Statements of Stockholders' Equity


Propell Corporation and Subsidiaries
Consolidated Statement of Stockholders’ Deficit
As of September 30, 2010
(unaudited)

        Common Stock
$0.01 Par Value
   
        Shares
    Amount
    Additional
Paid-in
Capital
    Distribution
to
Affiliates
    Accumulated
Deficit
    Total
Stockholders’
Deficit
Balance, January 29, 2008 (Inception)
                           $           $           $           $           $    
 
Issuance of common stock to acquire Crystal Magic, Inc.
                 5,400,000             5,400             (5,400 )                                             
 
Issuance of common stock to acquire Auleron 2005, LLC
                 136,088             136              (136 )                                             
 
Issuance of common stock to acquire Mountain Capital, LLC
                 2,094,864             2,095             381,709                                           383,804   
 
Conversion of convertible notes to common stock
                 2,278,000             2,278             20,502                                           22,780   
 
Reclassification of intercompany payable
                                               61,048                                           61,048   
 
Distributions to affiliate
                                                              (938,664 )                           (938,664 )  
 
Net loss for the period ended December 31, 2008
                                                                             (1,107,257 )            (1,107,257 )  
 
Balance, December 31, 2008
                 9,908,952             9,909             457,723             (938,664 )            (1,107,257 )            (1,578,289 )  
 
Recognition of stock based compensation in connection with stock option grants
                                               43,440                                           43,440   
 
Recognition of shares issued in connection with services rendered
                 856,667             857              285,793                                           286,650   
 
Conversion of convertible notes into common stock
                 8,650,000             8,650             1,763,014                                           1,771,664   
 
Issuance of common stock in rights offering
                 3,066,956             3,066             825,012                                           828,078   
 
Distributions to affiliate
                                                              (122,542 )                           (122,542 )  
 
Reclassification of affiliate distributions as a result of change in control
                                                              1,061,206                            1,061,206   
 
Reclassification of affiliate equity and payables due to change in control
                                               (1,680,368 )                                          (1,680,368 )  
 
Net loss for the year ended December 31, 2009
                                                                             (1,684,340 )            (1,684,340 )  
 
Balance, December 31, 2009
                 22,482,575             22,482             1,694,614                          (2,791,597 )            (1,074,501 )  
 
Net loss for the nine months ended September 30, 2010
                                                                             (1,041,476 )            (1,041,476 )  
 
Recognition of stock repurchases
                 (1,886,443 )            (1,886 )            (43,114 )                                          (45,000 )  
 
Recognition of stock based consulting in connection with stock option grants
                                               4,429                                           4,429   
 
Recognition of stock based compensation in connection with stock option grants
                                               339                                            339    
 
Recognition of stock based compensation
                 250,000             250              37,250                                           37,500   
 
Balance, September 30, 2010
                 20,846,132          $ 20,846          $ 1,693,518          $           $ (3,833,073 )         $ (2,118,709 )  

 

 

See accompanying notes to consolidated financial statements

 

3

 



Consolidated Statements of Cash Flows

 

Propell Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)

        For the nine months ended September 30,    
        2010
    2009
Cash Flows From Operating Activities:
                                      
Net loss
              $ (1,041,476 )         $ (828,375 )  
 
Adjustments to reconcile net loss to net cash used in operating activities:
                                      
 
Depreciation and amortization
                 8,548             27,608   
Elimination of debt repayment to Loco Lobo, LLC
                              (75,000 )  
Accrued interest classified as equity
                              41,664   
Issuance of common stock for services
                 37,500             26,400   
Issuance of stock options in connection with consulting services
                 4,429                
Issuance of stock options in connection with employment services
                 339                 
Writedown of assets from discontinued operations
                 1,219,996                
Changes in Assets and Liabilities
                                      
Decrease in accounts receivable
                 1,721             22,819   
Decrease (increase) in prepaid expenses
                 3,267             (2,166 )  
Decrease in inventory
                 94,408             86,203   
Decrease in deferred charges
                              4,865   
Decrease in deposits
                 7,401             2,973   
Decrease in accounts payable
                 (336,202 )            (16,235 )  
Increase (decrease) in accrued expenses and taxes
                 140,875             (32,915 )  
Increase (decrease) in deferred revenue
                 11,991             (23,017 )  
Increase (decrease) in due to related parties
                 51,286             (1,555 )  
Net Cash Provided By (Used In) Operating Activities
                 204,083             (766,731 )  
 
Cash Flows From Investing Activities:
                                      
Acquisitions of property and equipment
                 (5,921 )            (5,519 )  
Development of website asset
                 9,314             (101,317 )  
Cash received from the consolidation of Crystal Magic, Inc.
                              7,294   
Net Cash Provided By (Used In) Investing Activities
                 3,393             (99,542 )  
 
Cash Flows From Financing Activities:
                                      
Distributions to affiliate—Crystal Magic
                              (122,542 )  
Proceeds from rights offering
                              828,078   
Proceeds from note payable
                 100,000             100,000   
Increase (decrease) in intercompany payable to Auleron 2005
                              (7,778 )  
Proceeds from convertible notes payable
                 522,038                
Payment of notes payable
                 (838,942 )               
Payments on long term debt
                              (12,186 )  
Repurchase of common stock
                 (45,000 )                 
Net Cash Provided (Used in) provided by Financing Activities
                 (261,904 )            785,572   
 
Net increase (decrease) in cash and cash equivalents
                 (54,428 )            (80,701 )  
  Cash and cash equivalents at beginning of period
                 121,689             136,659   
  Cash and cash equivalents at end of period
              $ 67,261          $ 55,958   
 
Supplemental Cash Flow Information:
                                      
Cash paid for interest
              $           $    
Cash paid for income taxes
                                 
 
Supplemental Non-Cash Investing and Financing Information:
                                      
Assets of Crystal Magic merged in due to change of control
                              (747,106 )  
Liabilities of Crystal Magic merged in due to change of control
                              2,366,426   
Equity of Crystal Magic merged in due to change of control
                              (1,619,320 )  
Reclassification of intercompany payable due to change in control
                              1,061,206   
Reclassification of affiliate distribution to intercompany due to change in control
                              (1,061,206 )  
Conversion of convertible notes payable to stock
                              (1,730,000 )  
Conversion of convertible notes payable to stock
                              1,730,000   

 

See accompanying notes to unaudited consolidated financial statements

 

4

 



 


Propell Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)


Note 1 - Organization and Summary of Significant Accounting Policies

(A) Description of the Business

We are a company primarily engaged in the on demand e-commerce line of business. We enable turnkey ‘instant’ e-commerce for education, military and media partners, providing all necessary technology, on-demand manufacturing, marketing and fulfillment services at no risk or cost to our partners.


Our primary target markets for our service, called “PropellShops,” can be divided into three groups: schools, including K-12 and college; the armed forces; and independent music bands. Our business model is based upon the formation of strategic partnerships with key targeted companies involved in each of our target markets in order to obtain access to a large number of customers.


The PropellShops system permits partners with little or no technical or graphic expertise to quickly become “Store Owners” and create online shops displaying a wide variety of personalized apparel and other merchandise featuring the school or organization’s brand or other artwork.   The Store Owner then publicizes the shop to its potential customers, and Propell does all manufacturing, billing, customer support and shipping.   


Since Propell does not charge a setup or ongoing fee for e-commerce shops, and merchandise is only manufactured when ordered, the PropellShops system eliminates almost all risk or investment for Store Owners.  They carry no inventory, and Propell handles all fulfillment.  Further, Propell’s “on-demand” system also eliminates minimum order quantities and long lead times.  Propell collects all revenue and then distributes a share of every sale to the Store Owner.


(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, 2009, 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, 2009. The interim results for the period ended September 30, 2010 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 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 months ended September 30, 2010.

 

5

 



 

(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.

(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 September 30, 2010 and December 31, 2009, 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 September 30, 2010 and December 31, 2009, 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. In connection with its CMI subsidiary, the Company took an impairment charge of $85,527 during the year ended December 31, 2009.

(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 1,649,000 stock options and 4,600,434 warrants. Since the Company reported a net loss for the nine months ended September 30, 2010 and the year ended December 31, 2009, 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

 

6

 



 

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.

(N) Recent Accounting Pronouncements


In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which amends previous guidance to require disclosures about fair value of financial instruments in interim as well as annual financial statements in the current economic environment. This pronouncement was effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our business, financial condition or results of operations; however, these provisions of FASB ASC Topic 820 resulted in additional disclosures with respect to the fair value of our financial instruments.


In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This pronouncement was effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our business, results of operations or financial position; however, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events.


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.


Note 2 - Property and Equipment

Property and Equipment consisted of the following at September 30, 2010 and December 31, 2009.

 

 

9/30/2010

 

12/31/2009

Leasehold improvements

$

$

6,825 

Furniture and fixtures

 

500 

 

37,971 

Computer and equipment

 

12,486 

 

11,782 

     Total

 

12,986 

 

56,578 

Less accumulated depreciation/amortization

 

(6,191)

 

(52,757)

Property and equipment, net

$

   6,795 

$

   3,821 


Note 3 - Prepaid Expenses

At September 30, 2010 prepaid expenses consisted solely of prepaid insurance in the amount of $1,320.  At December 31, 2009 prepaid expenses consisted solely of prepaid insurance in the amount of $4,587.


Note 4 - Inventory

At September 30, 2010 inventory was valued at $736.  At December 31, 2009 inventory was valued at $95,114.

 

7

 



Note 5 – Website Assets

In 2009, the Company developed its primary website and capitalized the expenses incurred from programming in the amount of $501,201. As of September 30, 2010 this amount remained unchanged.

Note 6 – Accrued Expenses and Taxes

At September 30, 2010 and December 31, 2009 accrued expenses and taxes consisted of the following:

 

 

9/30/2010

 

12/31/2009

Payroll

$

43,573

$

5,756

Taxes

 

341

 

652

Interest on Notes

 

101,710

 

0

Other

 

1,900

 

240

Total

$

147,524

$

6,648


Note 7 - Notes and Convertible Notes Payable


In 2009 the Company borrowed $407,500 under the terms of a convertible note payable. During the nine months ended September 30, 2010 the Company borrowed an additional $535,000 on the same note. This note is convertible to 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, of which the Company has borrowed $942,500 as of September 30, 2010.  In July 2010, the holder of the convertible note agreed to convert the note to shares immediately preceding the closure of a fund raising of at least $1.5 million.


During the year, the Company also borrowed $100,000 under the terms of a note payable. This note is due on December 31, 2010 or upon the closing of the next financing, whichever occurs first. The note also carries an interest rate of 8%.  


Note 8 – Other Income and (Expense)

At September 30, 2010 and September 30, 2009 other income (expense) consisted of the following:

 

 

9/30/2010

 

9/30/2009

Interest income

$

14 

$

872

Vendor invoice adjustments

 

(15,000) 

 

23,420

Insurance claim/damaged kiosk

 

 

6,482

Debt forgiveness

 

 

76,875

Interest Expense

 

 

(199)

Net other income

$

(14,986)

$

107,450


Note 9 - Stockholders’ Deficit

(A) Common Stock Issuances of Issuer

For the nine months ended September 30, 2010

During the nine months ended September 30, 2010, the Company issued 250,000 shares of common stock for services rendered having a fair value of $37,500.

For the Year ended December 31, 2009

During the year ended December 31, 2009, the Company issued 856,667 shares of common stock for services rendered, having a fair value of $286,650. Of this, 741,667 shares were issued in connection with severance agreements.

During the year ended December 31, 2009, the Company issued 8,650,000 shares of common stock in connection with the conversion of convertible notes in the principal amount of $1,730,000 ($0.20 per share).

During the year ended December 31, 2009, the Company issued 3,066,956 shares of common stock in two rights offerings for proceeds of $828,078 ($0.27 per share).

 

8

 



(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 September 30, 2010 and December 31, 2009, there were 1,624,000 and 1,499,000 options issued and outstanding under the Stock Plan, respectively.

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. The Black-Scholes assumptions used in the nine months ended September 30, 2010 are as follows:

 

 

Nine Months ended 9/30/2010

Exercise price

 

$0.15 - $.027

 

Expected dividends

 

0%

 

Expected volatility

 

150%

 

Risk fee interest rate

 

2-02% to 3.59%

 

Expected life of option

 

5-10 years

 

Expected forfeitures

 

0%

 


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 year


During the nine months ended September 30, 2010, the Company granted 150,000 options to employees and consultants having a fair market value of $4,768.

 

Options

 

Weighted Average Exercise Price

 

Weighted Average Remaining Contractual Life

 

Aggregate Intrinsic Value

Balance – December 31, 2008

1,075,000

 

0.50

 

 

 

 

Granted

749,000

$

0.27

 

 

 

 

Exercised

 0

 

-

 

 

 

 

Forfeited

325,000

 

0.43

 

 

 

 

Balance – December 31, 2009

1,499,000

$

0.40

 

 

 

 

Granted

150,000

$

0.23

 

 

 

 

Exercised

  0

 

-

 

 

 

 

Forfeited

0

$

-

 

 

 

 

Balance – September  30, 2010 – outstanding

1,649,000

 

0.39

 

8.15 years

 

0

Balance – September 30, 2010 – exercisable

836,500

$

0.43

 

7.92 years

 

0

 

 

 

 

 

 

 

 


 

9

 




Note 10 - Subsequent Events

The Company has evaluated for subsequent events between the balance sheet date of September 30, 2010 and November 5, 2010, the date the financial statements were issued noting no events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended September 30, 2010.

Note 11 - 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.

 

10

 



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, 2009. 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, 2009.


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 and for the periods ending September 30, 2010 and September 30, 2009, 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 Mountain Capital, LLC 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. The Company is in the process of settling with creditors and expects to dissolve AMS by the end of 2010.

 

11

 




OUR PLAN OF OPERATIONS


Our Company


We are a Delaware company primarily engaged in the on demand e-commerce line of business. We enable turnkey ‘instant’ e-commerce for education, military and media partners, providing all necessary technology, on-demand manufacturing, marketing and fulfillment services at no risk or cost to our partners.


Our primary target markets for our service, called “PropellShops,” can be divided into three groups: schools, including K-12 and college; the armed forces; and independent music bands. Our business model is based upon the formation of strategic partnerships with key targeted companies involved in each of our target markets in order to obtain access to a large number of customers.


The PropellShops system permits partners with little or no technical or graphic expertise to quickly become “Store Owners” and create online shops displaying a wide variety of personalized apparel and other merchandise featuring the school or organization’s brand or other artwork. The Store Owner then publicizes the shop to its potential customers, and Propell does all manufacturing, billing, customer support and shipping.


Since Propell does not charge a setup or ongoing fee for e-commerce shops, and merchandise is only manufactured when ordered, the PropellShops system eliminates almost all risk or investment for Store Owners. They carry no inventory, and Propell handles all fulfillment. Further, Propell’s “on-demand” system also eliminates minimum order quantities and long lead times. Propell collects all revenue and then distributes a share of every sale to the Store Owner.


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 and nine months ended September 30, 2010.


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.


 

12

 



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 September 30, 2010 and September 30, 2009


For the three months ended September 30, 2010 as compared to the three months ended September 30, 2009, net revenues were $15,081 and $305,212, respectively; cost of goods sold were $10,675 and $53,727, respectively; operating expenses were $341,147 and $545,519, respectively, and other income was $10 and other expense was $74, respectively. Results from the three months ended September 30, 2009 include results from our Auleron and CMI operations, which were discontinued in late 2009 and June 2010, respectively. Results for the three months ended September 30, 2010 are solely attributable to our ecommerce operations. For the three months ended September 30, 2009, our e-commerce business generated $5,629 in revenue with a gross profit of $2,030. Year-over-year growth in revenue for our e-commerce business was 267%   In addition, the net loss from discontinued operations was $191 and $0, respectively. All totaled, the Company posted a net loss of $336,922 and $294,108, respectively.


For the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 revenue decreased 95% or $290,131; however since for the period ended September 30, 2010 both AMS and CMI were not consolidated into the financial statements, any comparison between the two periods would not be indicative of overall company performance.


Consolidated Results of Operations for the nine months ended September 30, 2010 and September 30, 2009


For the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, net revenues were $62,013 and $669,661, respectively; cost of goods sold were $46,910 and $160,152, respectively; operating expenses were $963,292 and $1,445,334, respectively, and other income (expense) was $(14,986) and $107,450, respectively. Results from the nine months ended September 30, 2009 include results from our Auleron and CMI operations, which were discontinued in late 2009 and June 2010, respectively. Unlike prior quarters, the revenue generated during the last three months has been solely derived from our ecommerce operations. For the nine months ended September 30, 2009, our e-commerce business generated $8,954 in revenue with a minimal gross profit. Year-over-year growth in revenue for our e-commerce business was 593%. In addition, net loss from discontinued operations was $78,301 and $0, respectively. All totaled, the Company posted a net loss of $1,041,476 and $828,375, respectively.


For the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 revenue decreased 91% or $607,648; however since for the period ended September 30, 2010 both AMS and CMI were not consolidated into the financial statements other than to reflect the discontinuance of their operations, any comparison between the two periods would not be indicative of overall company performance.


Nine Months Ended September 30, 2010 - Cash Flow Activity  


Propell’s primary sources and uses of cash for the nine months ended September 30, 2010, included losses from continuing operations, adjusted for non-cash items of income and expense and working capital needs, payments of notes payable totaling $838,942 offset by an influx of $622,038 in cash from notes payable. Net cash provided by operating activities from continuing operations was $204,083 for the nine months ended September 30, 2010 primarily as a result of a write down of assets from discontinued operations and loans from related parties of $103,000. Propell’s primary sources and uses of cash from operating activities for the period were losses from operations, as adjusted for non-cash items of income and expense which included:


·

A decrease in accounts receivables of $1,721 brought about by closing our Crystal Magic operation


·

The write off of all inventory of $95,144 related to our CMI subsidiary partially offset by $736 in inventory held by PropellShops.


·

A marked decrease of $284,916 in accounts payable and due to related parties


·

An increase in accrued expenses, taxes and deferred revenue of $152,866 manly consisting of $99,518 in interest due on convertible notes


Net cash provided by investing activities for the nine months ended September 30, 2010, was $3,393 attributable to PropellShops web development offset by the acquisition of property and equipment.


Net cash used in financing activities was $261,904 which included $522,038 from our notes offering that convert into common stock, $100,000 from a short-term note, offset by a $838,942 payment of notes payable and $45,000 used to reacquire common stock. The convertible  note is convertible to 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, of which the Company has borrowed $942,500 as of September 30, 2010. In July 2010, the holder of the convertible note agreed to convert the note to shares immediately preceding the closure of a fund raising of at least $1.5 million.

 

13

 



 


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 convertible debt offerings, notes and revenue derived from our CMI subsidiary; however as a result of the cessation of our CMI operations we will no longer receive revenues from CMI, and therefore will have to rely on outside funding until such time as our PropellShops product derives enough revenue to sustain business operations. Although we anticipate that our Internet business will eventually provide the needed revenue, it is difficult for us to assess exactly when this will occur.


In an effort to improve our operating results and increase our revenues we will continue to seek strategic partners. On June 14, 2010 we and our wholly owned subsidiary entered into a merger agreement with Designbyhumans.com. Upon closing of the Merger Agreement, DBH was to merge with and into the Acquisition Sub with DBH being the surviving entity. DBH’s obligation to consummate the Merger was conditioned upon us receiving a commitment for financing of at least $1,500,000 and the conversion by all current note holders, other than note holders of Crystal Magic, Inc., of their debt to equity. On September 20, 2010, due to our inability to receive a commitment for financing, DBH terminated the Merger Agreement. We will continue to discuss a merger if we are successful in raising the requisite financing. There can be no assurance that such financing will be available or if available that it will be on favorable terms and that we can complete a merger with DBH.


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.

 

However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, our partnership with DBH may be at risk and we may be unable to carry out the rest of our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.


The Company leases its office space on a month-to-month lease.  It has no other lease obligations.


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 September 30, 2010 are 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, is 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 September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

14

 



 

Part II.   OTHER INFORMATION


Item 1. Legal Proceedings


None.  


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds update issuances for the quarter


During the nine months ended September 30, 2010, the Company issued 250,000 shares of common stock to an individual for services rendered having a fair value of $37,500. The securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”), since the issuance by us did not involve a public offering. In addition, the shares were clearly marked as restricted. This restriction ensures that these shares will not be immediately redistributed into the market.


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). In September 2010, the SBA seized substantially all of the assets of CMI and subsequently sold these assets.


Item 4.  Removed and Reserved


None.


Item 5.  Other Information


None.


Item 6.  Exhibits


 

 

Regulation

S-B 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.

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


 

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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: November 11, 2010

PROPELL CORPORATION

(Registrant)

 


 

 

 

 

 

 

 

By:

/s/Edward L. Bernstein

 

 

Edward L. Bernstein President and Chief Executive Officer

(Principal Executive Officer and Principal Financial Officer)

 

 




 

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