United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended January 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 000-52980
PROPALMS, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 22-3351399
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
Unit 4, Park Farm Courtyard
Easthorpe, Malton N. Yorkshire
United Kingdom Y017 6QX
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(Address of Principal (Zip Code)
Executive Offices)
011-44-1653-696060
(Issuer's Telephone Number)
Securities Registered under Section 12(b) of the Exchange Act: None.
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the Issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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 Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.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 [ ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Issuer's revenues for the most recent fiscal year were $882,119.
The aggregate market value of the voting and non-voting common equity of the
registrant as of May 8, 2009 was $5,974,140 based on the $0.012 per share
closing price of the Common Stock on the Over The Counter Bulletin Board
composite transactions tape.
The number of shares of Common Stock outstanding as of May 8, 2009 was
487,845,650.
TABLE OF CONTENTS
Part I:
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Item 1. Description of Business 2
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II:
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Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity
Securities 13
Item 6. Financial Statements 14
Report of Registered Public Accountants 15
Consolidated Balance Sheets as of January 31, 2009
and 2008 16
Consolidated Statements of Operations for the years
ended January 31, 2009 and 2008 17
Consolidated Statement of Stockholders' Deficit for
the years ended January 31, 2009 and 2008 18
Consolidated Statement of Cash Flows for the
years ended January 31, 2009 and 2008 19
Notes to Consolidated Financial Statements 20
Item 7. Management's Discussion and Analysis or Plan of
Operation 29
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
Item 8A(T). Controls and Procedures 39
Item 8B. Other Information 39
Part III:
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Item 9. Directors, Executive Officers, Promoters, and Control
Persons and Corporate Governance; Compliance with
Section 16(a) of the Exchange Act 39
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 12. Certain Relations and Related Transactions, and
Director Independence 41
Item 13. Exhibits 41
Item 14. Principal Accountant Fees and Services 41
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" made in reliance upon the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 regarding the plans and
objectives of management for future operations. Such statements may relate to,
but are not limited to, information or assumptions about known and unknown
risks, sales (including pricing), income/(loss), earnings per share, operating
income or gross margin improvements, return on equity, return on invested
capital, capital expenditures, working capital, cash flow, dividends, capital
structure, debt to capitalization ratios, interest rates, internal growth rates,
restructuring, impairment and other charges, potential losses on divestitures,
impact of changes in accounting standards, pending legal proceedings and claims
(including environmental matters), future economic performance, costs and cost
savings (including raw material inflation, productivity and streamlining),
synergies, management's plans, goals and objectives for future operations,
performance and growth or the assumptions relating to any of the forward-looking
statements. These statements generally are accompanied by words such as
"intend," "anticipate," "believe," "estimate," "project," "target," "plan,"
"expect," "will," "should," "would" or similar statements. The Company cautions
that forward-looking statements are not guarantees because there are inherent
difficulties in predicting future results. Actual results could differ
materially from those expressed or implied in the forward-looking statements.
Factors that could cause actual results to differ include, but are not limited
to, those matters set forth in this Annual Report generally and Item 1A to this
Annual Report. Some of these factors are described as criteria for success. The
Company's failure to achieve all or even a limited success of these objectives
could result in actual results differing materially from those expressed or
implied in the forward-looking statements. In addition, there can be no
assurance that the Company has correctly identified and assessed all of the
factors affecting the Company or that the publicly available and other
information the Company receives with respect to these factors is complete or
correct.
Part I
Item 1. Description of Business.
Overview of our Business.
Propalms, Inc. (the "Company"), a Nevada corporation is the successor
to Propalms USA, Inc. ("Propalms USA"). Its sole asset is 100% ownership of
Propalms, Ltd. a United Kingdom limited company incorporated in October 2001.
On July 12, 2005 Propalms, Ltd. purchased from Tarantella, Inc. a
license and purchase option agreement for the world wide intellectual property
rights, including the entire customer base and all the ongoing maintenance
revenue, of a software product called Terminal Services Edition ("TSE"). The TSE
product and its related services comprise the Company's sole product line.
Jenna Lane was a publicly traded non-operating Delaware corporation,
incorporated in 1995. On December 8, 2006, shareholders of Propalms, Ltd.
purchased 13,750,000 shares of Jenna Lane, which represented 50.1% of the
outstanding shares. Jenna Lane immediately increased its authorized common to
500 million shares. On December 9, 2006, Jenna Lane entered into an agreement
with all the shareholders of Propalms, Ltd. to exchange 230 million shares of
Jenna Lane common equity for all the issued and outstanding stock of Propalms,
Ltd. After the consummation of the agreement, the former shareholders of
Propalms, Ltd. owned 243,750,000 shares of common stock of Jenna Lane, which
represented 89.35% of Jenna Lane's outstanding shares.
In December 2006, the Company incorporated in the state of Nevada. In
March 2007, Jenna Lane changed its name to Propalms USA and its trading symbol
to PRPM.PK in order to better reflect the Company's international sales and
global presence. Further, in June 2007, the Company filed Articles of Merger
with the State of Nevada merging Propalms USA into the Company. The merger was
effected to make the Company a public company in order to be able to provide the
Company with other business options for making acquisitions, other business
growth opportunities, provide potential share trading liquidity to the Company's
existing shareholders and to avail itself of the more favorable corporate tax
laws in Nevada.
In October 2008 Propalms, Inc. received from FINRA clearance to begin quotations
on the OTC Bulletin Board, and its ticker symbol changed to PRPM.OB
The Company, through its wholly owned subsidiary, Propalms Ltd., develops
software for Terminal Server Edition (TSE) which offers users a complete
management product for the Microsoft server-based computing ("SBC") environment.
TSE application allows users to manage and operate all their software
applications centrally on their servers rather than on each individual desktop
computer. The Company markets and licenses its TSE product and related services
through multiple channels such as value-added resellers and channel
distributors.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Propalms, Ltd. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The Company's website address is www.propalms.com where copies of
Exchange Act and Securities Act reports are available free of charge.
Software Products
Today, the Company is a software vendor and development company whose
products are applicable for a broad range of customers. The Company works with
international value-added resellers. In the computer and other industries, a
value-added reseller ("VARs") is a company that takes an existing product, adds
its own "value" usually in the form of a specific application for the product
(for example, a special computer application), and resells it as a new product.
Independent Software Vendors ("ISVs") develop their own software and require it
to run on Microsoft Windows 2000/2003/2008 as a SBC system. The Company utilizes
the services of VARs and ISVs to enable the Company's enhanced channel
distribution.
2
In July 2005, when Propalms Ltd. purchased the TSE worldwide product
business, it also acquired all rights and ownership interest in the TSE
intellectual property rights, including but not limited to trademark, patent,
copyrights, and technical knowledge base, all continuing annual support
agreements, and the entire TSE database consisting of all product and customer
information. Propalms Ltd. also took over the TSE development team. At the time
of this acquisition, the TSE product had a worldwide customer base and an
established distribution network in 26 countries. When purchased by the Company,
TSE was an existing and established software product, requiring no major core
development in regards to the product's functionality. Since the original
purchase of TSE Version 4, the Company has developed and markets Versions 5 and
6.
Server-based computing (SBC) is a technology whereby computer
applications are deployed, managed, supported and executed on servers rather
than on personal computers ("PCs"). In SBC environments, upgrades, application
deployment, technical support, and data storage and backup are simplified
because only the servers need to be managed, not the PCs. Data and applications
reside on a few servers rather than on many individual workstations. Personal
computers essentially become terminals and can be replaced by simpler, less
expensive (and most importantly) easier to manage devices called "thin clients."
SBC solutions are enormously popular among enterprises, as they promise to
greatly simplify the computing infrastructure.
In summary, TSE enables an enterprise to simply install and run
substantially all of their software applications that have traditionally been
installed on each separate work station or computer through remote and
centralized servers, rather than on each individual desktop. It enables
enterprise approved users, regardless of where they are based, to access their
applications without having the problems of incompatibility issues and upgrade
problems, all in a seamless manner. It also enables a centralized function to
control or manage software updates.
TSE is a comprehensive management product for the SBC environment. It
enables enterprises, large or small, to save significant money in managing their
software and hardware, providing secure remote access and providing a more
controlled IT environment. Using the base technologies of Microsoft Windows, TSE
provides a solution to manage end users, application servers and server hosted
Windows applications.
Unlike other SBC solutions, TSE leverages the Microsoft(R) RDP protocol
as a standard building block, adding an intelligent management layer and
protecting customers' long-term investments in Microsoft technology. TSE
publishes server-based Windows applications and the Windows desktop through a
single, unified and portable browser interface.
Partner Relationships
At this time, Microsoft does not sell a fully functioning SBC solution,
but only provides the operating system for all servers, known as Microsoft
Terminal Services Edition.
As TSE leverages the Microsoft(R) RDP protocol as a standard building
block, the Company has become a Microsoft Certified Gold ISV Partner, which is
the highest level of partnership that any third party software vendor can attain
with Microsoft. On becoming a Microsoft Gold ISV, the Company will have better
access to the Microsoft development and support teams, be listed on the
Microsoft website, and have the ability to conduct joint events from worldwide
Microsoft offices.
Marketing and Distribution
Most of the Company's sales are channeled through its certified
distribution network throughout the world which is currently composed of 37
distributors operating in 48 countries. The Company focuses its resources and
energy on the technical development and enhancement of its products, and the
marketing campaigns and sales generation leads, which are then passed on through
its distribution channels.
3
In February 2009 Propalms opened a sales office in Mumbai, India. The
sales team is headed by Naveen Merudi, VP of Sales, India and currently consists
of five (5) staff. We also plan to open a sales office in Delhi in the coming
months.
Currently Propalms product sells to three types of customers:
1. Independent software Vendors ("ISV") who develop their own
software and require it to run on Microsoft Windows 2000/2003/
2008 as a SBC system.
2. Application Service Providers ("ASP") who host and deliver
centrally managed applications. They typically rent
applications software from the provider on a per user per
month basis and charge their customer accordingly.
3. End users who can have any number of desktop computers.
End users are from both the public and private sectors and typically
have between 5 and 5000 desktop computers in their organization. Examples of
current TSE users by industry are:
o Manufacturing
o Software Houses
o Local Government
o Telecoms
o Communications
o Health Care
o Educational Establishments
o Legal
o Charitable organizations
o Banking
o International Groups
The Company's initial strategy is to focus on the small business
emerging market which its principal competitors have no significant interest
operating in. The Company is focused on acquiring orders for companies needing
100 to 400 end user licenses, a market in which the larger SBC companies are not
currently competing.
Currently, the Company has approximately 2600 customers worldwide which
comprise approximately a total of 250,000 concurrent users. Though the Company
has several large customers, it is not dependent on any or even a relative few
customers for its continued viability.
The Company markets its products in the following ways:
1. E-Shot: E-Short is e-mail marketing software produced by Net
Formation Ltd. It is an internet marketing tool that gives the
Company complete control in managing contacts, creation of
professionally designed messages and accurately targeting
them, all in a simple to use highly available online
application. It is both inexpensive to produce and inexpensive
to send, and can generate instant results. The Company is
currently evaluating two email marketing and lead generation
tools that enable it to verify the value of the e-shot blast
campaign and provide it with the metrics to ensure it is
obtaining value for the money invested. The Company is also
evaluating its E-Shot success through online tracking. Online
tracking is very important to see how many people have read an
e-shot or e-newsletter, who are reading it, and which articles
interested them most. This allows for a more targeted sales
and marketing effort by providing the Company with user
feedback that can be promptly analyzed to permit the Company
to access customer use patterns or needs.
2. Leadbank: which offers a complete service in generating
qualified leads and website optimization for search engines.
Those leads are then circulated to the Company's distributors
for follow up. Also, Leadbank can be configured to collect
certain data which can then be filtered to collect the
required results, providing a tool to generate responsive
email information.
4
3. Direct Mail: Sending hard copies and paper mailings of
corporate marketing materials directly to targeted consumers
through traditional mail services. Direct mailings can be a
positive marketing tool. However, the cost of direct mail
pieces can be prohibitive and will only be considered when
sufficient funding is available.
4. Telemarketing: The Company has access to three separate
telemarketing resources: (i) its internal telemarketing
department working out of its own offices, (ii) the sales
account managers, and (iii) a specialist UK based
telemarketing company that get technology companies
appointments with information technology directors (on a
project by project basis). Information is gathered by the
telemarketing process on customer/market needs, interests and
opportunities. This information is then provided to the
Company in order to target sales and customer opportunities.
Telemarketing enables the Company to ensure marketing messages
can be followed up and results can be quantified. The
Company's telemarketing is flexible and can respond quickly to
any topic which the public is interested in.
5. Advertising: The Company occasionally books space in specific
trade publications that provide targeted exposure to VARs and
ISVs.
6. The Company's Website: The website has been developed and is
maintained in-house. This allows for changes to be made
instantly, offering a dynamic website. As the backbone of the
Company's online marketing effort, the website constantly
reflects the products and services offered.
The Company provides the following support and services to its
worldwide VARs and ISVs:
1. Telesales: The Company's intention is to employ our own
telemarketing team both in the United Kingdom and the United
States that will focus on contacting government, health,
education and corporate enterprises with networks with more
than 250 personal computers. Currently, the Company employs
two telemarketers in the United Kingdom and one in the United
States. These existing telemarketers have generated more than
300 leads over the past three months that resulted in
approximately 30 new sales.
2. Telephone Support: The Company has seven technical people who
give free-of-charge pre-sales support and thirty days
post-sales support. The Company has six support people based
in India who provide 24-hour support, five days a week.
3. Online Pre-Sales Installation: The Company has the ability to
have online meetings with clients and operate offsite the
clients' computer for training and product setup.
4. On Site Pre-Sales Installation: When feasible, the Company
practice is to book an engineer to visit end users where the
account has more then 500 connections on their networks. This
helps promote the foundation for a successful installation and
provides initial training on the product. This method of
pre-sales support has resulted in a 90% conversion rate into
firm orders.
5. On Site Representative: The Company provides large VARs with a
representative to work in the respective VARs office with the
sales desk to help promote the TSE products.
Initial customer service support for all resellers is available via
chosen regional distributors. Additional support will be available directly with
the Company via our email at support@propalms.com or on-line support directly
with one of our representatives via Webex.
The following additional technical resources are available via our
website www.propalms.com:
1. Product downloads,
2. Searchable knowledgebase,
3. Press releases,
4. Case studies,
5. Public newsgroup, and
6. Technical newsletters.
5
Technical Training and Accreditation
To assist in the sales process, the Company provides to all VARs
technical staff training geared to their established provider accreditation
level. This in turn gives the VARs the tools to provide implementation and
support services directly to their customers.
Research and Development
When purchased by the Company, TSE was an existing and established
software platform product, requiring no major core development in regards to the
product's functionality, except with respect to routine advances and
enhancements. Since July 2005, Propalms has made two upgrades; a major upgrade
V5.0 released in April 2006 and in August 2008 a major upgrade V6.0 was
released. It is our intention to continue to upgrade and develop the TSE
technology to provide our existing and future customers with more practical and
up to date features. Since the original TSE acquisition in 2005, we have
expanded the development team. The development activity is contracted to India
based Aloha Technologies, the Managing Director being Nakul Sood, a Director of
the Company. All development work is performed by Aloha Technologies on a work
for hire basis and the Company owns all rights title and interest in any work
developed by Aloha Technologies.
In December 2008 Propalms established its own development team based in
Pune, India. The Company employs a team of seven developers. This team is
currently focused on bringing 2 new products to market; Propalms VDI, which is a
connection and management broker to manage virtual XP and Vista instances on
Parallels Virtualization Software. Also, already released in Beta is Propalms
VPN. Propalms VPN is a Linux based, enterprise class SSL VPN product. It allows
secure remote access to both applications and data on the corporate network, for
remote branch offices, home and mobile workers.
Competition
The Company experiences significant competition from Citrix which
started and dominates the SBC market and which started and dominates the SBC
market and developed the first SBC product. Citrix has continued to develop the
product and the market from the late 1990s and has maintained its position as
the major worldwide supplier.
The Company also competes with a small number of other providers who
have followed Citrix into the SBC market but none appear to have gained any
significant market share.
Employees
The Company employs 16 full-time employees and various part-time
consultants. The Company employees are not subject to collective bargaining
agreements.
Item 1A. Risk Factors
Lack of cash and working capital could impact adversely on expansion.
Limited cash flow due to our Company's past and intended expansion, we
have experienced periods of very limited cash flow and working capital. This
condition is likely to continue unless substantial positive cash flow is
realized from operations or a significant capital infusion is received. In the
absence of either of these the Company's ability to expand will likely be
slowed. There is no assurance that the Company will receive a significant
capital infusion in the near future or that cash flows from operations will
increase dramatically in light of the current economic climate.
The benefits we anticipate from acquiring TSE may not be realized.
Propalms Ltd. and the Company were established to develop the
underserved thin client server market for remote terminal services. The Company
acquired TSE with the expectation that the acquisition will result in various
benefits including, among other things, enhanced revenue and profits, and
greater market presence and development. TSE was acquired to establish the
Company in the emerging smaller and medium sized business markets. We may not
realize any of these benefits.
6
The Company may not achieve the anticipated benefits of our acquisition
of TSE as rapidly as, or to the extent, anticipated by management and certain
financial or industry analysts, and others may not perceive the same benefits of
the acquisition as does the Company. For example, TSE's contribution to the
Company financial results may not meet the current expectations of management
for a number of reasons, including marketplace penetration, product integration
risks, and could dilute our profits beyond the current expectations of our
management. Operations and costs incurred and potential liabilities assumed in
connection with our acquisition of TSE also could have an adverse effect on our
business, financial condition and operating results. If these risks materialize,
our publicly traded common stock price could be adversely affected.
Our business could be adversely impacted by conditions affecting the information
technology market.
The demand for our products and services depends substantially upon the
general demand for business-related computer appliances and software, which
fluctuates based on numerous factors, including capital spending levels, the
spending levels and growth of our current and prospective customers and general
economic conditions. Fluctuations in the demand for our products and services
could have a material adverse effect on our business, results of operations and
financial condition. Future economic projections for the information technology
sector are uncertain. If an unfavorable information technology spending
environment develops, it could negatively impact our business, results of
operations and financial condition.
Our long sales cycle for enterprise-wide sales could cause significant
variability in our revenue and operating results for any particular period.
In recent quarters, a growing number of our large and medium-sized
customers have decided to implement our enterprise customer license arrangements
on a departmental or enterprise-wide basis. Our long sales cycle for these
large-scale deployments makes it difficult to predict when these sales will
occur, and we may not be able to sustain these sales on a predictable basis.
We have a long sales cycle for these enterprise-wide sales because: our
sales force generally needs to explain and demonstrate the benefits of a
large-scale deployment of our product to potential and existing customers prior
to sale; our service personnel typically spend a significant amount of time
assisting potential customers in their testing and evaluation of our products
and services; our customers are typically large and medium size organizations
that carefully research their technology needs and the many potential projects
prior to making capital expenditures for software infrastructure; and before
making a purchase, our potential customers usually must get approvals from
various levels of decision makers within their organizations, and this process
can be lengthy.
The continued long sales cycle for these large-scale deployment sales
could make it difficult to predict the quarter in which sales will occur. Delays
in sales could cause significant variability in our revenue and operating
results for any particular period.
If we do not develop new products and services or enhancements to our
existing products and services, our business, results of operations and
financial condition could be adversely affected.
The markets for our products and services are characterized by: rapid
technological change; evolving industry standards; fluctuations in customer
demand; changes in customer requirements; and frequent new product and service
introductions and enhancements.
Our future success depends on our ability to continually enhance our
current products and services and develop and introduce new products and
services that our customers choose to buy. If we are unable to keep pace with
technological developments and customer demands by introducing new products and
services and enhancements, our business, results of operations and financial
condition could be adversely affected. Our future success could be hindered by:
delays in our introduction of new products and services; delays in market
acceptance of new products and services or new releases of our current products
and services; and our, or a competitor's, announcement of new product or service
enhancements or technologies that could replace or shorten the life cycle of our
existing product and service offerings.
7
We cannot guarantee that newer versions of TSE products will achieve
the broad market acceptance by our VARs and ISVs and entities with which we have
a technology relationship, customers and prospective customers necessary to
generate significant revenue. In addition, we cannot guarantee that we will be
able to respond effectively to technological changes or new product
announcements by others. If we experience material delays or sales shortfalls
with respect to our new products and services or new releases of our current
products and services, those delays or shortfalls could have a material adverse
effect on our business, results of operations and financial condition.
We believe that we could incur additional costs and royalties as we
develop, license or buy new technologies or enhancements to our existing
products. These added costs and royalties could increase our cost of revenues
and operating expenses. However, we cannot currently quantify the costs for such
transactions that have not yet occurred. In addition, we may need to use a
substantial portion of our cash and investments to fund these additional costs.
If we lose key personnel or cannot hire enough qualified employees, our ability
to manage our business could be adversely affected.
Our success depends, in large part, upon the services of a number of
key employees. Except for the CEO and President/CFO, we do not have long-term
employment our personnel. The effective management of our growth, if any, could
depend upon our ability to retain our highly-skilled technical, sales and
services managerial, finance and marketing personnel. If any of those employees
leave, we will need to attract and retain replacements for them. We may also
need to add key personnel in the future. The market for these qualified
employees is competitive. We could find it difficult to successfully attract,
assimilate or retain sufficiently qualified personnel in sufficient numbers.
Also, we may need to hire additional personnel to develop new products, product
enhancements and technologies. If we cannot add the necessary staff and
resources, our ability to develop future enhancements and features to our
existing or future products could be delayed. Any delays could have a material
adverse effect on our business, results of operations and financial condition.
If we fail to manage our operations or; to continue to grow revenue or fail to
continue to effectively control expenses, our future operating results could be
adversely affected.
Historically, the scope of our operations, the number of our employees
and the geographic area of our operations and our revenue have grown rapidly.
This growth could continue to place a significant strain on our managerial,
operational and financial resources. To manage our current growth and any future
growth effectively, we need to continue to implement and improve additional
management and financial systems and controls. We may not be able to manage the
current scope of our operations or future growth effectively and still exploit
market opportunities for our products and services in a timely and
cost-effective way. Our future operating results could also depend on our
ability to manage: our existing product lines; our sales and marketing
organizations; and our client support organization as installations of our
products increase.
In addition, to the extent our revenue grows, if at all, we believe
that our cost of revenues and certain operating expenses could also increase. We
believe that we could incur additional costs, including royalties, as we
develop, license or buy new technologies or enhancements to our existing
products and services. These added costs and royalties could increase our cost
of revenues and operating expenses and lower our gross margins. However, we
cannot currently quantify the costs for such transactions that have not yet
occurred or of these developing trends in our business. In addition, we may need
to use a substantial portion of our cash and investments or issue additional
shares of our common stock to fund these additional costs.
We cannot assure you that our operating expenses will be lower than our
estimated or actual revenues in any given quarter. If we experience a shortfall
in revenue in any given quarter, we likely will not be able to further reduce
operating expenses quickly in response. Any significant shortfall in revenue
could immediately and adversely affect our results of operations for that
quarter. Also, due to the fixed nature of many of our expenses and our current
expectation for revenue growth, our income from operations and cash flows from
operating and investing activities could be lower than in recent years.
8
Attractive acquisition opportunities may not be available to us, which could
negatively affect the growth of our business.
Our business strategy includes the selective acquisition of businesses
and/or technologies. We plan to seek opportunities to expand our product
portfolio, customer base, technology, and technical talent through acquisitions.
However, we may not have the opportunity to make suitable acquisitions on
favorable terms in the future, which could negatively impact the growth of our
business. We expect that other companies in our industry will compete with us to
acquire compatible businesses. This competition could increase prices for
businesses and technologies that we would likely pursue, and our competitors may
have far greater resources than we do to complete these acquisitions.
If we determine that any of our goodwill or intangible assets, including
technology purchased in acquisitions, are impaired, we would be required to take
a charge to earnings, which could have a material adverse effect on our results
of operations.
We have a significant amount of goodwill and other intangible assets,
such as product and core technology, related to our TSE acquisition. We do not
amortize goodwill and intangible assets that are deemed to have indefinite
lives. However, we do amortize certain product and core technologies and other
intangibles. We periodically evaluate our intangible assets, including goodwill,
for impairment at the reporting unit level (operating segment). We review for
impairment annually, or sooner if events or changes in circumstances indicate
that the carrying amount could exceed fair value. Fair values are based on
discounted cash flows using a discount rate determined by our management to be
consistent with industry discount rates and the risks inherent in our current
business model. Due to uncertain market conditions and potential changes in our
strategy and product portfolio, it is possible that the forecasts we use to
support our goodwill and other intangible assets could change in the future,
which could result in non-cash charges that would adversely affect our results
of operations and financial condition.
Furthermore, impairment testing requires significant judgment,
including the identification of reporting units based on our internal reporting
structure that reflects the way we manage our business and operations and to
which our goodwill and intangible assets would be assigned. Significant
judgments are required to estimate the fair value of our goodwill and intangible
assets, including estimating future cash flows, determining appropriate discount
rates, estimating the applicable tax rates, foreign exchange rates and interest
rates, projecting the future industry trends and market conditions, and making
other assumptions. Changes in these estimates and assumptions, including changes
in our reporting structure, could materially affect our determinations of fair
value.
We recorded approximately $958,000 of goodwill and unamortized
intangible assets in connection with our TSE acquisition. If the actual revenues
and operating profit attributable to acquired intangible assets are less than
the projections we used to initially value these intangible assets when we
acquired them, then these intangible assets may be deemed to be impaired. If we
determine that any of the goodwill or other intangible assets associated with
our recent acquisitions are impaired, then we would be required to reduce the
value of those assets or to write them off completely by taking a related charge
to earnings. If we are required to write down or write off all or a portion of
those assets, or if financial analysts or investors believe we may need to take
such action in the future, our stock price and operating results could be
materially adversely affected.
Our business could be adversely affected if we are unable to expand and
diversify our distribution channels.
We currently intend to continue to expand our distribution channels by
leveraging our relationships with independent hardware and software vendors and
system integrators to encourage them to recommend or distribute our products. In
addition, an integral part of our strategy is to diversify our base of channel
relationships by adding and training more channel members with abilities to
reach larger enterprise customers and to sell our newer products. This strategy
will require additional resources, as we will need to expand our internal sales
and service coverage of these customers. If we fail in these efforts and cannot
expand, train or diversify our distribution channels, our business could be
adversely affected. In addition to this diversification of our base, we will
need to maintain a healthy mix of channel members who cater to smaller
customers. We may need to add and remove distribution members to maintain
customer satisfaction and a steady adoption rate of our products, which could
increase our operating expenses. We are currently investing, and intend to
continue to invest, significant resources to develop these channels, which could
reduce our profits.
9
We could change our licensing programs or subscription renewal programs, which
could negatively impact the timing of our recognition of revenue.
We continually re-evaluate our licensing programs and subscription
renewal programs, including specific license models, delivery methods, and terms
and conditions, to market our current and future products and services. We could
implement new licensing programs and subscription renewal programs, including
offering specified and unspecified enhancements to our current and future
product and service lines. Such changes could result in recognizing revenues
over the contract term as opposed to upon the initial shipment or licensing of
our software product. We could implement different licensing models in certain
circumstances, for which we would recognize licensing fees over a longer period.
Changes to our licensing programs and subscription renewal programs, including
the timing of the release of enhancements, upgrades, and maintenance releases,
the term of the contract, discounts and other factors, could impact the timing
of the recognition of revenue for our products, related enhancements and
services and could adversely affect our operating results and financial
condition.
Sales of our TSE product constitute substantially all of our license sales
revenue and our deferred revenue.
We anticipate that sales of our TSE product will continue to constitute
a substantial portion of our license sales revenue. Our ability to continue to
generate both recognized and deferred revenue from that product will depend on
our customers continuing to perceive value in automatic delivery of our software
upgrades and enhancements. If our customers do not continue to purchase our TSE
product, our license sales revenue and deferred revenue would decrease
significantly and our results of operations and financial condition would be
adversely affected.
As our international sales and operations grow, we could become increasingly
subject to additional risks that could harm our business.
We conduct significant sales and customer support, development and
engineering operations in countries outside of the United States. During the
year ended January 31, 2008, we derived approximately 44.5% of our revenues from
sales other than the United States. Our continued growth and profitability could
require us to further expand our international operations. To successfully
expand international sales, we must establish additional foreign operations,
hire additional personnel and recruit additional international resellers. Our
international operations are subject to a variety of risks, which could cause
fluctuations in the results of our international operations. These risks
include: compliance with foreign regulatory and market requirements; variability
of foreign economic, political and labor conditions; changing restrictions
imposed by regulatory requirements, tariffs or other trade barriers or by United
States export laws; longer accounts receivable payment cycles; potentially
adverse tax consequences; difficulties in protecting intellectual property;
burdens of complying with a wide variety of foreign laws; and as we generate
cash flow in non-United States jurisdictions, if required, we may experience
difficulty transferring such funds to the United States in a tax efficient
manner.
Our proprietary rights could offer only limited protection. Our products,
including products obtained through acquisitions, could infringe third-party
intellectual property rights, which could result in material costs.
Our efforts to protect our proprietary rights may not be successful. We
rely primarily on a combination of copyright, trademark, patent and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. The loss of any material trade secret, trademark, trade
name, patent or copyright could have a material adverse effect on our business.
Despite our precautions, it could be possible for unauthorized third parties to
copy or reverse engineer certain portions of our products or to otherwise obtain
and use our proprietary information. If we cannot protect our proprietary
technology against unauthorized copying or use, we may not remain competitive.
Any of our pending or future patent applications, whether or not being currently
challenged, may not be issued with the scope we seek, if at all, and if issued,
may not provide any meaningful protection or competitive advantage.
We are subject to risks associated with our strategic and technology
relationships.
Our business depends on strategic and technology relationships
primarily with our VAR's and ISV's. We cannot assure you that those
relationships will continue in the future. In addition to our relationship with
Microsoft, we rely on strategic or technology relationships with other
companies. We depend on the entities with which we have strategic or technology
relationships to successfully test our products, to incorporate our technology
into their products and to market and sell those products. We cannot assure you
that we will be able to maintain our current strategic and technology
relationships or to develop additional strategic and technology relationships.
If any entities in which we have a strategic or technology relationship are
unable to incorporate our technology into their products or to market or sell
those products, our business, results of operations and financial condition
could be materially adversely affected.
10
Our success depends on our ability to attract, retain and further penetrate
large enterprise customers.
We must retain and continue to expand our ability to reach and
penetrate large enterprise customers by adding more effective VARs and ISVs. Our
inability to attract and retain large enterprise customers could have a material
adverse effect on our business, results of operations and financial condition.
Large enterprise customers usually request special pricing and generally have
longer sales cycles, which could negatively impact our revenues. By granting
special pricing, such as bundled pricing or discounts, to these large customers,
we may have to defer recognition of some or all of the revenue from such sales.
This deferral could reduce our revenues and operating profits for a given
reporting period. Additionally, as we attempt to attract and penetrate large
enterprise customers, we may need to increase corporate branding and marketing
activities, which could increase our operating expenses. These efforts may not
proportionally increase our operating revenues and could reduce our profits.
We rely on distribution channels and major distributors that we do not control.
We rely significantly on independent distributors and resellers (VARs
and ISVs) to market and distribute our products and appliances. We do not
control our distributors and resellers. Additionally, our distributors and
resellers are not obligated to buy our products and could also represent other
lines of products. We maintain and periodically revise our sales incentive
programs for our independent distributors and resellers, and such program
revisions may adversely impact our results of operations. Further, we could
maintain individually significant accounts receivable balances with certain
distributors. The financial condition of our distributors could deteriorate and
distributors could significantly delay or default on their payment obligations.
Any significant delays, defaults or terminations could have a material adverse
effect on our business, results of operations and financial condition.
Our products could contain errors that could delay the release of new products
and may not be detected until after our products are shipped.
Despite significant testing by us and by current and potential
customers, our products, especially new products or releases or acquired
products, could contain errors. In some cases, these errors may not be
discovered until after commercial shipments have been made. Errors in our
products could delay the development or release of new products and could
adversely affect market acceptance of our products. Additionally, our products
depend on third party products, which could contain defects and reduce the
performance of our products or render them useless. Because our products are
often used in mission-critical applications, errors in our products or the
products of third parties upon which our products rely could give rise to
warranty or other claims by our customers.
If we do not generate sufficient cash flow from operations in the future, we may
not be able to fund our product development and acquisitions and fulfill our
future obligations.
Our ability to generate sufficient cash flow from operations to fund
our operations and product development, including the payment of cash
consideration in acquisitions and the payment of our other obligations, depends
on a range of economic, competitive and business factors, many of which are
outside our control. We cannot assure you that our business will generate
sufficient cash flow from operations, or that we will be able to liquidate our
investments, repatriate cash and investments held in our overseas subsidiaries,
sell assets or raise equity or debt financings when needed or desirable. An
inability to fund our operations or fulfill outstanding obligations could have a
material adverse effect on our business, financial condition and results of
operations. For further information, please refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operations Liquidity and
Capital Resources.
Our stock price could be volatile, and you could lose the value of your
investment.
Our stock price has been volatile and has fluctuated significantly in
the past. The trading price of our stock is likely to continue to be volatile
and subject to fluctuations in the future. Your investment in our stock could
lose some or all of its value. Some of the factors that could significantly
affect the market price of our stock include: actual or anticipated variations
in operating and financial results; analyst reports or recommendations; changes
in interest rates; and other events or factors, many of which are beyond our
control.
11
The stock market in general, and stock markets for software companies
and technology companies in particular, have experienced extreme price and
volume fluctuations. These broad market and industry factors could materially
and adversely affect the market price of our stock, regardless of our actual
operating performance.
Our business is subject to seasonal fluctuations.
Our business is subject to seasonal fluctuations. Historically, our net
revenues have fluctuated quarterly and have generally been the highest in the
fourth quarter of our fiscal year due to corporate calendar year-end spending
trends. In addition, our European operations generally provide lower revenues in
the summer months because of the generally reduced level of economic activity in
Europe during the summer. This seasonal factor also typically results in higher
fourth quarter revenues. Quarterly results are also affected by the timing of
the release of new products and services. Because of the seasonality of our
business, results for any quarter, especially our fourth quarter, are not
necessarily indicative of the results that may be achieved for the full fiscal
year.
Our common stock may be considered a "penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define "penny stock" to
be an equity security that has a market or exercise price of less than $5.00 per
share, subject to specific exemptions. The market price of our common stock may
be below $5.00 per share and therefore may be designated as a "penny stock"
according to the rules of the Securities and Exchange Commission ("SEC"). This
designation requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of our stockholders
to sell their shares. In addition, since our common stock is currently quoted on
the OTC Bulletin Board, our stockholders may find it difficult to obtain
accurate quotations of our common stock and may find few buyers to purchase the
stock or a lack of market makers to support the stock price.
We are subject to risks associated with our strategic and technology
relationships.
Our business depends on strategic and technology relationships. We
cannot assure you that those relationships will continue in the future. In
addition to our relationship with Microsoft, we rely on strategic or technology
relationships with other companies. We depend on the entities with which we have
strategic or technology relationships to successfully test our products, to
incorporate our technology into their products and to market and sell those
products. We cannot assure you that we will be able to maintain our current
strategic and technology relationships or to develop additional strategic and
technology relationships. If any entities in which we have a strategic or
technology relationship are unable to incorporate our technology into their
products or to market or sell those products, our business, results of
operations and financial condition could be materially adversely affected.
Item 2. Properties.
The Company currently does not own any real property. All operations of
the Company are managed out of the Propalms offices in the United Kingdom. The
Company is currently evaluating its options with respect to purchasing or
leasing real property in the United States.
Propalms leases its main office, located at Unit 4, Park Farm
Courtyard, Easthorpe, Malton, North Yorkshire YO17 6QX, UK. The lease term is
for 3 years, ending December 31, 2011.
The Company leases an 1,780 sq. foot office in India.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceeding which would be
material to our business, financial condition or results of operations other
than the ordinary course, routine litigation.
12
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the fiscal year ended January 31, 2009,
our annual meeting of security holders was held on January 31, 2009. At this
meeting the following individuals were elected to serve as directors of the
Company for a one-year term: Robert Zysblat, Owen Dukes and Nakul Sood.
Also voted on at the Annual Meeting was the ratification of the
appointment of the Company's independent auditor Kabani & Company, Los Angeles,
CA for 2009.
Part II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
Market Information.
The Company common stock began trading on the Pink Sheets over-the-counter
system under the symbol "JLNY" on December 15, 2006. The symbol was changed to
"PRPM" on February 14, 2007. In October 2008 Propalms, Inc. received clearance
from FINRA clearance to begin quotations on the OTC Bulletin Board, and its
ticker symbol changed to PRPM.OB
Historical Market Price Data for Common Stock
The following table sets forth the range of high and low bid prices for
the common stock for the periods indicated as reported by the OTC Bulletin
Board. These over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
Year Ended January 31, 2009 High ($) Low ($)
--------------------------- -------- -------
1st Quarter $0.088 $0.025
2nd Quarter $0.035 $0.015
3rd Quarter $0.02 $0.005
4th Quarter $0.015 $0.005
Year Ended January 31, 2008
---------------------------
4th Quarter $0.10 $0.03
Holders of Common Stock.
As of May 8, 2009, 497,845,650 shares of our common stock were
outstanding and, as far as we can determine, were held by approximately 2,187
holders of record. We believe that there are significantly more beneficial
holders of our common stock, as many beneficial holders hold their stock in
`street name.'
Dividends.
We have not paid any cash dividends on our common stock in the last two
years and do not currently anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain any earnings for use in our
business. The payment of dividends on our common stock is within the discretion
of our board of directors.
13
Securities Authorized for Issuance under Equity Compensation Plans.
--------------------------- ---------------------------- -------------------------- ------------------------------
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding of options, outstanding options, future issuance under equity
warrants and rights warrants and rights compensation plans
(excluding securities
reflected in column (a))
--------------------------- ---------------------------- -------------------------- ------------------------------
(a) (b) (c)
--------------------------- ---------------------------- -------------------------- ------------------------------
Equity compensation plans 4,000,000 .065 0
approved by security
holders
--------------------------- ---------------------------- -------------------------- ------------------------------
Equity compensation plans 0 0
not approved by security
holders
--------------------------- ---------------------------- -------------------------- ------------------------------
TOTAL 4,000,000 .065 0
--------------------------- ---------------------------- -------------------------- ------------------------------
Recent Sale of Unregistered Securities.
Pursuant to a Private Placement Memorandum dated January 1, 2007, MJMM
Investments, LLC signed a subscription agreement dated January 9, 2007. Pursuant
to the terms of the subscription agreement a total of 93,500,000 common shares
were reserved for purchase by MJMM Investments, LLC. From January 1, 2007 to
January 31, 2008, MJMM Investments, LLC has purchased a total of 42,174,687 of
the reserved shares. Out of the 93,500,000 reserved shares, MJMM Investments,
LLC was granted 13,500,000 shares in exchange for services provided in acquiring
Jenna Lane, a publicly-traded company; MJMM Investments, LLC received payment of
12,000,000 for future services to be rendered on behalf of the Company; and MJMM
Investments, LLC purchased 16,674,687 shares for an average purchase price of
$0.03 per share.
Pursuant to its Private Placement Memorandum dated January 1, 2007,
Ivest Group, LLC signed a subscription agreement dated January 10, 2007.
Pursuant to the terms of the subscription agreement a total of 39,750,000 common
shares were reserved for purchase by Ivest Group, LLC. From that date to
November 1, 2007, Ivest Group purchased a total of 21,343,441 of the optioned
shares. The agreement has been terminated and the remaining 18,406,559 reserved
shares have been transferred to reserves for purchase by MJMM Investments, LLC.
In March 2009, the Company terminated the agreement with Big Apple Consulting
and MJMM Investments, LLC.
Note 16. Subsequent Events
On April 4, 2008, the board of directors and an approximately 80% majority of
the stockholders entitled to vote of Propalms, Inc. adopted by written consent
an Amendment to Propalms' Articles of Incorporation changing the Corporation's
fiscal year to end from December 31 of each year to January 31 of each year.
Item 6. Selected Financial Data.
14
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Propalms, Inc.
We have audited the accompanying consolidated balance sheets of Propalms, Inc.
(a Nevada corporation) as of January 31, 2009 and 2008 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Propalms, Inc. as of January 31, 2009 and 2008, and the consolidated results of
their operations and their consolidated cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the years ended
January 31, 2009 and 2008, the Company incurred net losses of $3,272,441 and
$2,469,599, respectively. In addition, the Company had negative cash flow in
operating activities amounting to $423,183 and $448,036, respectively for the
years then ended. The Company's accumulated deficit was $8,157,995 as of January
31, 2009. These factors, among others, as discussed in Note 2 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
April 29, 2009
15
PROPALMS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2009 AND 2008
2009 2008
------------ ------------
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 7,622 $ 25,107
Accounts receivable, net 148,698 91,622
Prepaid expenses & other current assets 27,227 70,734
------------ ------------
Total current assets 183,548 187,463
PROPERTY, PLANT & EQUIPMENT, net 12,876 22,223
INTANGIBLE ASSETS, net 415,982 792,971
------------ ------------
TOTAL ASSETS $ 612,406 $ 1,002,657
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 784,843 $ 457,314
Deferred revenue 46,470 94,432
Loans from shareholders -- 74,806
Related party payable 184,116 --
Notes payable 801,232 801,232
Shares to be issued -- 990,000
------------ ------------
Total current liabilities 1,816,662 2,417,784
LONG TERM LIABILITIES
Notes payable 54,205 105,882
Deferred revenue 459,899 537,324
------------ ------------
Total long term liabilities 514,104 643,206
------------ ------------
Total liabilities 2,330,766 3,060,990
------------ ------------
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT
Common stock, $0.0001 par value; Authorized shares 500,000,000,
497,845,650 shares issued and outstanding as of January 31, 2009
438,237,924 shares issued and 328,335,385 outstanding as of January 31, 2008 49,785 32,835
Additional paid in capital 6,266,272 3,480,985
Pre-paid consulting -- (703,500)
Comprehensive gain 123,579 16,901
Accumulated deficit (8,157,995) (4,885,554)
------------ ------------
Total stockholders' deficit (1,718,360) (2,058,333)
------------ ------------
TOTAL LIABILITIES & STOCKHOLDER DEFICIT $ 612,406 $ 1,002,657
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
16
PROPALMS INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008
2009 2008
------------- -------------
Revenue, net $ 882,119 $ 1,076,715
Cost of revenue 505,669 517,243
------------- -------------
Gross profit 376,450 559,472
------------- -------------
Operating Expenses:
Research & Development 254,010 379,273
Sales & Marketing 404,528 379,900
General and administrative expenses 538,928 632,021
Officer compensation 1,248,549 681,675
Consulting fee 1,157,159 1,158,821
------------- -------------
Total operating expenses 3,603,173 3,231,690
------------- -------------
Total Loss From Operations (3,226,723) (2,672,218)
------------- -------------
Other Income (Expense):
Change in fair value of derivative liability -- 191,962
Tax credit refund -- 88,757
Other income 31,222 7,747
Interest expense (76,940) (85,847)
------------- -------------
Total other income (expense) (45,718) 202,619
------------- -------------
Net Loss (3,272,441) (2,469,599)
Other comprehensive income
Foreign currency translation 106,678 3,445
------------- -------------
Comprehensive Loss $ (3,165,763) $ (2,466,154)
============= =============
Basic & diluted loss per share $ (0.01) $ (0.01)
============= =============
Weighted average shares for computing basic & diluted loss per share 384,133,793 306,875,266
============= =============
Weighted average number of shares used to compute basic and diluted loss per
share is equivalent as the effect of dilutive securities is anti dilutive.
The accompanying notes are an integral part of these consolidated financial
statements
17
PROPALMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008
Additional Total
Common Common Paid in Prepaid Subscription Comprehensive Accumulated Equity
Shares Par Capital consulting receivable Gain Deficit Deficit)
--------------------------------------------------------------------------------------------------------
Balance as of
January 31, 2007 286,297,448 $ 28,630 $ 844,011 $(10,000) $ 13,456 $ (2,415,955) $(1,539,858)
Shares issued
for cash 16,430,795 1,643 511,807 10,000 523,450
Options granted
to consultant 941,615 941,615
Issued for services 25,607,142 2,561 1,078,403 (703,500) 377,464
Contributed services 105,150 105,150
Comprehensive loss 3,445 3,445
Net Loss for the year (2,469,599) (2,469,599)
--------------------------------------------------------------------------------------------------------
Balance as of
January 31, 2008 328,335,385 32,834 3,480,986 (703,500) -- 16,901 (4,885,554) (2,058,333)
Shares issued
for cash 41,813,146 4,181 481,445 -- -- -- -- 485,626
Shares issued
for services 28,106,559 2,811 450,848 (100,000) -- -- -- 353,659
Shares issued
for compensation 81,090,560 8,109 553,842 -- -- -- -- 561,951
Shares issued
against the
liability
incurred in
prior year
(shares to
be issued) 18,000,000 1,800 988,200 -- -- -- -- 990,000
Exercise of
stock options 500,000 50 34,950 -- -- -- -- 35,000
Amortization of
prepaid
consulting -- -- -- 803,500 -- -- -- 803,500
Grant of stock
options -- -- 276,000 -- -- -- -- 276,000
Comprehensive
loss -- -- -- -- -- 106,678 -- 106,678
Net Loss for
the year -- -- -- -- -- -- (3,272,441) (3,272,441)
--------------------------------------------------------------------------------------------------------
Balance as of
January 31, 2009 497,845,650 $ 49,785 $ 6,266,272 $ -- $ -- $ 123,579 $ (8,157,995) $(1,718,360)
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
18
PROPALMS INC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,272,441) $ (2,469,599)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 203,791 252,113
Issuance of shares for service 353,659 377,464
Stock to be issued for services -- 720,000
Provision for bad debt -- 34,244
Amortization of prepaid consulting 803,500 --
Options expense 276,000 941,615
Contributed services -- 105,150
Change in derivative liability -- (191,962)
Settlement of compensation in shares 561,951 --
(Increase) decrease in current assets:
Receivables (107,928) (28,780)
Prepayments (71,228) 89,061
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 579,351 (176,052)
Related party payable 184,116 --
Deferred income 66,046 (101,289)
------------ ------------
Net cash used in operating activities (423,183) (448,036)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash -- 121,360
Acquisition of property & equipment (4,761) (14,438)
------------ ------------
Net cash provided by (used in) investing activities (4,761) 106,922
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable -- (262,338)
Proceeds from notes payable 55,767 148,061
(Payments on)/proceeds from notes payable - officer (68,083) (74,396)
Proceeds from shares to be issued for options exercised 35,000 --
Proceeds from issuance of shares for cash 485,626 523,450
------------ ------------
Net cash provided by financing activities 508,311 334,777
------------ ------------
Effect of exchange rate on cash & cash equivalents (97,852) 10,159
NET INCREASE/ (DECREASE) IN CASH & CASH EQUIVALENTS (17,485) 3,822
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 25,107 21,285
------------ ------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 7,622 $ 25,107
============ ============
Supplementary Information:
Cash paid during the year for:
Interest $ $ 90,926
============ ============
Income taxes $ -- $ --
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
19
PROPALMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business
Propalms, Inc. (the "Company"), formerly Jenna Lane, Inc. (Jenna Lane), was
incorporated in 1995 under the laws of the State of Delaware. Propalms, Ltd was
a UK registered company incorporated in October 2001 with a fiscal year end of
January 31. On July 12, 2005 Propalms, Ltd purchased from Tarantella, Inc. a
license and purchase option agreement for the world wide intellectual property
rights, including the entire customer base and all the ongoing maintenance
revenue, of a software product called Terminal Services Edition ("TSE"). Jenna
Lane was a Delaware Corporation, incorporated in 1995. Jenna Lane was a
non-operating company. On December 8, 2006, shareholders of Propalms, Ltd
purchased 13,750,000 shares of Jenna Lane. On December 9, 2006, Jenna Lane
entered into an agreement with all the shareholders of Propalms Ltd to exchange
230,000,000 shares of Jenna Lane for all the issued and outstanding stock of
Propalms, Ltd. After the consummation of the agreement, the former shareholders
of Propalms, Ltd. owned 243,750,000 shares of common stock of Jenna Lane, which
represented 89.35% of Jenna Lane's outstanding shares.
The exchange of shares with Propalms, Ltd has been accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders of
the Propalms, Ltd. obtained control of the consolidated entity. Accordingly, the
merger of the two companies has been recorded as a recapitalization of Propalms,
Ltd, with Propalms, Ltd being treated as the continuing entity. The historical
financial statements presented are those of Propalms, Ltd. The continuing
Company has retained January 31 as its fiscal year end. The financial statements
of the legal acquirer are not significant; therefore, no pro forma financial
information is submitted.
The consolidated financial statements include the accounts of Propalms, Inc. and
its wholly owned subsidiary, Propalms, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
During December 2006 Jenna Lane increased its authorized common shares to
500,000,000 in order to acquire Propalms, Ltd. Jenna Lane moved from Delaware to
be incorporated in Nevada. In March 2007 Jenna Lane, Inc. changed its name to
Propalms USA, Inc. On June 22, 2007 Propalms USA, Inc. changed its name to
Propalms, Inc.
Propalms Inc., through Propalms, Ltd., develops TSE which offers users a systems
management product for the Microsoft server based computing (SBC) environment.
TSE allows users to manage and operate all their software applications centrally
on their servers rather than on each individual desktop computer. The Company
markets and licenses its products through multiple channels such as value-added
resellers and channel distributors.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Propalms, Inc. and
its wholly owned subsidiary Propalms, Ltd, collectively referred to herein as
the Company. All material inter-company accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
20
Accounts Receivable
The Company's customer base consists of geographically dispersed customer base.
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation is computed using straight line method over the estimated useful
lives of the assets, which is four years. Depreciation expense was $8,688 and
$5,417 for the years ended January 31, 2009 and 2008, respectively.
The Company accounts for the costs of computer software developed or obtained
for internal use in accordance with Statement of Position 98- , "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
Company capitalizes costs of materials, consultants, and payroll and payroll
related costs for employees incurred in developing internal use computer
software. These costs are included with "Computer equipment and software." Costs
incurred during the preliminary project and post implementation stages are
charged to general and administrative expense.
Intangible Assets
Intangible assets consist of product licenses, renewals, distributor
relationships and goodwill. The Company evaluates intangible assets, goodwill
and other long-lived assets for impairment, at least on an annual basis and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable from its estimated future cash flows. Recoverability of
intangible assets, other long-lived assets and, goodwill is measured by
comparing their net book value to the related projected undiscounted cash flows
from these assets, considering a number of factors including past operating
results, budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related undiscounted cash
flows, the asset is considered impaired, and a second test is performed to
measure the amount of impairment loss. Potential impairment of goodwill is being
evaluated in accordance with SFAS No. 142. As part of intangible assets, the
Company capitalizes certain computer software development costs in accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Costs incurred internally to create a computer
software product or to develop an enhancement to an existing product are charged
to expense when incurred as research and development expense until technological
feasibility for the respective product is established. Thereafter, all software
development costs are capitalized and reported at the lower of unamortized cost
or net realizable value. Capitalization ceases when the product or enhancement
is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate that
the unamortized software development costs exceed the net realizable value, the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight line basis over three
years, whichever method results in a higher level of amortization.
Revenue Recognition
The Company recognizes its revenue in accordance with the Securities and
Exchange Commissions ("SEC") Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104") and The American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-4 and SOP 98-9, SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," and
21
Accounting Research Bulletin 45 (ARB 45) "Long-Term Construction Type
Contracts." The Company's revenue recognition policy is as follows: License
Revenue: The Company recognizes revenue from license contracts without major
customization when a non-cancelable, non-contingent license agreement has been
signed, delivery of the software has occurred, the fee is fixed or determinable,
and collectibilty is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage of
completion method, in conformity with ARB 45 and SOP 81-1. Revenue from the
implementation of software is recognized on a percentage of completion method,
in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Any
revenues from software arrangements with multiple elements are allocated to each
element of the arrangement based on the relative fair values using vendor
specific objective evidence as defined in the SOPs. An output measure of "Unit
of Work Completed" is used to determine the percentage of completion which
measures the results achieved at a specific date. Units completed are certified
by the Project Manager and EVP IT/ Operations.
Services Revenue: Revenue from consulting services is recognized as the services
are performed for time and materials contracts. Revenue from training and
development services is recognized as the services are performed. Revenue from
maintenance agreements is recognized ratably over the term of the maintenance
agreement, which in most instances is one to two years.
The Company markets and licenses its products, TSE, primarily through indirect
channels such as value-added resellers and channel distributors. The product
license is perpetual and includes either one to two years of maintenance.
Maintenance includes enhancements and unspecified software upgrades.
Fair Value
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for assets and liabilities qualifying as financial
instruments are a reasonable estimate of fair value.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for
the years ended January 31, 2009 and 2008 were insignificant.
Basic and Diluted Earnings Per Share
Earnings per share are calculated in accordance with the Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net income (loss)
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net income (loss) per share is based upon the weighted
average number of common shares outstanding. Diluted net loss per share is based
on the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period. Basic and diluted loss per share were $0.01 and $0.01
for the years ended January 31, 2009 and 2008 respectively.
Product Concentration
The Company derives substantially all of its revenues from its TSE server
product and anticipates that this product and future derivative products and
product lines based upon this technology will continue to constitute a majority
of its revenues. The Company could experience declines in demand for this
product, whether as a result of general economic conditions, new competitive
product releases, price competition, lack of success of its strategic partners,
technological changes or other factors. The total revenue generated during the
years ended January 31, 2009 and 2008 from the product was $882,119 and
$1,076,715, respectively.
22
Cost of Revenues
Cost of revenues consists primarily of fees paid to outside firms to perform
software support tasks, amortization of acquired product technology and
capitalized software development costs, and other personnel related costs of
providing technical support and consulting, as well as, the Company's online
services.
Foreign Currency & Operations
The functional currency was the Great Britain Pound for the year ended January
31, 2009. The January 31, 2009 financial statements of the Company were
translated to United States dollars using year-end exchange rates as to assets
and liabilities and average exchange rates as to revenues and expenses. Capital
accounts were translated at their historical exchange rates when the capital
transactions occurred. Net gains and losses resulting from translation of
foreign currency financial statements are included in the statements of
stockholder's deficit as other comprehensive income or (loss). Foreign currency
transaction gains and losses are included in consolidated income (loss).
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). Under SFAS 109, deferred
income tax assets or liabilities are computed based on the temporary difference
between the financial statement and income tax bases of assets and liabilities
using the currently enacted marginal income tax rate. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period. Deferred tax assets may be recognized for
temporary differences that will result in deductible amounts in future periods
and for loss carry forwards. A valuation allowance is established if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
United Kingdom
As of January 31, 2009 and 2008, the Company's UK subsidiary had net operating
loss carry forwards which can be carried forward indefinitely to offset future
taxable income. The deferred tax assets for the subsidiary at January 31, 2009
consists mainly of net operating loss carry forwards and were fully reserved as
the management believes it is more likely than not that these assets will not be
realized in the future.
The following table sets forth the significant components of the net deferred
tax assets for operation in the UK as of January 31, 2009 and 2008:
2009 2008
---------- ----------
Net Operating Loss
Carryforward $ 1,862,529 $ 1,403,853
Total Deferred Tax
Assets 651,885 491,349
Less: Valuation
Allowance (651,885) (491,349)
---------- ----------
Net Deferred Tax
Asset $ -- $ --
========== ==========
United States of America
The Company has significant income tax net operating losses carried forward from
prior years. Due to the uncertainty of the realizability of the related deferred
tax assets of $6,295,466, a reserve equal to the amount of deferred income taxes
has been established at December 31, 2008. The Company has provided 100%
valuation allowance to the deferred tax assets as of January 31, 2009.
The following table sets forth the significant components of the net deferred
tax assets for operation in the United States as of January 31, 2009 and 2008:
2009 2008
------------ ------------
Net Operating Loss
Carryforward $ 6,295,466 $ 3,481,701
Total Deferred Tax
Assets 1,183,778 2,140,459
Less: Valuation
Allowance (1,183,778) (2,140,459)
------------ ------------
Net Deferred Tax
Asset $ 0 $ 0
============ ============
23
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
2009 2008
------------ ------------
Tax expense (credit) at
statutory rate-federal (34) (34)
State tax expense net of
federal tax (6) (6)
Changes in valuation
allowance 40 40
Foreign income tax:
UK 19 19
Changes in valuation
allowance (19) (19)
Tax expense at actual rate -- --
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The Company's functional currency is the Great Britain Pound (GBP);
however the accompanying consolidated financial statements have been translated
and presented in United States Dollars ($).
Stock-based compensation
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options,
using a fair value based method and the recording of such expense in the
consolidated statements of operations. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of
SFAS 123R and the valuation of share-based payments for public companies. The
Company has adopted SFAS 123R and related FASB Staff Positions ("FSPs") as of
January 1, 2006 and will recognize stock-based compensation expense using the
modified prospective method.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, during the years ended January 31, 2009 and 2008,the
Company incurred net losses of $3,272,441 and $2,469,599, respectively. In
addition, the Company had negative cash flow in operating activities amounting
to $423,183 and $448,036, respectively for the periods then ended. The Company's
accumulated deficit was $8,175,995 as of January 31, 2009. If the Company is
unable to generate profits and is unable to continue to obtain financing for its
working capital requirements, it may have to curtail its business sharply or
cease business altogether.
The Company has taken certain restructuring steps to provide the necessary
capital to continue its operations. These steps included, but are not limited
to: 1) focus on sales to minimize capital needs; 2) financial restructuring by
converting part of the outstanding accounts payable to equity; 3) raising equity
financing; 4) continuous focus on reductions in costs where possible.
Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements.
SFAS 157 does not require any new fair value measurements but rather eliminates
24
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for the Company beginning in the first quarter of 2008. In
February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2--Effective
Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008.
Adoption of SFAS No. 157 did not affect the Company consolidated financial
condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company's fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements". This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company's fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of this
pronouncement on financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities. The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity's financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. Management is
currently evaluating the effect of this pronouncement on financial statements.
In May of 2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted
Accounting Principles. The pronouncement mandates the GAAP hierarchy reside in
the accounting literature as opposed to the audit literature. This has the
practical impact of elevating FASB Statements of Financial Accounting Concepts
in the GAAP hierarchy. This pronouncement will become effective 60 days
following SEC approval. The company does not believe this pronouncement will
impact its financial statements.
In May of 2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.
Reclassifications
Certain reclassifications have been made to the 2008 financial statements to
conform to the 2009 presentation.
25
Note 3. Intangible Assets
Intangible assets consist of acquired developed software technology, acquired
customer relationship, and capitalized software development costs.
The components of intangible assets at January 31, 2009 and 2008 are summarized
as follows:
2009 2008 Est. Life
------------ ------------ ------------
Developed Software Technology $ 485,672 $ 675,866 5 years
Customer Relationships 324,853 452,068 10 years
Software Development Costs 159,874 222,482 2 years
Less: Accumulated Amortization (554,893) (557,445)
------------ ------------
Net intangible assets $ 415,982 $ 792,971
============ ============
The developed software technology and software development costs are being
amortized to cost of revenues. The value of the customer relationships is being
amortized to Sales and Marketing expense. The amortization for the years ended
January 31, 2009 and 2008 amounted to $195,103 and $246,620, respectively.
The amortization schedule for the next five years ending January 31, is as
follows:
2010 $ 110,161
2011 64,842
2012 32,485
2013 32,485
2014 32,485
------------
$ 272,458
============
Note 4. Accounts payable & accrued expenses
The accounts payable and accrued expenses as of January 31, 2009 and 2008
comprised of the following:
2009 2008
------------ ------------
Trade creditors $ 265,834 $ 283,009
Accrued expenses 106,511 174,305
Accrued payroll taxes 95,750 --
Accrued payroll 301,759 --
------------ ------------
Total 784,843 457,314
============ ============
Note 5. Debt
To finance the acquisition of the assets and liabilities related to the TSE
server product in July 2005, the Company made a initial cash payment of $100,000
and agreed to make payments to the seller over a scheduled 30-month period, for
a total of $900,000. The agreement calls for quarterly payments of $50,000, with
the initial payment due October 2005, until December 2007, at which time the
remaining balance was due and payable. The note is non-interest bearing. In
recording this liability, the Company imputed approximately $135,000 of interest
using a rate of 8%. At December 31, 2007, the parties extended the length of the
agreement and left the quarterly payment obligation of $50,000 unchanged.
26
At January 31, 2009, the note is in default and the remaining obligation owed to
the seller was $760,000. The Company has also accrued interest on this note and
included it in the accrued liabilities in the accompanying financials. This note
has been presented as a current liability in the accompanying balance sheet.
On July 10, 2006 the Company received a working capital loan financing from HSBC
Plc. Interest is charged on a monthly basis and repayments of principal and
interest are made monthly. The total principal outstanding at January 31, 2009
was $95,437. The loan is repayable over a ten year period beginning three months
from July 2006 in fixed monthly installments of $3,436 per month inclusive of
interest. $41,232 of the balance is presented as a current liability and $54,205
is presented as a long term liability in the accompanying financial statements.
Interest is at 2.2% margin over the bank's base rate.
The maturity schedule of the loans over the next five years ending January 31 is
as follows:
2009 801,232
2010 41,232
2011 12,973
Note 6. Loans from Shareholders
As part of the Company's July 2005 reorganization and recapitalization discussed
in Note 1, the Company's CEO and CFO each loaned to Propalms, Ltd. $53,205 as a
down payment on the TSE acquisition price. These notes are unsecured,
non-interest-bearing and due on demand or upon certain events that would effect
a change in control of the Company. Further advances were made to the Company
during the year ended January 31, 2007. As of January 31, 2008, the balance owed
to shareholders amounted to $74,806. As of January 31, 2009, the entire balance
had been repaid to the shareholders.
Note 7. Deferred Revenue
The Company recognizes as deferred revenue, payments received before all
relevant criteria for revenue recognition are satisfied. The Company renders
maintenance services which often extend over a period of more than one year and
the revenue pertaining to the period after one year is presented as long term
liability. As of January 31, 2008, the current portion of deferred revenue
amounted to $94,432 and the long term portion amounted to $537,324. As of
January 31, 2009, the current portion of deferred revenue amounted to $46,470
and the long term portion amounted to $459,899.
Note 8. Shares to be Issued
During the year ended January 31, 2007, the Company entered into an agreement
with an investor relations firm to provide services for a period of two years.
The fees for the services were determined to be $37,500 per month or 1,500,000
shares per month. The Company agreed to issue the investor relations firm
18,000,000 shares as its fee for the year, pursuant to the agreement. As of
January 31, 2008, they were recorded as shares to be issued. The shares were
issued during the year ended January 31, 2009. These shares were valued at the
fair market value of $990,000 pursuant to EITF 96-18.
Note 9. Stockholders Deficit
During the year ended January 31, 2009, the Company issued 4,700,000 shares to
an independent outside contractor. These shares were valued at the fair market
value of $188,000, pursuant to EITF 96-18.
27
During the year ended January 31, 2009, the Company raised $485,626 cash, net of
finders' fee, by issuing 41,813,146 shares. The shares were issued out of the
escrow account maintained by the investor relations firm.
The Company issued 81,090,560 shares during the year ended January 31, 2009 for
the part payment of accrued compensation of the President & CEO of the Company.
These shares were valued at the fair market value of $561,951, pursuant to EITF
96-18.
The Company agreed to issue the investor relations firm 18,000,000 shares as its
fee for the year ended January 31, 2007, pursuant to the agreement. As of
January 31, 2008, they were recorded as shares to be issued. The shares were
issued during the year ended January 31, 2009. These shares were valued at the
fair market value of $990,000 pursuant to EITF 96-18.
The Company agreed to issue the investor relations firm 5,000,000 shares as
prepaid fee for the period from January 1, 2009 to May 31, 2009. The Company
terminated the agreement with the firm in February 2009 and the whole amount was
expensed to consulting services for the year. These shares were valued at the
fair market value of $100,000 pursuant to EITF 96-18.
The Company also issued the investor relations firm 18,406,559 shares as fee for
the year ended January 31, 2009. The Company terminated the agreement with the
firm in February 2009 and the whole amount was expensed to consulting services
for the year. These shares were valued at the fair market value of $165,659
pursuant to EITF 96-18.
Note 10. Stock Options
During the year ended January 31, 2008, the Company granted ten million options
each to the CEO and President as part of the Equity Compensation Plan. The
options have an exercise price of $0.05 and will expire on January 11, 2018. The
options vest over a five year period at the rate of 2 million options at the end
of each year. The options were valued at $1,380,000 on the date of grant
pursuant to the black scholes option pricing model. The expense for the options
is being recorded pursuant to SFAS 123R. During the year ended January 31, 2009,
the Company recorded expense of $276,000.
The following assumptions have been used:
Risk-free interest rate 2.12% - 4.13%
Expected life of the options 2-10 year
Expected volatility 305%
Expected dividend yield 0%
A summary of the status of the plan is presented below:
Aggregate
Weighted Intrinsic
Total Price Value
------------ ------------ ------------
Outstanding,
January 31, 2008 30,000,000 $ 0.06 --
Granted -- -- --
Cancelled -- -- --
Exercised 500,000 -- --
------------ ------------ ------------
Outstanding,
January 31, 2009 29,500,000 $ 0.06 --
============ ============ ============
During the year ended January 31, 2009, 500,000 options were exercised @0.07 per
share.
Options outstanding at January 31, 2009 and related weighted average price and
intrinsic value are as follows:
28
Weighted Total
Total Average Weighted Weighted
Options Remaining Average Average Aggregate
Exercise Out- Life Exercise Options Exercise Intrinsic
Prices standing (Years) Price Exercisable Price Value
---------- ---------- ---------- ---------- ---------- ---------- ----------
$0.05-0.10 29,500,000 7.45 $ 0.06 15,500,000 $ 0.06 --
Note 11. Related Party transactions
The Company has contracted certain development activity with India based Aloha
Technologies, a related party. Mr. Nakul Sood is the the Managing Director of
Aloha Technologies as well as a Director of the Company. All development work is
performed by Aloha Technologies on a work for hire basis and the Company owns
all rights title and interest in any work developed by Aloha Technologies.
During the year ended January 31, 2009, the Company contracted services worth
$292,185. As of January 31, 2009 the payable amounted to $184,116.
The Company has executive agreements with each of the President and the CEO of
the Company for an annual salary of $65,000 per annum. From October 27, 2008,
the salary was increased to $120,000 per annum as the Company became registered
on the Bulletin Board. These agreements can be cancelled when the executives
reach the age of 65 years or after giving six (6) months notice.
On August 1, 2008 the Company extended the executive agreement with each of the
President and the CEO for a period of three years. The purpose was to provide a
commitment and long term stability to the growth of the Company.
The Company agreed to pay the President and the CEO the sum of $400,000 each for
this extension. The President and CEO have agreed to accept this payment in
either cash or restricted stock. The company issued 81,090,560 free trading
shares during the year ended January 31, 2009 for the part payment of accrued
compensation of the President & CEO of the Company. These shares were valued at
the fair market value of $561,951, pursuant to EITF 96-18.
Note 12. Commitments and Contingencies
At January 31, 2009 there were no material commitments or contingencies. The
Company leases office spare in the United Kingdom on a three year lease. This
lease is accounted for as an operating lease. Rental expense for this lease
consisted of approximately $26,104 for the year ended January 31, 2009. The rent
commitment for the three years ended January 31 is as follows:
2010 $ 6,682
2011 29,850
2012 29,850
The Company also has executive agreements with each of the President and CEO of
the Company for an annual salary of $65,000 per annum. These agreements can be
canceled when the executives reach the age of 65 years or after giving six (6)
months notice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
--------------------------
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED," "BELIEVE,"
"EXPECT, "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "COULD," "MAY," AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS,
FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT
OUR MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION,
GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL,
AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL
CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND OUR CONTROL.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING
ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND
ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED OR OTHERWISE INDICATED.
CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT ARE
QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE
ACTUAL RESULTS OR DEVELOPMENTS.
29
Overview
Propalms, Inc. (the "Company"), formerly Jenna Lane, Inc. (Jenna Lane), was
incorporated in 1995 under the laws of the State of Delaware.
Propalms, Ltd was a UK registered company incorporated in October 2001 with a
fiscal year end of January 31. On July 12, 2005 Propalms, Ltd purchased from
Tarantella, Inc. a license and purchase option agreement for the world wide
intellectual property rights, including the entire customer base and all the
ongoing maintenance revenue, of a software product called Terminal Services
Edition ("TSE"). Jenna Lane is a Nevada Corporation, incorporated in 1995. Jenna
Lane was a non-operating company. On December 8, 2006, shareholders of Propalms,
Ltd purchased 13,750,000 shares of Jenna Lane. On December 9, 2006, Jenna Lane
entered into an agreement with all the shareholders of Propalms, Ltd to exchange
230,000,000 shares of Jenna Lane for all the issued and outstanding stock of
Propalms, Ltd. After the consummation of the agreement, the former shareholders
of Propalms, Ltd. own 243,750,000 shares of common stock of Jenna Lane, which
represent 89.35% of Jenna Lane's outstanding shares. Jenna Lane moved from
Delaware to be incorporated in Nevada.
The exchange of shares with Propalms, Ltd. has been accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders of
the Propalms, Ltd. obtained control of the consolidated entity. Accordingly, the
merger of the two companies has been recorded as a recapitalization of Propalms,
Ltd, with Propalms, Ltd being treated as the continuing entity. The historical
financial statements presented are those of Propalms, Ltd. The continuing
company has retained January 31 as its fiscal year end. The financial statements
of the legal acquirer are not significant; therefore, no pro forma financial
information is submitted.
The consolidated financial statements include the accounts of Propalms, Inc. and
its wholly owned subsidiary, Propalms, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
During December 2006 Jenna Lane increased its authorized common shares to
500,000,000 in order to acquire Propalms Ltd.
In March 2007 Jenna Lane, Inc. changed its name to Propalms USA, Inc. and its
ticker symbol to PRPM.PK in order to better reflect the nature of the Company's
business. As a result of this recapitalization and reorganization, the financial
statements of the Company reflect the results of operations beginning on July
12, 2005 (since "Inception"). Further, on June 22, 2007 Propalms USA, Inc.
changed its name to Propalms, Inc. to better reflect the Company's international
sales and global presence.
In October 2008 Propalms, Inc. received clearance from FINRA to commence posting
quotations on the OTC Bulletin Board, and its ticker symbol changed to PRPM.OB
Propalms, Inc., through Propalms, Ltd., develops TSE which offers users a system
management product for the Microsoft server based computing (SBC) environment.
TSE allows users to manage and operate all their software applications centrally
on their servers rather than on each individual desktop computer. The Company
markets and licenses its products through multiple channels such as value-added
resellers and channel distributors.
Propalms, Inc on May 12, 2008 in an all cash transaction, completed its
acquisition of the source code and the customer lists of a Virtual Private
Network (VPN) solution from an Indian company called vFortress. The addition of
VPN capability to the Company product offerings should support additional
revenue generation.
30
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Propalms, Inc. and
its wholly owned subsidiary Propalms, Ltd, collectively referred to within as
the Company. All material inter-company accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
Accounts Receivable
The Company's customer base consists of a geographically dispersed customer
base. The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, which is four years. Depreciation expense was $8,688
and $5,417 for the years ended January 31, 2009 and 2008, respectively.
The Company accounts for the costs of computer software developed or obtained
for internal use in accordance with Statement of Position 98-, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
Company capitalizes costs of materials, consultants, and payroll and payroll
related costs for employees incurred in developing internal use computer
software. These costs are included with "Computer equipment and software." Costs
incurred during the preliminary project and post implementation stages are
charged to general and administrative expense.
Intangible Assets
Intangible assets consist of product licenses, renewals, distributor
relationships and goodwill. The Company evaluates intangible assets, goodwill
and other long-lived assets for impairment, at least on an annual basis and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable from its estimated future cash flows. Recoverability of
intangible assets, other long-lived assets and, goodwill is measured by
comparing their net book value to the related projected undiscounted cash flows
from these assets, considering a number of factors including past operating
results, budgets, economic projections, market trends and product development
cycles. If the net book value of an asset exceeds the related undiscounted cash
flows, the asset is considered impaired, and a second test is performed to
measure the amount of impairment loss. Potential impairment of goodwill is being
evaluated in accordance with SFAS No. 142. As part of intangible assets, the
Company capitalizes certain computer software development costs in accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Costs incurred internally to create a computer
software product or to develop an enhancement to an existing product are charged
to expense when incurred as research and development expense until technological
31
feasibility for the respective product is established. Thereafter, all software
development costs are capitalized and reported at the lower of unamortized cost
or net realizable value. Capitalization ceases when the product or enhancement
is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate that
the unamortized software development costs exceed the net realizable value, the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight line basis over three
years, whichever method results in a higher level of amortization.
Revenue Recognition
The Company recognizes its revenue in accordance with the Securities and
Exchange Commissions ("SEC") Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104") and The American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-4 and SOP 98-9, SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," and
Accounting Research Bulletin 45 (ARB 45) "Long-Term Construction Type
Contracts." The Company's revenue recognition policy is as follows: License
Revenue: The Company recognizes revenue from license contracts without major
customization when a non-cancelable, non-contingent license agreement has been
signed, delivery of the software has occurred, the fee is fixed or determinable,
and collectibilty is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage of
completion method, in conformity with ARB 45 and SOP 81-1. Revenue from the
implementation of software is recognized on a percentage of completion method,
in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Any
revenues from software arrangements with multiple elements are allocated to each
element of the arrangement based on the relative fair values using vendor
specific objective evidence as defined in the SOPs. An output measure of "Unit
of Work Completed" is used to determine the percentage of completion which
measures the results achieved at a specific date. Units completed are certified
by the Project Manager and EVP IT/ Operations.
Services Revenue: Revenue from consulting services is recognized as the services
are performed for time and materials contracts. Revenue from training and
development services is recognized as the services are performed. Revenue from
maintenance agreements is recognized ratably over the term of the maintenance
agreement, which in most instances is one to two years.
The Company markets and licenses its products, TSE, primarily through indirect
channels such as value-added resellers and channel distributors. The product
license is perpetual and includes either one to two years of maintenance.
Maintenance includes enhancements and unspecified software upgrades.
Fair Value
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for assets and liabilities qualifying as financial
instruments are a reasonable estimate of fair value.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for
the years ended January 31, 2009 and 2008 were insignificant.
Basic and Diluted Earnings Per Share
Earnings per share are calculated in accordance with the Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net income (loss)
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net income (loss) per share is based upon the weighted
32
average number of common shares outstanding. Diluted net loss per share is based
on the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period. Basic and diluted loss per share were $0.01 and $0.01
for the years ended January 31, 2009 and 2008 respectively.
Product Concentration
The Company derives substantially all of its revenues from its TSE server
product and anticipates that this product and future derivative products and
product lines based upon this technology will continue to constitute a majority
of its revenue. The Company could experience declines in demand for this
product, whether as a result of general economic conditions, new competitive
product releases, price competition, lack of success of its strategic partners,
technological change or other factors. The total revenue generated during the
years ended January 31, 2009 and 2008 from the product was $882,119 and
$1,076,715, respectively.
Cost of Revenues
Cost of revenues consists primarily of fees paid to outside firms to perform
software support tasks, amortization of acquired product technology and
capitalized software development costs, and other personnel related costs of
providing technical support and consulting, as well as, the Company's online
services.
Foreign Currency & Operations
The functional currency was the Great Britain Pound for the year ended January
31, 2009. The January 31, 2009 financial statements of the Company were
translated to United States dollars using year-end exchange rates as to assets
and liabilities and average exchange rates as to revenues and expenses. Capital
accounts were translated at their historical exchange rates when the capital
transactions occurred. Net gains and losses resulting from translation of
financial statements are included in the statements of stockholder's deficit as
other comprehensive income or (loss). Foreign currency transaction gains and
losses are included in consolidated income (loss).
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). Under SFAS 109, deferred
income tax assets or liabilities are computed based on the temporary difference
between the financial statement and income tax bases of assets and liabilities
using the currently enacted marginal income tax rate. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period. Deferred tax assets may be recognized for
temporary differences that will result in deductible amounts in future periods
and for loss carry forwards. A valuation allowance is established if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
United Kingdom
As of January 31, 2009 and 2008, the Company's UK subsidiary had net operating
loss carry forwards which can be carried forward indefinitely to offset future
taxable income. The deferred tax assets for the subsidiary at January 31, 2009
consists mainly of net operating loss carry forwards and were fully reserved as
the management believes it is more likely than not that these assets will not be
realized in the future.
The following table sets forth the significant components of the net deferred
tax assets for operation in the UK as of January 31, 2009 and 2008:
2009 2008
---------- ----------
Net Operating Loss
Carryforward $ 1,862,529 $1,403,853
Total Deferred Tax
Assets 651,885 491,349
Less: Valuation
Allowance (651,885) (491,349)
---------- ----------
Net Deferred Tax
Asset $ - $ -
========== ==========
33
United States of America
The Company has significant income tax net operating losses carried forward from
prior years. Due to the uncertainty of the realizability of the related deferred
tax assets of $6,295,466, a reserve equal to the amount of deferred income taxes
has been established at December 31, 2008. The Company has provided 100%
valuation allowance to the deferred tax assets as of January 31, 2009.
The following table sets forth the significant components of the net deferred
tax assets for operation in the United States as of January 31, 2009 and 2008:
2009 2008
------------ ------------
Net Operating Loss
Carryforward $ 6,295,466 $ 3,481,704
Total Deferred Tax
Assets 1,183,778 2,140,459
Less: Valuation
Allowance (1,183,778) (2,140,459)
------------ ------------
Net Deferred Tax
Asset $ 0 $ 0
============ ============
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
2009 2008
------------ ------------
Tax expense (credit) at
statutory rate-federal (34) (34)
State tax expense net of
federal tax (6) (6)
Changes in valuation
allowance 40 40
Foreign income tax:
UK 19 19
Changes in valuation
allowance (19) (19)
Tax expense at actual rate -- --
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The Company's functional currency is the Great Britain Pound (GBP);
however the accompanying consolidated financial statements have been translated
and presented in United States Dollars ($).
Stock-based compensation
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options,
using a fair value based method and the recording of such expense in the
consolidated statements of operations. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of
SFAS 123R and the valuation of share-based payments for public companies. The
Company has adopted SFAS 123R and related FASB Staff Positions ("FSPs") as of
January 1, 2006 and will recognize stock-based compensation expense using the
modified prospective method.
34
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, during the years ended January 31, 2009 and 2008,the
Company incurred net losses of $3,272,441 and $2,469,599, respectively. In
addition, the Company had negative cash flow in operating activities amounting
to $423,183 and $448,036, respectively for the periods then ended. The Company's
accumulated deficit was $8,175,995 as of January 31, 2009. If the Company is
unable to generate profits and is unable to continue to obtain financing for its
working capital requirements, it may have to curtail its business sharply or
cease business altogether.
The Company has taken certain restructuring steps to provide the necessary
capital to continue its operations. These steps included, but were not limited
to: 1) focus on sales to minimize the capital needs at this stage; 2) financial
restructuring by changing part of the outstanding accounts payable to equity; 3)
raising equity financing; 4) continuous focus on reductions in cost where
possible.
Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements.
SFAS 157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for the Company beginning in the first quarter of 2008. In
February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2--Effective
Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008.
Adoption of SFAS No. 157 did not affect the Company consolidated financial
condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company's fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements". This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company's fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of this
pronouncement on its financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities. The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity's financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. Management is
currently evaluating the effect of this pronouncement on its financial
statements.
35
In May of 2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted
Accounting Principles. The pronouncement mandates the GAAP hierarchy reside in
the accounting literature as opposed to the audit literature. This has the
practical impact of elevating FASB Statements of Financial Accounting Concepts
in the GAAP hierarchy. This pronouncement will become effective 60 days
following SEC approval. The company does not believe this pronouncement will
impact its financial statements.
In May of 2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.
Reclassifications
Certain reclassifications have been made to the 2008 financial statements to
conform to the fiscal year 2009 presentation.
Comparison of Years Ended January 31, 2009 and 2008.
The following table sets forth the results of our operations for the periods
indicated:
2009 2008
------------ ------------
NET REVENUES $ 882,119 $ 1,076,715
COST OF SALES 505,669 517,243
GROSS PROFIT 376,450 559,472
OPERATING EXPENSES:
Research and development 254,010 379,273
Sales and marketing 404,528 379,900
General and administrative 538,928 2,472,517
Officer compensation 1,248,549 --
Consulting fee 1,157,159 --
Total Operating Expenses 3,603,173 3,231,690
LOSS FROM OPERATIONS (3,226,723) (2,672,218)
OTHER INCOME (EXPENSE):
Change in fair value of derivative -- 191,962
Tax credit refund -- 88,757
Other income (expense) 31,222 7,747
Interest income (expense) (76,940) (85,847)
Total Other Income (Expense) (45,718) 202,619
NET LOSS (3,272,441) (2,469,599)
OTHER COMPREHENSIVE ITEM:
Foreign currency translation 106,678 3,445
COMPREHENSIVE LOSS $ (3,165,763) $ (2,466,154)
36
Net Revenues. Our software revenue has historically been primarily derived from
product licensing fees and service fees from maintenance contracts. For the year
ended January 31, 2009, our net revenues decreased approximately 18% from
$1,076,715 to $882,119 relative to the same period ended January 31, 2008 in
anticipation, by the customers, of launch of TSE V6.0 upgrade of the existing
software. The rate change in dollar currency over 2008 also had an impact on the
decrease of revenues. The revenues increased during the last two months after
the upgrade was launched. The Company is continuing to develop its international
sales and marketing activities as well continuing its product enhancements and
modifications.
Cost of Sales. Cost of sales decreased 2% from $517,243 for the year ended
January 31, 2008, to $505,669 for the year ended January 31, 2009. The decrease
was due to decrease in costs associated with realizing Net Revenue for the year
January 31, 2009 and better cost controls.
Gross Profit. Gross profit decreased approximately 33% from $559,472 for the
year ended January 31, 2008 to $376,450 for the year ended January 31, 2009.
This decrease in gross profit was primarily due to the decrease in the net
revenues during the period.
Operating Expenses. For the year ended January 31, 2009, overall operating
expenses increased approximately 11% from $3,231,690 to $3,603,173 relative to
the year ended January 31, 2009. This increase was mainly due to the following:
Research and Development. Research and development expenses decreased
approximately 33% from $379,273 for the year ended January 31, 2008 to $254,010
for the same period in 2009. This decrease was related to better cost controls
and downsizing of the development team. In February 2009 Propalms opened a sales
and development office in Mumbai, India. The team currently consists of six
staff. The Company also plans to open a sales office in Delhi in the coming
months.
Our research and development efforts currently are focused on further enhancing
of the functionality, performance and reliability of existing products. We
historically have made significant investments in our protocols and in the
performance and development of our server-based software, and we expect to
continue to make significant product investments during 2009, including
investments in new product offerings. We expect 2010 research and development
expense to be higher than 2009 levels.
Sales and Marketing Expenses. Sales and Marketing expenses increased
approximately 6% from $379,900 for the year ended January 31, 2008 to $404,528
for the same period in 2009. This increase was related to an increase in efforts
to develop international sales during this period.
General and Administrative Expenses.
General and administrative expenses were $632,021 for the year ended January 31,
2008, as compared to $538,928 for the year ended January 31, 2009, a decrease of
4015%. This decrease is due to cost cutting and better cost control.
Officer Compensation: Officer compensation was $681,675 for the year ended
January 31, 2008 as compared to $1,248,549 for the year ended January 31, 2009.
The increase of 83% was due to an increase in the officers' compensation on the
OTCBB listing pursuant to the employment agreement. The officers were also
granted bonuses of $800,000 on the OTCBB listing. Most of the compensation has
been paid in shares of common stock.
Consulting fee: Consulting fees of 1,157,159 were comparable to consulting fee
for last year of $969,1591,158,821. The consulting fee was predominantly paid to
the investor relations firm and the arrangement with it was terminated in April
2009.
We anticipate that cumulative general and administrative expenses in fiscal year
2010 will be lesser than those incurred during 2009.
Net Loss. Net loss increased approximately 33% from a net loss of $2,469,599 for
the year ended January 31, 2008 to a net loss of $3,272,441 for the year ended
January 31, 2009.
37
Liquidity and Capital Resources
At January 31, 2009, we had cash on hand of $7,622 and a working capital deficit
of 1,633,114. At January 31, 2009, we also had loans payable to various
unrelated parties amounting to $ 855,437.
The Company's future capital requirements will depend on many factors: the scope
and results of customer testing and installations, especially for the larger
customers, research and development activities, and the continued establishment
of the marketing and sales organizations. There is no guarantee that without
additional revenue or financing, the Company will be able to meet its future
working capital needs.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. Our continuation as
a going concern is dependent upon our ability to generate sufficient cash flow
to meet our obligations on a timely basis, to retain our current financing, to
obtain additional financing, and ultimately to attain profitability. We are in
the process of raising equity financing to overcome the condition. If the
Company is unable to generate profits and is unable to continue to obtain
financing for its working capital requirements, it may have to curtail its
business sharply or cease business altogether.
We are aggressively looking at ways to improve our revenue stream,
including through the development of new products and additional acquisitions of
licenses or other corporate entities. We continue to review potential merger
opportunities as they present themselves to us and at such time as a merger
might make financial sense and add value for our shareholders, we will pursue
that merger opportunity
Cash Flows
Year Ended January 31, 2009 and 2008
Net cash flow used in operating activities was $423,183 for the year ended
January 31, 2009 and net cash used in operations was $448,036 for the year ended
January 31, 2008. For the year ended January 31, 2009, the decrease in cash
flows used in operating activities was mainly attributable to an increase in
payables.
The Company incurred cash outflows of $4,761 in investing activities during the
year ended January 31, 2009, as compared to $106,922 provided by investing
activities for the same period in 2008 with respect to the release of restricted
cash.
We received a loan of $55,767 from non-affiliated parties and paid off loans of
$68,083 to related parties during the year ended January 31, 2009. For the same
period in 2008, we received loan of $148,061 from non-affiliated parties and
paid off loans of $262,338 and also paid off $74,396 to related parties. We also
raised $485,626 by selling shares for cash during the year ended January 31,
2009 and $35,000 from the exercise of options. For the same period in 2008, we
raised $523,450 from issuance of shares for cash.
Propalms, Inc on May 12, 2008 in an all cash transactions, completed its
acquisition of the source code and the customer lists of a Virtual Private
Network (VPN) solution from an Indian company called vFortress.
VFortress sales commenced in the start of 2009.
Contractual Obligations and Off-Balance Sheet Arrangements
38
Off Balance Sheet Arrangements
There are no off balance sheet arrangements between us and any other entity that
have, or are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to the Company's stockholders.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company changed accountants in June 2007 to Kabani & Company, Inc.,
Certified Public Accountants, 6033 West Century Blvd., Suite 810, Los Angeles,
CA 90045, Phone: 310-694-3590. The previous accountants were Richard L. Brown &
Company, P.A. in Tampa, Florida. There were no disagreements or events, as
described in Item 304(a)(1)(iv) of Regulation S-B of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), with the previous accountants.
Item 8A(T). Controls and Procedures.
The Securities and Exchange Commission defines the term disclosure
controls and procedures to mean a Company's controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. The Company maintains such
a system of controls and procedures in an effort to ensure that all information
which it is required to disclose in the reports it files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified under the SEC's rules and forms.
The Company's management believes that the disclosure controls and
procedures were effective as of January 31, 2009, to provide reasonable
assurance of the achievement of these objectives.
There was no change in the Company's internal controls over financial
reporting during the fiscal year ended January 31, 2009, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 8B. Other Information.
None.
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act.
Executive Officers and Directors.
The following table sets forth the information regarding our executive
officers and directors as of the date of this filing:
Name Age Position
-------------- --- --------------------------------------------
Owen Dukes 41 CEO; Chairman; Director
Robert Zysblat 52 President; Chief Financial Officer; Director
Nakul Sood 34 Director
The directors of the Company are elected annually by the shareholders
for a term of one year, or until their successors are elected and qualified. The
Officers are appointed by the Board of Directors at the annual meeting of
directors immediately following each annual meeting of shareholders of the
Company and serve at the pleasure of the Board of Directors.
39
Background of Directors and Executive Officers.
Owen Dukes, CEO, Chairman and Director. In July 2005, Mr. Dukes became
a director of Propalms Ltd. and upon its formation in 2006, he was appointed CEO
of the Company. Mr. Dukes has twenty years of extensive industry experience. He
worked for Phoenix Distribution, the leading Microsoft reseller, as their UK
channel manager from 1993 to 2000. Mr. Dukes then worked as Business Development
Manager for Surf Control PLC, from 2000 to 2001, building up their UK market to
a multi-million pound enterprise. Also in 2000, he launched Arc Technology
Distribution Ltd, and purchased two other distributors, Unidirect Ltd and
IPconnect Ltd. Mr. Dukes resigned from ARC in 2006. Mr. Dukes was appointed CEO
and a director of Jenna Lane in December 2006 and assumed those same positions
as part of the merger with the Company in June 2007.
Robert Zysblat: President and Director. Mr. Zysblat has a well-known
entrepreneurial track record in the security software industry and has
successfully led and sold a number of significant messaging companies. In 1998
he purchased 100% of the shares of Computer Communications Ltd, becoming its
CEO, and successfully sold this business in an management buyout in July 2001.
In December 2000, he purchased 5th Generation Messaging, becoming its CEO and
sold all his stock in July 2002. In September 2002, he purchased MSS
communications becoming its Chairman, and sold the business in 2004. Mr. Zysblat
has been with Propalms Ltd. since July 2005. He was appointed CFO and became a
director of Jenna Lane in December 2006 and assumed the positions of Chairman
and Chief Financial Officer as part of the merger with the Company in June 2007.
Nakul Sood: Director. Mr. Sood was formerly the Director of Product
Management and Planning at New Moon Systems, Inc. and on the original
development team of the Propalms TSE software. Several years later, New Moon
Systems was purchased by Tarantella, Inc. where he was named the Director of IDC
and Product Management. Just prior to the acquisition of Tarantella by Sun
Microsystems, Mr. Sood founded Aloha Technology Pvt. Ltd where he is currently
the Managing Director. Mr. Sood has dual MBAs in Marketing and Information
Systems and a Bachelor's degree in Mechanical Engineering. Mr. Sood was
appointed a director of the Company in May 2007.
Significant Employees
The Company has retained Katherine Dukes, wife of Owen Dukes, as the
operations Manager in the United Kingdom office. Ms. Dukes is the wife to the
CEO of the Company.
Meetings and Committees of the Board
The Board of Directors currently consists of three members and the
entire board of directors' acts as the Company's audit committee Mr. Zysblat is
the financial expert for the Company's board. There are no other committees of
the Board. The Board meets as needed.
Section 16(a) Beneficial Owner Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company's
directors, executive officers, and persons who own more than 10% percent of a
registered class of the Company's equity securities, file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Officers, directors, and greater than
10% beneficial owners are required by SEC regulation to furnish the Company with
copies of all Section 16(a) reports they file. As of the date of this report,
all of the initial reports of ownership has been made by the Company's
directors.
Code of Ethics
The Company has adopted a code of ethics for all of the employees,
directors and officers which is attached to this Form 10-KSB as Exhibit 14.1.
This code of ethics is available on our Internet website,
http://www.propalms.com. The Company will provide a copy of our code of ethics
in print without charge to any stockholder who makes a written request to:
President Robert Zysblat, Unit 4, Park Farm Courtyard, Easthorpe, Malton N.
Yorkshire, United Kingdom. Any waivers of, and any amendments to, our code of
ethics will be disclosed promptly on our Internet website,
http://www.propalms.com.
40
Item 12. Certain Relationships and Related Transactions, and Director
Independence.
Related Party Transactions.
Other than as set forth in Note 12 to the Financial Statements, there
were no related party transactions for the period ended January 31, 2008.
Director Independence.
The Company does not have a majority of Independent directors. The
Company is actively seeking to recruit independent directors. Currently the
Company has three (3) directors and Mr. Dukes, Mr. Zysblat are insider director,
and Mr. Sood is an independent director.
Item 13. Exhibits
a) The exhibits included in this report are indicated below.
Exhibit No. Description of Exhibit
----------- ------------------------------------------------------------------
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 2.1 to the Company's Form 10SB filed with the
SEC on December 13, 2007).
3.2 Certificate of Amendment to the Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
Form 10SB filed with the SEC on December 13, 2007).
3.3 Certificate of Amendment to the Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed with the SEC on April 9, 2008).
3.4 Bylaws of the Company (incorporated by reference to Exhibit 2.3 to
the Company's Form 10SB filed with the SEC on December 13, 2007).
4.1 Articles of Incorporation of the Company, as amended, is included
in Exhibits 3.1, 3.2 and 3.3.
4.2 Bylaws of the Company are included in Exhibit 3.4.
10.1 The 2007 Equity Compensation Plan.
10.2 The TSE acquisition Note and related documentation (should be
included as Item 2 exhibits too).
10.3 The HSBC credit document.
14.1 Code of Ethics (filed herewith).
21.1 List of subsidiaries of the Company.(filed herewith).
23.1 Consent of Kabani & Company, Inc. (filed herewith).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
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 of 2002 (filed herewith).
Item 14. Principal Accountant Fees and Services.
Audit Fees.
The aggregate fees billed for the fiscal years ended January 31, 2009
and 2008 for the certified audit of the Company's financial statements, and the
review of the interim financial statements and services provided in connection
with periodic filings totaled $30,000 and $25,000, respectively.
Audit Related Fees.
Aggregate fees billed for professional services rendered by Kabani &
Company, Inc. in connection with its audit of Propalms financial statements as
of and for the years ended January 31, 2009 and 2008, its reviews of Propalms
unaudited condensed consolidated interim financial statements, and for SEC
consultations and filings totalled $ 30,000.00 and $ 25,000.00 respectively.
41
Tax and Other Fees.
There were no other fees paid to the principal accountant for the
fiscal years ended January 31, 2009 and 2008 for professional services rendered
for tax compliance, tax advice and tax planning or other services.
All Other Fees.
There were no other fees for the fiscal years ended January 31, 2009
and 2008 for products and services provided by the principal accountant, other
than the services reported above.
Policy for Pre-Approval of Audit and Non-Audit Services.
(i) The Company's Board of Directors acts as the Audit Committee. The
Board of Directors selected the Company's Auditors after reviewing the auditor's
qualifications and proposal and approved the terms of the Auditor's engagement.
The stockholders ratified this approval at the Company's annual meeting.
(ii) 29.4%
42
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROPALMS, INC.
(Registrant)
Date: May 15, 2009 By: /s/ Owen Dukes
-------------------------------------
Owen Dukes
Chief Executive Officer and Director
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
Date: May 15, 2009 By: /s/ Owen Dukes
-------------------------------------
Owen Dukes
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 15, 2009 By: /s/ Robert Zysblat
-------------------------------------
Robert Zysblat
President, Chief Financial Officer
and Director (Principal Financial
Officer)
Date: May 15, 2009 By: /s/ Nakul Sood
-------------------------------------
Nakul Sood
Director
43