UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) Of The Securities Exchange Act
of 1934
For the Quarterly Period ended October 31, 2008
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period to
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Commission file number 000-52980
Propalms, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 22-3351399
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Unit 4, Park Farm Courtyard, Easthorpe, Malton,
N. Yorkshire, United Kingdom Y017 6QX
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(Address of principal executive offices)
011-44-1653-696060
-------------------------
(Issuer's telephone number)
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 is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 488,937,924 shares of $0.001 par value
common stock outstanding as of November 10, 2008.
PROPALMS INC.
QUARTER ENDED OCTOBER 31, 2008
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements 4
Consolidated Balance Sheets as of October 31, 2008 (unaudited)and
January 31, 2008 4
Consolidated Statements of Operations for the three months
and nine month periods ended October 31, 2008 and 2007 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
and nine month periods ended October 31, 2008 and 2007 (unaudited) 6
Notes to Financial Statements (unaudited). 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Risk Factors. 20
ITEM 3. Controls and Procedures. 32
PART II. OTHER INFORMATION 32
ITEM 1. Legal Proceedings 32
ITEM 2. Changes in Securities 32
ITEM 3. Defaults upon Senior Securities 33
ITEM 4. Submission of Matters to a Vote of Security Holders 33
ITEM 5. Other Information 33
ITEM 6. Exhibits and Reports on Form 8-K 33
2
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Form 10QSB 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 10-QSB. Some of these factors are described
as criteria for success. The Company"s failure to achieve, or limited success in
achieving, 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.
3
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PROPLAMS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
October 31, January 31,
2008 2008
(Unaudited) (Audited)
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ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 8,691 $ 25,107
Accounts receivable, net 111,686 91,622
Prepaid expenses & other current assets 29,417 70,734
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Total current assets 149,795 187,463
PROPERTY, PLANT & EQUIPMENT, net 16,866 22,223
INTANGIBLE ASSETS, net 510,901 792,971
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TOTAL ASSETS $ 677,562 $ 1,002,657
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 881,271 $ 457,314
Deferred revenue 455,189 94,432
Loans from shareholders -- 74,806
Notes payable 801,232 801,232
Shares to be issued -- 990,000
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Total current liabilities 2,137,693 2,417,784
LONG TERM LIABILITIES
Notes payable 72,262 105,882
Deferred revenue 57,522 537,324
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Total long term liabilities 129,785 643,206
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TOTAL LIABILITIES 2,267,477 3,060,990
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COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $0.0001 par value; Authorized shares 500,000,000,
488,937,924 and 438,237,924 shares issued as of October 31 and
January 31, 2008, respectively and 435,212,094 and 328,335,385
shares outstanding as of October 31 and January 3143,521,
respective 43,521 32,835
Additional paid-in capital 5,598,085 3,480,985
Shares to be issued stock options 20,000
Prepaid consulting (200,500) (703,500)
Comprehensive gain 193,311 16,901
Accumulated deficit (7,244,333) (4,885,554)
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Total stockholders' deficit (1,589,915) (2,058,333)
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TOTAL LIABILITIES & STOCKHOLDER'S DEFICIT $ 677,562 $ 1,002,657
=========== ===========
The accompanying notes are an integral part of
these unaudited consolidated financial statements
4
PROPALMS INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three month Nine month
periods ended October, 31 periods ended October, 31
2008 2007 2008 2007
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Revenue, net $ 185,357 $ 286,729 $ 698,739 $ 837,540
Cost of Goods Sold 94,815 167,942 363,900 508,966
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Gross profit 90,542 118,787 334,839 328,574
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Operating Expenses:
Research & Development 143,017 30,150 300,400 89,365
Sales & Marketing 367,091 54,055 725,802 202,324
General and administrative expenses 601,084 152,495 1,607,549 534,661
------------- ------------- ------------- -------------
Total operating expenses 1,111,193 236,700 2,633,752 826,350
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Loss From Operations (1,020,651) (117,913) (2,298,913) (497,776)
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Other Income (Expense):
Foreign currency (113) -- (1,700) --
Interest income (expense) (34,390) (22,681) (58,185) (65,559)
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Total other expenses (34,504) (22,681) (59,886) (65,559)
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Net Loss (1,055,155) (140,594) (2,358,799) (563,335)
Other comprehensive item
Foreign currency translation 196,194 (709) 176,410 (212)
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Net comprehensive Loss $ (858,961) $ (141,303) $ (2,182,389) $ (563,547)
============= ============= ============= =============
Basic & diluted loss per share $ (0.00) $ (0.00) $ (0.01) $ (0.00)
============= ============= ============= =============
Weighted average shares for computing basic &
diluted loss per share 392,547,135 363,097,240 357,576,284 327,882,117
============= ============= ============= =============
The accompanying notes are an integral part of
these unaudited consolidated financial statements
5
PROPALMS INC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED OCTOBER 31, 2008 AND 2007
(UNAUDITED)
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,358,799) $ (563,335)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 176,557 186,545
Issuance of shares for service 188,000 1,141,813
Amortization of prepaid consulting 603,000 --
Options expense 207,000 --
Settlement of compensation in shares 207,000 --
(Increase) decrease in current assets:
Receivables (42,918) (112,812)
Prepayments 32,298 (900,782)
Increase in current liabilities:
Accounts payable and accrued expense 416,791 (251,392)
Deferred income (12,189) 45,456
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Net cash used in operating activit (583,261) (454,507)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property & equipment (5,044) (47,201)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 7,772 228,044
(Payments on)/proceeds from notes payable - officer (72,119) 4,595
Proceeds from shares to be issued for option exercised 20,000 --
Proceeds from issuance of shares for cash 435,626 282,998
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Net cash provided by financing activties 391,280 515,637
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Effect of exchange rate on cash & cash equivalent 180,608 (212)
NET INCREASE/ (DECREASE) IN CASH & CASH EQUIVALETS (16,416) 13,717
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 25,107 141,000
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CASH & CASH EQUIVALENTS, ENDING BALANCE $ 8,691 $ 154,717
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Supplementary Information:
Cash paid during the year for:
Interest $ 25,695 $ 38,370
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Income taxes $ -- $ --
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The accompanying notes are an integral part of
these unaudited consolidated financial statements
6
PROPALMS, INC
NOTES TO UNAUDITED 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. own 243,750,000 shares of common stock of Jenna Lane, which
represent 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. 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 from FINRA clearance to begin quotations
on the OTC Bulletin Board, and its ticker symbol changed to PRPM.OB
7
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
by Propalms, Inc., pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") Form 10-QSB and Item 310 of Regulation S-B, and
generally accepted accounting principles for interim financial reporting. The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-KSB. The
results of the nix month period ended October 31, 2008 are not necessarily
indicative of the results to be expected for the full year ending January 31,
2009.
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 ($).
Foreign currency transactions and comprehensive income (loss)
As of October 31, 2008, the accounts of Propalms, Ltd were maintained, and its
financial statements were expressed, in Great Britain Pound (GBP). Such
financial statements were translated into U.S. Dollars (USD) in accordance with
Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency
Translation," with the GBP as the functional currency. According to the
Statement, all assets and liabilities were translated at the current exchange
rate, stockholder's equity are translated at the historical rates and income
statement items are translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component
of shareholders' equity.
8
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 straight line method over the estimated useful
lives of the assets, which is four years. Depreciation expense was $6,836 and
$3,639 for the nine month periods ended October 31, 2008 and 2007, 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."
9
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
10
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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
11
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 earnings or loss per share were $0.00
and $0.00 for the three month periods ended 31,October 2008 and 2007
respectively. Basic and diluted earnings or loss per share were $0.01 and $0.00
for the nine month periods ended October 31, 2008 and 2007 respectively.
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 nine month periods ended October 31, 2008 and
2007,the Company incurred net losses of $2,358,799 and $563,335, respectively.
In addition, the Company had negative cash flow in operating activities
amounting to $583,261 and $454,507, respectively for the periods then ended. The
Company's accumulated deficit was $7,244,333 as of October 31, 2008. 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 need 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
12
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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
13
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 2007 financial statements to
conform to the 2008 presentation.
Note 3. Intangible Assets
Intangible assets consist of acquired developed software technology, acquired
customer relationship, capitalized software development costs.
The components of intangible assets at October 31, 2008 and January 31, 2008 are
summarized as follows:
October 31 January 31 Est. Life
-------- ---------- ---------
Developed Software Technology $ 631,830 $675,866 5 years
Customer Relationships 374,376 452,068 10 years
Software Development Costs 112,128 222,482 2 years
Less: Accumulated Amortization (607,433) (557,445)
--------- ----------
Net intangible assets $ 510,901 $792,971
========= ==========
14
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 three and
nine month periods ended October 31, 2008 amounted to $42,603 and $169,721,
respectively. The amortization for the three and nine month periods ended
October 31, 2007 amounted to $45,215 and $182,906 respectively.
The amortization schedule for the next five years ending October 31, is as
follows:
2009 $127,108
2010 127,108
2011 119,864
2012 37,483
2013 37,483
--------
$449,046
========
Note 4. Accounts payable & accrued expenses
The accounts payable and accrued expenses as of October 31, 2008 and January 31,
2008 comprised of the following:
October 31 January 31
Trade creditors $ 224,961 $ 283,009
Accrued expenses 140,505 174,305
Accrued payroll taxes 82,405 --
Accrued payroll 433,400 --
--------- ---------
Total 881,271 457,314
========= ==========
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 leaving the quarterly payment obligation of $50,000 unchanged.
At April 30, 2008, the note is in default and the remaining obligation owed to
the seller was $760,000. The Company has also accrued interest at the rate of 8%
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.
15
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On July 10, 2006 the Company received 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, 2008
was $147,114. 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 $72,262 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 loan over the next five years ending October 31 is
as follows:
2009 41,232
2010 41,232
2011 31,030
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 October 31, 2008, 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
October 31, 2008, the current portion of deferred revenue amounted to $455,189
and the long term portion amounted to $57,522.
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. 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 nine month period ended October 31, 2008. These shares were valued at the
fair market value of $990,000 pursuant to EITF 96-18.
16
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
During the nine month period ended October 31, 2008, 500,000 options @0.07 were
exercised. The Company received $20,000 of the amount due before October 31,
2008 and the balance amount was received in November 2008. The shares were not
issued as of October 31, 2008 and the amount is reflected as shares to be issued
in the accompanying financials.
Note 9. Stockholders Deficit
During the nine month period ended October 31, 2008, 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.
During the nine month period ended October 31, 2008, the Company raised $435,626
cash, net of finders' fee, by issuing 33,176,709 shares. The shares were issued
out of the escrow account maintained by the investor relations firm.
The company issued 46,000,000 shares during the nine month period ended October
31, 2008 for the part payment of accrued compensation of the President & CEO of
the Company. These shares were valued at the fair market value of $207,000,
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 nine month period ended October 31, 2008. 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 ended January 31, 2009 to May 31, 2009, pursuant to
the agreement. As of October 31, 2008, they were recorded as prepaid consulting.
These shares were valued at the fair market value of $100,000 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 nine month period ended
October 31, 2008, the Company recorded expense of $207,000.
The following assumptions have been used:
Risk-free interest rate 2.12% - 4.13%
Expected life of the options 2-10 year
17
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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,
October 31, 2008 29,500,000 $0.06 -
========== ====== =======
During the nine month period ended October 31, 2008, 500,000 options were
exercised @0.07 per share. The Company received $20,000 of the amount due before
October 31, 2008 and the balance amount was received in November 2008. The
shares were not issued as of October 31, 2008 and the amount is reflected as
shares to be issued in the accompanying financials.
Options outstanding at October 31, 2008 and related weighted average price and
intrinsic value are as follows:
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 7.70 $0.06 15,500,000 $0.06 --
Note 11. Related Party transactions
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 got 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.
18
PROPALMS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company agreed to pay the President and the CEO the sum of $300,000 each for
this extension. The President and CEO have agreed to accept this payment in
either cash or restricted stock. The company issued 46,000,000 free trading
shares during the nine month period ended October 31, 2008 for the part payment
of accrued compensation of the President & CEO of the Company. These shares were
valued at the fair market value of $207,000, pursuant to EITF 96-18[t].
Note 12. Commitments and Contingencies
At January 31, 2008 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 $7,069 and $17,487 for the three and nine month
periods ended October 31, 2008. The rent commitment for the next three years
ended October 31 is as follows:
2009 $ 6,682
2010 29,850
2011 29,850
The Company has a 2 year agreement with an investor relations firm. The
agreement entails for a cash fee of $37,500 per month or one million common
shares per month. Twelve million shares were issued to the firm in December 2007
and the Company has recorded a prepayment for the first year services. Another
five million shares were granted to the IR form in August as a prepayment for
the period January 2009 to May 2009. The agreement is through December 11, 2009.
The Company also has executive agreements with each of the President and the CEO
of the Company for an annual salary of $65,000 per annum. 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
also has a commitment to increase the salary of the President & CEO to $200,000
per annum upon the Company's listing on the NASDAQ or American Stock Exchange.
The Company agreed to pay the President and the CEO the sum of $300,000 each for
this extension. The President and CEO have agreed to accept this payment in
either cash or restricted stock.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements
--------------------------
The following discussion of the financial condition and results of operation of
the Company for the nine month periods ended October 31, 2008 and 2007 should be
read in conjunction with the selected consolidated financial data, the financial
statements and the notes to those statements that are included elsewhere in this
Current Report on Form 10-Q ("Form 10-Q"). Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this Form 10-Q. We
use words such as "anticipate," "estimate," "plan," "project," "continuing,"
"ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and
similar expressions to identify forward-looking statements.
The following discussions of our financial conditions and results of operations
--------------------------------------------------------------------------------
contains forward-looking statements within the meaning of Section 27A of the
--------------------------------------------------------------------------------
Securities Act of 1933 and Section 21E of the Securities Act of 1934. Actual
--------------------------------------------------------------------------------
results and the timing of certain events could differ materially from those
--------------------------------------------------------------------------------
anticipated in these forward- looking statements as a result of certain factors,
--------------------------------------------------------------------------------
including :
-----------
o Our history of operating losses, and expectation that those losses
----------------------------------------------------------------------
will continue
-------------
o That our stock price has been volatile and you could lose your
----------------------------------------------------------------------
investment
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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 July12, 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
20
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.
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.
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
-------------------------------------------------------------------
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.
21
CRITICAL ACCOUNTING POLICIES
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 ($).
Foreign currency transactions and comprehensive income (loss)
As of October 31, 2008, the accounts of Propalms, Ltd were maintained, and its
financial statements were expressed, in Great Britain Pound (GBP). Such
financial statements were translated into U.S. Dollars (USD) in accordance with
Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency
Translation," with the GBP as the functional currency. According to the
Statement, all assets and liabilities were translated at the current exchange
rate, stockholder's equity are translated at the historical rates and income
statement items are translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component
of shareholders' equity.
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.
22
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 $6,836 and
$3,639 for the nine month periods ended October 31, 2008 and 2007, 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
23
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 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.
24
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 earnings or loss per share were $0.00
and $0.00 for the three month periods ended 31,October 2008 and 2007
respectively. Basic and diluted earnings or loss per share were $0.01 and $0.00
for the nine month periods ended October 31, 2008 and 2007 respectively.
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 nine month periods ended October 31, 2008 and
2007,the Company incurred net losses of $2,358,799 and $563,335, respectively.
In addition, the Company had negative cash flow in operating activities
amounting to $583,261 and $454,507, respectively for the periods then ended. The
Company's accumulated deficit was $7,244,333 as of October 31, 2008. 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 inculde, but were not limited
to: 1) focus on sales to minimize the capital need at this stage; 2) financial
restructuring by changing part of the outstanding accounts payable to equity; 3)
raising equity financing; 4) continous focus on reductions in cost where
possible.
25
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 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
26
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 2007 financial statements to
conform to the 2008 presentation.
Comparison of Three Month Periods Ended October 31, 2008 and 2007.
The following table sets forth the results of our operations for the periods
indicated:
2008 2007
--------- ---------
NET REVENUES $ 185,357 $ 286,729
COST OF SALES 94,815 167,942
GROSS PROFIT 90,542 118,787
OPERATING EXPENSES:
Research and development 143,017 30,150
Sales and marketing 367,091 54,055
General and administrative 601,084 152,495
Total Operating Expenses 1,111,193 236,700
LOSS FROM OPERATIONS (1,020,651) (117,913)
OTHER INCOME (EXPENSE):
Foreign currency translation (113) -
Interest expense (34,390) (22,681)
Total Other Expenses (34,504) (22,681)
NET LOSS (1,055,155) (140,594)
OTHER COMPREHENSIVE ITEM:
Foreign currency translation (196,194) (709)
COMPREHENSIVE LOSS $(858,961) $ 141,303
27
Net Revenues. For the three month period ended October 31, 2008, our net
revenues decreased approximately 35% from $286,729 to $185,357 relative to the
same period ended October 31, 2007 in anticipation, by the customers, of launch
of TSE V6.0 upgrade of the existing software. 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 44% from $167,942 for the three month
period ended October 31, 2007, to $94,815 for the three month period ended
October 31, 2008. The decrease was due to decrease in Net Revenue for the three
month period October 31, 2008 and better cost control.
Gross Profit. Gross profit decreased approximately 24% from $118,787 for the
three month period ended October 31, 2007 to $90,542 for the three month period
ended October 31, 2008. This decrease in gross profit was primarily due to the
decrease in the net revenues during the period.
Operating Expenses. For the three month period ended October 31, 2008, overall
operating expenses increased approximately 369% from $236,700 to $1,111,193
relative to the three month period ended October 31, 2007. This increase was
mainly due to the following:
Research and Development. Research and development expenses increased
approximately 374% from $30,150 for the three month period ended October 31,
2007 to $143,017 for the same period in 2008. 167% of this increase equals to
$50,272 was related to the stock options and employment extension bonus granted
to the president and CEO (please refer to the accompanying notes # 10: stock
option and notes #11 related party transaction).
Also there is an increase in the software enhancement and modification
activities during the period. Also the Company is launching a new software and
lot of research and development has been done for the proper working of the
software. TSE V6.0 software enhancement and modification activities during the
period. Also the Company is launching a new software product called VFortress
and lot of research and development has been done for the proper working of the
software.
Sales and Marketing Expenses. Sales and Marketing expenses increased
approximately 579% from $54,055 for the three month period ended October 31,
2007 to $367,091 for the same period in 2008. Some portion of this increase was
related to an increase in efforts to develop international sales for the period.
290% of this increase equals to $156,744 was related to the stock options and
employment extension bonus granted to the president and CEO (please refer to the
accompanying notes # 10: stock option and notes #11 related party transaction).
General and Administrative Expenses. General and administrative expenses were
$152,495 for the three month period ended October 31, 2007, as compared to
$601,084 for the three month period ended October 31, 2008, an increase of 294%.
114% of this increase equals to $174,552 was related to the stock options and
employment extension bonus granted to the president and CEO (please refer to the
accompanying notes # 10: stock option and notes # 11 related party transaction).
Also there was increase due to increase in operations of the Company. New
28
employees were added in the sales, customer relations and marketing, and the
Company moved premises and invested in a more robust technology infrastructure .
The Company has also increased its expenses in its professional fees and its
effort to uplist to the OTCBB.
Net Loss. Net loss increased approximately 650% from a net loss of $140,594 for
the three month period ended October 31, 2007 to a net loss of $1,055,155 for
the three month period ended October 31, 2008.
Comparison of Nine Month Periods Ended October 31, 2008 and 2007.
The following table sets forth the results of our operations for the periods
indicated:
2008 2007
------------- --------------
NET REVENUES $ 698,739 $ 837,540
COST OF SALES 363,900 508,966
GROSS PROFIT 334,839 328,574
OPERATING EXPENSES:
Research and development 300,400 89,365
Sales and marketing 725,802 202,324
General and administrative 1,607,549 534,661
Total Operating Expenses 2,633,752 826,350
LOSS FROM OPERATIONS (2,298,913) (497,776)
OTHER INCOME (EXPENSE):
Foreign currency translation (1,700) -
Interest expense (58,185) (65,559)
Total Other Expenses (59,886) (65,559)
NET LOSS (2,358,799) (563,335)
OTHER COMPREHENSIVE ITEM:
Foreign currency translation 176,410 (212)
NET COMPREHENSIVE LOSS $ (2,182,389) $ (563,547)
Net Revenues. For the nine month period ended October 31, 2008, our net revenues
decreased approximately 17% from $837,540 to $698,739 relative to the same
period ended October 31, 2007. The Company is continuing to develop its
international sales and marketing activities as well continuing its product
enhancements and modifications. It is anticipated that sales will increase in
the future as a result of these activities.
29
Cost of Sales. Cost of sales decreased 29% from $508,966 for the nine month
period ended October 31, 2007, to $363,900 for the nine month period ended
October 31, 2008. The decrease was due to the decrease in the net revenue during
the period and better control.
Gross Profit. Gross profit increased approximately 2% from $328,574 for the nine
month period ended October 31, 2007 to $334,839 for the nine month period ended
October 31, 2008. This increase in gross profit was primarily due to the better
cost control during the period.
Operating Expenses. For the nine month period ended October 31, 2008, overall
operating expenses increased approximately 219% from $826,350 to $2,633,752
relative to the nine month period ended October 31, 2007. This increase was
mainly due to the following:
Research and Development. Research and development expenses increased
approximately 236% from $89,365 for the nine month period ended October 31, 2007
to $300,400 for the same period in 2008. 169% of this increase equals to
$150,816 was related to the stock options and employment extension bonus granted
to the president and CEO (please refer to the accompanying notes # 10: stock
option and notes #11 related party transaction).
In addition, this increase was also related to an increase in the TSE V6.0
software enhancement and modification activities during the period. Also the
Company is launching a new software product called VFortress and lot of research
and development has been done for the proper working of the software.
Sales and Marketing Expenses. Sales and Marketing expenses increased
approximately 259% from $202,324 for the nine month period ended October 31,
2007 to $725,802 for the same period in 2008. Some of this this increase was
related to an increase in efforts to develop international sales for the period.
232% of this increase equals to $470,234 was related to the stock options and
employment extension bonus granted to the president and CEO (please refer to the
accompanying notes # 10: stock option and notes #11 related party transaction).
General and Administrative Expenses. General and administrative expenses were
$534,661 for the nine month period ended October 31, 2007, as compared to
$1,607,549 for the nine month period ended October 31, 2008, an increase of
201%. This increase is due to increase in operations of the Company. New
employees were added in the sales, customer relations and marketing, and the
Company moved premises and invested in a more robust technology infrastructure .
The Company also increased its expenses in its professional fees and its effort
to uplist to the OTCBB. Executive bonus was also awarded to the officers for the
uplisting to OTCBB, - 98% of this increase equals to $523,658 was related to the
stock options and employment extension bonus granted to the president and CEO
(please refer to the accompanying notes #10: stock option and notes #11 related
party transaction).
Net Loss. Net loss increased approximately 319% from a net loss of $563,335 for
the nine month period ended October 31, 2007 to a net loss of $2,358,799 for the
nine month period ended October 31, 2008.
Liquidity and Capital Resources
At October 31, 2008, we had cash on hand of $8,691 and a working capital deficit
of 1,987,898. At October 31, 2008, we had loans payable to various unrelated
parties amounting to $ 873,494.
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
30
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.
Cash Flows
Nine month period Ended October 31, 2008 and 2007
Net cash flow used in operating activities was $583,261 for the nine month
period ended October 31, 2008 and net cash used in operations was $454,507 for
the nine month period ended October 31, 2007. For the nine month period ended
October 31, 2008, increase in cash flows used in operating activities was mainly
attributable to an increase in net loss.
The Company incurred cash outflows of $5,044 in investing activities during the
nine month period ended October 31, 2008, as compared to $47,201 used in
investing activities for the same period in 2007 for the purchase of property &
equipment.
We raised a loan of $7,772 from unrelated parties and paid off $72,119 to
related parties during the nine month period ended October 31, 2008. For the
same period in 2007, we raised $228,044 from unrelated parties and $4,595 from
related parties. We also raised $435,626 through our investor relation firm by
selling shares for cash during the nine month period ended October 31, 2008. For
the same period in 2007, we raised $282,998 from issuance of shares for cash. We
also raised $20,000 form an exercise of stock options during the ninemonth
period ended October 31, 2008.
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. The cash
consideration was $55,000 with additional investment cost in modifications to
the software of $25,000. During the three month period ended October 31, 2008,
the Company invested a further $18,000 in modifications to enable the new
product to be sold. It is anticipated that sales will start of VFortress in the
start of 2009.
31
Contractual Obligations and Off-Balance Sheet Arrangements
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 3
Controls and Procedures
Propalms management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this quarterly report (the "Evaluation Date"). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion.
There have been no significant changes in internal controls over financial
reporting (as defined in Rule 13a-15(f)) during the nine months ended October
31, 2008 that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II
-----------
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is party to other litigation. The Company and its
counsel believe this litigation is not material.
Item 2. Changes in Securities
Pursuant to its Private Placement Memorandum dated January 1, 2007, MJMM
Investments, LLC ("MJMM") 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. From January 1, 2007 to January 31,
2008, MJMM has purchased a total of 42,174,687 of the reserved shares. Out of
the 93,500,000 reserved shares, MJMM was granted 13,500,000 shares in exchange
for services provided in acquiring Jenna Lane, the public shell company; MJMM
received payment of 12,000,000 for future services to be rendered on behalf of
the Company; and MJMM 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 ("Ivest") signed a subscription agreement dated January 10, 2007. Pursuant
to the terms of the subscription agreement a total of 39,750,000 common shares
32
were reserved for purchase by Ivest. From that date to November 1, 2007, Ivest
purchased a total of 21,343,441 of the optioned shares. The agreement has been
terminated and the remaining 18,573,226 reserved shares have been transferred to
reserves for purchase by MJMM.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
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. The
effective date of the amendment was April 4, 2008.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports
None.
33
SIGNATURES
------------
In accordance with the requirements of the Exchange Act, the registrant,
Propalms, Inc., caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 15, 2008 /s/ Owen Dukes
-----------------------------------
Owen Dukes, CEO
/s/ Robert Zysblat
-----------------------------------
Robert Zysblat, CFO
34