UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2008
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-19705
WYNDSTORM CORPORATION
(Exact name of registrant as specified in its charter)
| NEVADA | 13-3469932 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 2236 Cathedral Avenue, Washington, D.C. | 20008 | |
| (Address of principal executive offices) | (Zip Code) |
(202) 491 4550
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer (Do not check if a smaller reporting company) ¨ | Smaller reporting company 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2008 was 18,271,227 shares of the registrant’s common stock, including 136,167 in options and warrants.
Table of Contents
i
Explanatory Notes
Unless the context otherwise requires, in this annual report on Form 10-Q the term “Wyndstorm,” “Company,” “we,” “us” or “our” refers to the registrant, Wyndstorm Corporation, formerly known as Packetport.com, Inc. a Nevada corporation. The Company also owns a wholly owned subsidiary by the name of Wyndstorm Corporation, a Delaware corporation (“Wyndstorm Corporation”).
Note on Forward-Looking Information
Except for historical facts, the statements in this quarterly report on Form 10-Q are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed under the headings “Management’s Discussion and Analysis or Plan of Operations,” “Business” and “Risk Factors.” We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this quarterly report on Form 10-Q and the other documents that we file with the Securities and Exchange Commission (the “SEC” or “Commission”). You can read these documents at www.sec.gov.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, NEW EVENTS OR ANY OTHER REASON, OR REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS QUARTERLY REPORT ON FORM 10-Q.
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| Item 1. | Financial Statements |
WYNDSTORM CORPORATION
Balance Sheets
| (Unaudited) October 31, 2008 |
January 31, 2008 |
|||||||
| ASSETS | $ | $ | ||||||
| Current Assets |
||||||||
| Cash |
15,703 | 520 | ||||||
| Accounts Receivable (Net of Allowance of $84,000, and $0 respectively) |
$ | 53,810 | ||||||
| Advances |
$ | 22,500 | — | |||||
| Total Current Assets |
92,013 | 520 | ||||||
| Fixed Assets |
||||||||
| Website (Net of Accumulated Amortization of $22,504) |
6,430 | — | ||||||
| Fixed Assets (Net of Accumulated Depreciation of $8,495) |
2,837 | — | ||||||
| Total Fixed Assets |
9,267 | — | ||||||
| Other Assets |
||||||||
| Deferred Financing Costs |
18,877 | — | ||||||
| TOTAL ASSETS |
$ | 120,157 | $ | 520 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities |
$ | $ | ||||||
| Accounts Payable |
648,415 | 107,013 | ||||||
| Due to Officers |
— | — | ||||||
| Taxes Payable |
1,000 | 1,000 | ||||||
| Accrued Expenses |
147,269 | 147,269 | ||||||
| Accrued Interest Payable |
75,435 | — | ||||||
| Accrued Compensation |
353,500 | — | ||||||
| Note Payable - Current Portion |
475,000 | — | ||||||
| Convertible Notes Payable - Current Portion |
135,975 | |||||||
| Line of Credit |
292,501 | — | ||||||
| Total Current Liabilities |
2,129,095 | 255,282 | ||||||
| Long Term Liabilities |
||||||||
| Notes Payable |
151,842 | 5,318,669 | ||||||
| Convertible Notes Payable |
857,500 | — | ||||||
| Total Long Term Liabilities |
1,009,342 | 5,318,669 | ||||||
| Total Liabilities |
3,138,437 | 5,573,951 | ||||||
| Stockholders’ Deficit |
||||||||
| Common Stock, $.003 Par Value, 149,000,000 shares authorized, 18,131,060 shares issued and outstanding at October 31, 2008 and 1,105,333 at January 31, 2008 |
54,255 | 3,316 | ||||||
| Capital in Excess of Par |
2,231,681 | 22,278,778 | ||||||
| Accumulated Deficit |
(5,303,856 | ) | (27,855,525 | ) | ||||
| Total Stockholders’ Deficit |
(3,017,920 | ) | (5,573,431 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
$ | 120,517 | $ | 520 | ||||
1
WYNDSTORM CORPORATION
Statements of Operations
(Unaudited)
| For the Quarter Ended October 31, |
||||||||
| 2008 | 2007 | |||||||
| Revenues |
$ | 17,900 | $ | 60,000 | ||||
| Cost of Sales |
— | — | ||||||
| Gross Margin |
17,900 | 60,000 | ||||||
| Selling, General and Administrative Expenses |
499,674 | 440,199 | ||||||
| 499,674 | 440,199 | |||||||
| Operating Loss |
(481,774 | ) | (380,199 | ) | ||||
| Other Expenses: |
||||||||
| Interest Expense |
(30,201 | ) | (48,548 | ) | ||||
| Net Loss |
$ | (511,975 | ) | $ | (428,747 | ) | ||
| Net Loss per Share, Basic and Diluted |
(0.03 | ) | ||||||
| Weighted Average Number of Shares Outstanding, Basic and Diluted |
18,131,060 | |||||||
2
WYNDSTORM CORPORATION
Statements of Operations
(Unaudited)
| For the Nine Months Ended October 31, |
||||||||
| 2008 | 2007 | |||||||
| Revenues |
$ | 169,313 | $ | 164,849 | ||||
| Cost of Sales |
— | 350 | ||||||
| Gross Margin |
169,313 | 164,499 | ||||||
| Selling, General and Administrative Expenses |
1,905,686 | 1,417,476 | ||||||
| 1,905,686 | 1,417,476 | |||||||
| Operating Loss |
(1,736,373 | ) | (1,252,977 | ) | ||||
| Other Expenses: |
||||||||
| Interest Expense |
(66,626 | ) | (98,155 | ) | ||||
| Net Loss |
$ | (1,802,999 | ) | $ | (1,351,132 | ) | ||
| Net Loss per Share, Basic and Diluted |
(0.10 | ) | ||||||
| Weighted Average Number of Shares Outstanding, Basic and Diluted |
18,131,060 | |||||||
3
WYNDSTORM CORPORATION
Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended October 31, |
||||||
| 2008 | 2007 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||
| Net Loss |
(1,802,999 | ) | (1,351,132 | ) | ||
| Add: Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: |
||||||
| Depreciation |
946 | — | ||||
| Amortization |
14,467 | — | ||||
| Changes in Assets and Liabilities: |
||||||
| Accounts Receivable |
142,313 | (97,437 | ) | |||
| Prepaid Expenses |
— | (21,259 | ) | |||
| Deferred Financing Costs |
(18,877 | ) | — | |||
| Employee Advances |
(5,490 | ) | — | |||
| Accounts Payable |
224,559 | 144,666 | ||||
| Due to Officers |
(10,373 | ) | — | |||
| Taxes Payable |
— | — | ||||
| Accrued Expenses |
— | — | ||||
| Accrued Interest Payable |
75,435 | 48,648 | ||||
| Accrued Compensation |
50,500 | 102,000 | ||||
| Net Cash (Used in) Operating Activities |
(1,329,519 | ) | (1,174,514 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||
| Capital Contributions |
— | 25,000 | ||||
| Capital Expenditures |
— | (6,341 | ) | |||
| Net Cash Provided by Financing Activities |
— | 18,659 | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||
| Proceeds from Notes |
1,268,881 | 715,000 | ||||
| Net Cash Provided by Financing Activities |
1,268,881 | 715,000 | ||||
| Net Increase (Decrease) in Cash |
(60,638 | ) | (440,855 | ) | ||
| Cash at the Beginning of Period |
76,341 | 18,666 | ||||
| Cash at the End of Period |
15,703 | (422,189 | ) | |||
| Supplemental Information: |
||||||
| Cash Paid for Interest |
66,626 | 959 | ||||
| Cash Paid for Taxes |
— | — | ||||
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Notes to Financial Statements
NOTE 1 - ORGANIZATION
Our Company was incorporated in Nevada in 1988 under the name Deals Are Good, Inc. In 1990 the Company changed its name to Linkon Corporation, and on December 9, 1999 the Company changed its name to Packetport.com, Inc. On October 31, 2007, the Company, its wholly-owned subsidiary Packetport Acquisitions, Inc. and Wyndstorm Corporation, a Delaware Corporation, successor by merger to YFonGlobal, LLC, a limited liability company chartered in the District of Columbia (“Wyndstorm Corporation”) executed and delivered an Agreement and Plan of Merger. Pursuant to this agreement, the Company acquired Wyndstorm Corporation by means of a reverse triangular merger with Packetport Acquisitions, Inc., on February 25, 2008 (the “Merger”). The terms of the Merger included: (i) a 1:20 reverse split resulting in the issuance of post-reverse-split common shares to Wyndstorm Corporation shareholders, giving them approximately 86% control of the combined companies; (ii) resignation of all management and board of Packetport.com. Inc., and (iii) approval of Marian Sabety as the sole director of the Company. The Merger was accounted for as a reverse merger with Wyndstorm Corporation deemed to be the accounting acquirer and the Company deemed to be the legal acquirer. Accordingly, the financial information presented in the financial statements is that of Wyndstorm Corporation as adjusted to give effect to any difference in the par value of the issuer’s and the accounting acquirer’s stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of Wyndstorm Corporation, the accounting acquirer, have been carried over in accounting for the reverse merger. The Company changed its name to Wyndstorm Corporation by filing amended articles of incorporation with the Nevada Secretary of State on May 1, 2008.
Net loss from the date of inception to October 31, 2008 was $5,303,856. The Company expects to continue to incur losses in the near term. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for full year financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the three month and nine month periods ended October 31, 2008, are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-KSB for the fiscal period ended January 31, 2008.
Revenue Recognition – The Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB) 104, Revenue Recognition, when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collection is reasonably assured. The Company records service revenue as the services are performed.
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Risks and Uncertainties – The Company is subject to various risks similar to other companies in a comparable stage of growth. Including, but not limited to, dependence on key personnel, competition from substitute providers, larger companies, and the continued successful development and marketing of its products and services.
Going Concern – As shown in the accompanying financial statements, the Company reported a net loss of $1,802,999 during the nine months ended October 31, 2008 and stockholders’ deficit was $3,017,920 at that date. In addition, cash available at October 31, 2008 is not sufficient to support the Company’s operations for the next year. The Company needs to raise more capital through public or private financing. The Company does not know if additional financing will be available or, if available, whether it will be available on attractive terms. If the Company does raise more capital in the future, it is probably that it will result in substantial dilution to its stockholders. These factors create substantial doubt as to the Company’s ability to continue as a going concern.
The Company intends to continue its efforts to complete the necessary steps in order to meet its cash flow requirements throughout fiscal year 2009 and to continue its commercialization efforts. Management’s plans in the regard include, but are not limited to, the following:
Evaluate new business opportunities for the Company.
Raise additional working capital through borrowing or through issuing equity securities.
Management is uncertain if it will be successful in executing the above plans. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Advertising Costs – The Company conducts advertising for the purpose of building awareness of the Company and its services. It is the policy of the Company to expense the cost of advertising as it is incurred. Advertising expense is included in these financial statements with administrative and general expense and amounted to $(113) and $1,977 for the quarter and nine months ended October 31, 2008, respectively.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
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NOTE 3 – LOSS PER SHARE
The Company has adopted SFAS No.128, “Earnings per Share.” Earnings per common share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The earnings per common share computation, assuming dilution, gives effect to all dilutive potential common shares during the period. The computation assumes that the outstanding stock options and warrants were exercised and that the proceeds were used to purchase common shares of the Company. Common equivalent shares have been excluded from the computation of diluted earnings per share since their effect is antidilutive.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
During the quarter and nine months ended October 31, 2008, the Company issued $187,500 and $993,475, respectively, in convertible notes (the “Notes”). Upon the earliest to occur of (i) the closing of a financing in cash through a private placement of equity securities of the Company to one or more institutional investors of at least two million dollars ($2,000,000), in the aggregate (the “Financing”) or (ii) the sale of more than fifty percent (50%) of the Company’s outstanding shares of stock, the Company has the option to convert these Notes into shares of common stock of the Company equal to the aggregate principal and unpaid interest outstanding under the Notes divided by the Conversion Price (defined below). The Conversion Price of the Notes means, the quotient of (a) the sum of (x) the product of (i) the price at which shares are issued pursuant to the Financing, multiplied by (ii) two, plus (y) ten cents ($0.10), divided by (b) three. The Notes are also convertible by the note holder into shares of common stock of the Company equal to the aggregate principal and unpaid interest outstanding divided by the last reported sales price, or in the case no such reported sale takes place on such day, the average of the reported closing bid and asked prices of the Company’s common stock on any national securities exchange on which the shares of common stock are listed or admitted to trading, or if the shares are not listed on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market. The Notes have a maturity date of 5 years from the date of issuance. Unless earlier paid or converted as described above, the entire outstanding principal shall be due and payable on the maturity date. Interest on the unpaid principal during the period from the date of issuance through the maturity date, will accrue at a rate of six percent (6%) per annum, non-compounding. The institutional investors have not been determined at this time.
NOTE 5 – LINE OF CREDIT
The Company has secured a line of credit from Merrill Lynch in the amount of $300,000. This line of credit is guaranteed by certain shareholders. The Company pays interest only each month. The interest rate is the LIBOR rate plus the spread rate.
NOTE 6 – RELATED PARTY INFORMATION
The Company owed Mr. Durando, the former President of the Company, $1,087,824 and $958,307 at January 31, 2008 and 2007, respectively, including accrued interest. These amounts, consist of unpaid executive consulting fees, cash advances from the Company president and accrued interest. Additional advances made by Mr. Durando during fiscal year ended January 31, 2008 totaled $20,000. The Company incurred interest expenses to Mr. Durando of $72,017 and $74,341 that are included in interest expenses and notes payable for
7
the fiscal years ended January 31, 2008 and 2007, respectively. Mr. Durando waived interest charges to the Company for December 2007 and January 2008. As of February 21, 2008, Mr. Durando released all claims for payment against the Company upon the payment of a promissory note in the amount of $100,000.
Marian Sabety, the current Director, Chairman, President and Chief Executive Officer of the Company, is the spouse of Thomas Kerns McKnight, the Secretary, Treasurer and General Counsel of the Company.
On April 20, 2008 J. Pari Sabety, sister of Marian Sabety, transferred, as a gift, 1,571,285 shares of the Company’s common stock to Thomas McKnight.
During the current quarter, Thomas McKnight lent the Company $20,000. This amount was repaid shortly after quarter end.
NOTE 7 – NOTES PAYABLE
The Company has issued a series of notes to various individuals, of which $5,000 is due to a related party. The notes provide for various rates of between 6% and 8% per annum.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following is management’s discussion and analysis of certain significant factors that have affected the Company’s financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of the Company’s management.
Forward-Looking Information
The statements in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute “forward-looking statements”. Such forward-looking statements involve risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performances or achievements, expressly predicted or implied by such forward-looking statements. These forward-looking statements are identified by their use or forms of such terms and phrases as “expects,” “intends,” “goals,” “estimates,” “projects,” “plans,” “anticipates,” “should,” “future,” “believes,” and “scheduled.”
The important factors which may cause actual results to differ from the forward-looking statements contained herein include, but are not limited to, the following: general economic and business conditions; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain key management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with, government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this filing will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or by any other person that the objectives and expectations of the Company will be achieved.
8
Our History and Our Background
Our Company was incorporated in Nevada in 1988 under the name Deals Are Good, Inc. In 1990 the Company changed its name to Linkon Corporation, and on December 9, 1999 the Company changed its name to Packetport.com, Inc. On October 31, 2007, the Company, its wholly-owned subsidiary Packetport Acquisitions, Inc. and Wyndstorm Corporation, a Delaware Corporation, successor by merger to YFonGlobal, LLC, a limited liability company chartered in the District of Columbia executed and delivered an Agreement and Plan of Merger. Pursuant to this agreement, the Company acquired Wyndstorm Corporation by means of a reverse triangular merger with Packetport Acquisitions, Inc., on February 25, 2008. The terms of the Merger included: (i) a 1:20 reverse split resulting in the issuance of post-reverse-split common shares to Wyndstorm Corporation shareholders, giving them approximately 86% control of the combined companies; (ii) resignation of all management and board of Packetport.com. Inc., and (iii) approval of Marian Sabety as the sole director of the Company. The Company changed its name to “Wyndstorm Corporation” by filing amended articles of incorporation with the Nevada Secretary of State on May 1, 2008. The Agreement and Plan of Merger was filed as an exhibit to the Company’s most recently filed Annual Report on Form 10-KSB, and is incorporated herein by reference.
Description of Business
Our Company builds interactive networks that entertain or inform our clients’ customers. Our products are all about capturing people’s imaginations, much like opera, movies, radio and television did in the first half of last century. People typically hope to “lose themselves” inside our networks because they are interesting, made more so each time we upgrade the technologies on each of our hosted sites. We provide end-to-end technology and online marketing know-how. We specialize in social media, gaming, online entertainment, and ecommerce web solutions. We apply experience, knowledge, expertise, and pre-built applications to bear on speed-to-market pressure. Our goal is to provide our clients with the best methods to increase user value and achieve desired business results. We use leading edge technologies which support the latest internet crazes (video, 3-D virtual worlds, and whatever else materializes in the market). The “imagination experience” we create is, in great part, manipulated by each end user who often creates their own persona, including name and image, for participation in the network. The Company uses software we have already built or which is instantly available so that our customers pay merely for the tailoring and monthly maintenance—typically this is 75% cheaper for our clients than if they built it themselves. Generally, our customers are businesses which need web programs to attract consumers using the latest internet-web-trends in marketing. We charge for the design, deployment, hosting, and advertising on our customers’ sites. These networks are extremely valuable to our customers who use the resulting winds of information to sell their products, much like a storm.
Technology
The Company has, what we believe to be a unique ability to integrate new technologies into existing systems to create an original systems performance. The technology prowess of our team grants us the opportunity to provide to our customers the next wave of new media (including mobile games, mobile payment, mobile social networks, and advertising sales, audits and billing). Additionally, because our hosted system has pre-built features that support the desires of our customers, we can meet the budget and time-to-market constraints imposed on us by the fast paced industry in which we work.
Industry Overview and Competition
We consider ourselves to be part of the larger social media, gaming, online entertainment, and ecommerce industry. Our particular niche in this industry continues to evolve.
Marketing and Customers
We are concentrating on expanding our customer base for recurring revenues. We consider one of our most effective marketing tools to be customer referrals and direct sales. We plan to continue this approach to further build our customer base and to grow our revenues. This strategy, coupled with targeted trade shows and direct sales people incentivized with cash, warrants, options and stock (through an equity incentive plan which we plan to adopt during the
9
next fiscal year) will be our marketing focus for the coming year. We do not anticipate that the Company will gravitate toward an exclusive few customers. Our intended customer base is industrially diverse and numerically robust. Overall, we anticipate that our customer base will broaden over time, giving stability, steady growth, and predictability to our revenues.
Principal Suppliers
The Company relies upon a number of vendors who write software, prepare marketing plans, manage specific technological tasks, audit viewership or click accounts, sell advertising, manage billing and otherwise host our customer’s networks. This policy is a matter of basic underlying corporate philosophy that is expected to insulate or impede exposure of the Company against technological obsolescence.
Intellectual Properties
We have several proprietary aspects to our software that we believe make our products unique and desirable in the marketplace. Additionally, we have registered several domain names and trademarks for our company and its products, including logos. We intend to pursue additional protections for our intellectual property as we develop new software and related products and enhance existing products.
Government Regulation
The ecommerce environment is rapidly changing and federal and state regulation relating to the Internet and ecommerce is evolving. Laws and regulations have recently been enacted in many jurisdictions with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services, and other jurisdictions are considering imposing additional restrictions. The interpretation and application of these laws are in a state of flux. These laws may be interpreted and applied inconsistently and our current policies and practices may not be consistent with those interpretations and applications. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. In addition, we are subject to the possibility of security breaches, which themselves may result in a violation of these laws. Because of the increasing popularity of the Internet and the growth of online services, there are regular initiatives at both the federal and state level to expand the scope of regulation as problems and perceived problems arise and develop. Many of our customers will be subject to such regulation and we strive to notify them that they may be subject to certain regulatory obligations. In the United States, the Federal Trade Commission (the “FTC”) enforces rules and regulations enacted pursuant to the Children’s Online Privacy Protection Act of 1998 (“COPPA”), imposing restrictions on the ability of online services to collect information from minors under the age of 13. Although the Company does not interface directly with the consuming end users, these restrictions could dissuade some percentage of our potential customers from using such websites as they themselves do business with the consuming public (so called B2C), which may adversely affect our business (we are known as B2B or Business to Business). If one or more of their websites are found not to be COPPA compliant, our customers may face enforcement actions by the FTC, complaints to the FTC by individuals, or face a civil penalty, any of which could adversely affect our reputation and business. Laws on the state level protecting the identity of personal information of children online have been enacted or are under consideration. Furthermore, the Americans with Disabilities Act (the “ADA”) imposes certain obligations upon our customers to make their websites more accessible and user friendly to people who are protected by the ADA. As such, government regulation does have an impact on how we conduct our business and may have an impact on our financial results if we are limited in our business activities or there are additional costs associated with compliance. As a public company we are also subject to the reporting and regulatory requirements of the SEC.
Results of Operations
We have a limited operating history upon which an evaluation of our prospects can be made. Our prospects must therefore be evaluated in light of the problems, expenses and complications associated with a development stage company.
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Revenues
We currently generate revenues from the development of software and websites; the deployment and set up of websites; hosting of websites; and the back office management of website administration through the management of our clients’ billing and advertising process. The Company has determined that it will not accept revenues from advertising. At October 31, 2008, the Company had revenues of $17,900 for the quarter ended October 31, 2008, compared to 60,000 for the quarter ended October 31, 2007.
Net Loss
The Company reported a net loss of $511,975for the quarter ended October 31, 2008 as compared to a net loss of $428,747for the quarter ended October 31, 2007.
Liquidity And Capital Resources
At October 31, 2008 the Company had a working capital deficit of $2,037,82 as compared to a working capital deficit of $254, 762 at January 31, 2008.
The Company’s ability to continue as a going concern and its future success is dependent upon its ability to:
| (1) | Evaluate and act upon new directions and business opportunities for the Company. |
| (2) | Raise additional working capital through borrowing or through issuing equity securities. |
Management is uncertain if it will be successful in executing the above plans.
Plan of Operation
Before the Merger, as Wyndstorm Corporation, we built interactive networks that entertain or inform our clients’ customers (see Description of Business above). Under new control since the Merger, the Company plans to continue to develop the business built by Wyndstorm Corporation focusing our business on web advertising while continuing to build the “web enhancement” capability of our software systems. During the next twelve months, the Company will actively seek out and investigate possible business opportunities with the intent to acquire or merge with one or more business ventures. Because the Company lacks cash and other capital resources, the Company’s survival will depend upon its ability to raise working capital, and unless the Company is able to generate sufficient earnings or obtain significant outside financing, substantial doubt will be cast on its ability to continue as a viable business entity.
Management intends to keep expenses to a minimum and to obtain services on a contingency basis when possible. On November 26, 2008, the Company entered into an engagement agreement to use an outside advisor to raise capital. Additionally, the Company will award usual and customary finder’s fees on a discretionary basis to outside advisors that introduce approved investors to the Company. The Company also intends to use trade shows, internet promotions, name brand customers, effective sales generation using outsourced services and incentivized sales people as a strategy to penetrate the market. Significant research and development of new technologies is an ongoing effort. To the extent that the Company develops intellectual property which can be protected, the Company intends to take all appropriate measures to file for such protection. From time to time the Company may create new enterprises that deploy Wyndstorm products to capture a certain market niche much like creating customers that the Company owns itself.
Because of the highly temporary nature of many of the technologies, the Company expects to continue its current policy of outsourcing a substantial amount of its software and website design and development. We do not expect to purchase or sell any significant equipment and the Company has no current material commitments to do so.
Management expects that it will be able to operate in this manner and to continue its search for business opportunities during the next twelve months; however, there can be no assurance that the Company will be able to obtain additional funding when and if needed, or that such funding, if available, can be obtained on terms acceptable to the Company.
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Off Balance Sheet Arrangements
The Company had no off balance sheet arrangements during the last two fiscal years, and at this time no off balance sheet arrangements are anticipated.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We do not own any derivative financial instruments in our portfolio. Accordingly, we do not believe there is any material market risk exposure with respect to derivatives or other financial instruments that would require disclosure under this item.
| Item 4. | Controls and Procedures. |
Our Management is responsible for establishing and maintaining adequate internal controls over our financial reporting. As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Inherent Limitations of the Effectiveness of Internal Control. A control deficiency exists when the design or operation of a control does not allow management or employees, in the ordinary course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP, such that there is a more than remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.
Changes in internal control over financial reporting. As described above, as of February 25, 2008, the Company implemented certain changes, including hiring a new Chief Financial Officer. The Company expects to implement additional internal controls related to the Company’s period-end closing and reporting process. These additional controls will likely include the Chief Financial Officer and outside consultants.
| Item 4T. | Controls and Procedures. |
Based upon an evaluation conducted for the period ended October 31, 2008, our President (our principal executive officer) and our Acting Principal Financial Officer (our principal accounting and finance officer) have concluded that as of the end of the period covered by this report, we are able to state that our internal controls over financial reporting were effective as required under Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act.
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| Item 1. | Legal Proceedings. |
From time to time the Company may be involved in various legal proceedings and other matters arising in the normal course of business. The Company is not aware of any impending nor threat of any legal proceeding.
| Item 1A. | Risk Factors. |
WE EXPECT TO INCUR SUBSTANTIAL NET LOSSES FOR THE FORESEEABLE FUTURE.
We have experienced operating losses and negative cash flow during the last two fiscal years and we may continue to experience such losses for the foreseeable future. We cannot be certain when and if we will achieve sufficient revenues in relation to expenses to become profitable.
Our future profitability depends on generating and sustaining high revenue growth while maintaining reasonable expense levels. Having slower revenue growth than we anticipate or operating expenses that exceed our expectations would harm our business. If we achieve profitability, we cannot be certain that we would be able to sustain or increase profitability in the future.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS IF WE DO NOT GENERATE ENOUGH REVENUE.
We require substantial working capital to fund our business and will need more in the future. If we need to raise additional funds through the issuance of equity, equity-related or debt securities, shareholders rights may be subordinate to other investors and shareholders stock ownership percentage may be diluted. We cannot be certain that additional financing will be available to us.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION STRATEGY.
Our growth strategy is subject to related risks, including pressure on our management and on our internal systems and controls. Our planned growth will require us to invest in new, and improve our existing, operational, technological and financial systems and to expand, train and retain our employee base. Our failure to effectively manage our growth could have a material adverse effect on our future financial condition. In addition, our lack of operating experience may cause us difficulty in managing our growth. We have limited marketing and sales capabilities, and if we are unable to develop sales and marketing capabilities, we may not be successful in commercializing our products. As a result, we may be forced to depend on collaborations or agreements with third parties that have established distribution systems and direct sales forces. In addition to our currently limited sales, marketing and distribution capabilities, we are currently maxed out in terms of personnel handling of both web-building and maintenance, and we are risking our intellectual property and cost-basis by outsourcing. To the extent that we enter into co-promotion or other licensing arrangements, our revenues will depend upon the efforts of third parties, over which we may have little or no control. We may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize anticipated benefits. We may acquire additional businesses, technologies and products if we determine that these additional businesses, technologies and products complement our existing business or otherwise serve our strategic goals. If we do undertake transactions of this sort, the process of integrating an acquired business, technology or product may result in operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets, which could adversely affect our results of operations and financial condition.
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OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Our revenues and operating results may vary significantly from quarter to quarter due to several factors. Many of these factors are outside our control and include:
| • | our ability to create and deploy products with competitive features; |
| • | fluctuations in customer purchasing patterns and advertising spending; |
| • | changes in the growth rate of Internet usage and online user traffic levels; |
| • | actions of our competitors; |
| • | the timing and amount of costs relating to the expansion of our operations and acquisitions of technology or businesses; and |
| • | general economic and market conditions. |
Because we have a limited operating history, our future revenues are difficult to forecast. A shortfall in revenues will damage our business and would likely affect the market price of our common stock. Our limited operating history and the new and rapidly evolving Internet market make it difficult to ascertain the effects of seasonality on our business. If seasonal and cyclical patterns emerge in Internet purchasing, our results of operations from quarter to quarter may vary greatly and may cause our business to suffer.
OUR CURRENT PREMISES ARE INADEQUATE FOR OUR BUSINESS.
We do not currently own adequate office space and our current premises are inadequate for our business development plans. We need to move into commercial office space. Our clients expect us to have an office they can visit for design workshops and sales meetings, and our personnel need a common place to work together efficiently in order to effectively build our business.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING AGAINST A CLAIM OF INFRINGEMENT OR PROTECTING OUR INTELLECTUAL PROPERTY FROM INFRINGEMENT
In recent years there has been significant litigation in the United States involving patents and other intellectual property rights. Companies providing Internet related products and services are increasingly bringing and becoming subject to suits alleging infringement of property rights, particularly patent rights. We could incur substantial costs in prosecuting or defending any intellectual property litigation.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD BURDEN OUR BUSINESS.
The adoption or modification of laws or regulations applicable to the Internet could harm our business. The U.S. Congress has passed laws regarding online children’s privacy, copyrights and taxation. The law governing the Internet, however, remains largely unsettled. New laws may impose burdens on companies conducting business over the Internet. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet and online advertising. In addition, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers. (See also the discussion of “Government Regulation” in Part I, Item 2.)
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AS A PUBLIC COMPANY OUR COST OF DOING BUSINESS MAY INCREASE BECAUSE OF NECESSARY EXPENSES, INCLUDING COMPLIANCE WITH SEC REPORTING REQUIREMENTS.
Because we are a public company, we incur significant legal, accounting and other expenses to comply with certain SEC requirements and, in particular, the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley and other rules implemented by the SEC, requires management to assess its internal controls over financial reporting and requires auditors to attest to that assessment. Current regulations require us to include this assessment and attestation in our annual report on Form 10-KSB. Management will need to invest significant time and energy to stay current with the public company responsibilities of our business, which will limit the time they can apply to other tasks associated with operating our business. It is possible that the additional burden and expense of operating as a public company will cause us to fail to achieve profitability, which would cause our business to fail and our investors to lose money invested in our stock. It is important that we maintain adequate cash flow not only to operate our business, but also to pay the cost of remaining public. If we fail to pay public company costs as such costs are incurred, we will become delinquent in our reporting obligations and our shares may no longer remain qualified for quotation on a public market.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE, AS IS TYPICAL OF INTERNET-RELATED COMPANIES.
Our stock price has been volatile and is likely to continue to be volatile. The stock market has experienced significant price and volume fluctuations, and the market prices of securities of technology companies, particularly Internet- related companies, have been highly volatile.
The number of registered shares of Company stock that can be bought and sold in the open market is very small. As a result the pricing and liquidity of the stock visible in the market is unlikely to be a wholly accurate valuation of the Company.
The market price for the Company’s common stock is likely to be highly volatile and subject to wide fluctuations in response to the following factors:
| • | actual or anticipated variations in our quarterly operating results; |
| • | announcements of technological innovations or new products or services by us or our competitors; |
| • | changes in financial estimates by securities analysts; |
| • | the potential risk that investors may make short sales in our common stock, which could have a depressive effect on the price of our common stock; |
| • | conditions or trends in the entertainment media and e-commerce industries; |
| • | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| • | additions or departures of key personnel; |
| • | release of lock-up or other transfer restrictions on our outstanding shares of common stock or sales of additional shares of common stock; and |
| • | potential litigation. |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
During the nine months ended October 31, 2008, the Company issued $993,475, in convertible notes (the “Notes”). Upon the earliest to occur of (i) the closing of a financing in cash through a private placement of equity securities of the Company to one or more institutional investors of at least two million dollars ($2,000,000), in the aggregate (the “Financing”) or (ii) the sale of more than fifty percent (50%) of the Company’s outstanding shares of stock
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the Company has the option to convert these Notes into shares of common stock of the Company equal to the aggregate principal and unpaid interest outstanding under the Notes divided by the Conversion Price (defined below). The Conversion Price of the Notes means, the quotient of (a) the sum of (x) the product of (i) the price at which shares are issued pursuant to the Financing, multiplied by (ii) two, plus (y) ten cents ($0.10), divided by (b) three. The Notes are also convertible by the note holder into shares of common stock of the Company equal to the aggregate principal and unpaid interest outstanding divided by the last reported sales price, or in the case no such reported sale takes place on such day, the average of the reported closing bid and asked prices of the Company’s common stock on any national securities exchange on which the shares of common stock are listed or admitted to trading, or if the shares are not listed on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market. The Notes have a maturity date of 5 years from the date of issuance. Unless earlier paid or converted as described above, the entire outstanding principal shall be due and payable on the maturity date. Interest on the unpaid principal during the period from the date of issuance through the maturity date, will accrue at a rate of six percent (6%) per annum, non-compounding.
The Notes were issued to accredited investors and are exempt from registration under Section 4(2) of the Securities Act of 1933.
The Company intends to utilize all funds from the issuance of such notes for working capital purposes.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders during the quarter ended October 31, 2008.
| Item 5. | Other Information. |
None.
| Item 6. | Exhibits. |
Exhibit 31.1: Certification of the Sole Director and Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2: Certification of the Acting Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1: Certification of the Sole Director and the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2: Certification of the Acting Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WYNDSTORM CORPORATION | ||
| December 15, 2008 | /s/ Marian Sabety | |
| Date | Marian Sabety | |
| Chief Executive Officer | ||
| December 15, 2008 | /s/ Thomas Kerns McKnight | |
| Date | Thomas Kerns McKnight | |
| Acting Principal Financial Officer | ||
EXHIBITS