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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): JULY 22, 2004
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PROTOCALL TECHNOLOGIES INCORPORATED
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(Exact Name of Registrant as Specified in Its Charter)
NEVADA
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(State or Other Jurisdiction of Incorporation)
333-86498 41-2033500
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(Commission File Number) (IRS Employer Identification No.)
47 MALL DRIVE
COMMACK, NEW YORK 11725-5717
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(Address of Principal Executive Offices) (Zip Code)
(631) 543-3655
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(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
================================================================================
This Amendment No. 2 on Form 8-K/A amends the Current Report on Form
8-K, dated July 22, 2004, of Protocall Technologies Incorporated, a Nevada
corporation (formerly Quality Exchange, Inc.) ("Protocall"), filed with the U.S.
Securities and Exchange Commission (the "SEC") on August 6, 2004, as amended by
Amendment No. 1 thereto, filed with the SEC on September 20, 2004.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements of the Business Acquired. In accordance with
Item 9.01(a), attached hereto are the unaudited financial statements of
Protocall for the six months ended June 30, 2004 and 2003. The audited
finanical statements of Protocall for the years ended December 31, 2003 and
2002 were filed with Amendment No. 1 to this Form 8-K/A.
(b) Pro Forma Financial Information. In accordance with Item 9.01(b),
attached hereto are the pro forma financial statements of Protocall.
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash $ 538,583
Accounts receivable, net 17,146
Inventory 38,157
Prepaid expenses and other current assets 96,707
-------------------
Total current assets 690,593
Property and equipment, net 432,458
Other assets 369,675
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TOTAL ASSETS $ 1,492,726
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,736,776
Notes payable to related parties - includes convertible notes payable 754,940
Notes payable to officers/stockholders 23,683
Convertible notes payable - stockholder, net of debt discount of $ 0,
including accrued interest of $841,461 3,851,304
Non-convertible notes payable - stockholder, net of debt discount of $73,060,
including accrued interest of $199,512 1,826,452
Convertible notes payable - other, net of debt discount of $124,410,
including accrued interest of $200,824 1,682,414
Convertible notes payable - other, including accrued interest of $10,679 1,345,679
Convertible bridge notes payable- stockholder, net of debt discount of $127,202,
including accrued interest of $9,891 382,689
Convertible bridge notes payable - other, net of debt discount of $128,828
including accrued interest of $32,425 498,596
Accrued salaries - officers/stockholders 816,740
Other current liabilities 191,511
Current portion of obligations under capital leases 44,721
Net liabilities of discontinued operations 453,216
-------------------
Total current liabilities 13,608,721
Obligations under capital leases, less current portion 155,984
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.001 par value, 100,000,000 shares
authorized, 6,480,271 shares issued and outstanding 6,480
Additional paid-in capital 17,242,666
Deferred sales fee, net (329,227)
Stock subscription receivable (4,165)
Accumulated deficit (29,187,733)
-------------------
Total stockholders' deficit (12,271,979)
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,492,726
===================
See notes to consolidated financial statements
2
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
---------------- ----------------
(UNAUDITED)
Sales, net $ 51,091 $ 14,912
Cost of sales 40,570 6,861
---------------- ----------------
Gross profit 10,521 8,051
---------------- ----------------
Selling, general and administrative expenses 2,038,259 1,055,835
Research and development expenses 75,163 170,935
---------------- ----------------
OPERATING LOSS (2,102,901) (1,218,719)
Interest expense, including amortization of debt discounts
and beneficial conversion feature 1,381,421 857,178
Other income - including gain on settlement of trade notes and
accounts payable of $303,404 (314,604) -
---------------- ----------------
LOSS FROM CONTINUING OPERATIONS (3,169,718) (2,075,897)
INCOME FROM DISCONTINUED OPERATIONS 5,807 47,619
---------------- ----------------
NET LOSS $ (3,163,911) $ (2,028,278)
================= ================
INCOME (LOSS) PER SHARE-BASIC AND DILUTED:
Continuing Operations $ (.49) $ (.32)
Discontinued Operations .00 .01
----------------- ----------------
NET LOSS $ (.49) $ (.31)
================= ================
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 6,480,271 6,480,271
================= ================
See notes to consolidated financial statements
3
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
---------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss - continuing operations $ (3,169,718) $(2,075,897)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 147,894 114,979
Amortization of deferred financing costs 88,826 145,298
Non cash financing and interest expenses 638,575 461,332
Amortization of deferred lease costs 38,959 --
Settlement of trade notes and accounts payable 303,404 --
Changes in:
Accounts receivable (11,897) (6,453)
Inventory (13,963) 10,347
Prepaid expenses and other current assets (60,938) (20,160)
Accounts payable and accrued expenses (484,967) (2,535)
Other payables (51,000) 139,417
Accrued interest on notes payable - other 104,363 57,201
Accrued interest on notes payable to related parties 334,381 192,959
Net cash provided by (used in) discontinued operations 38,114 (12,219)
---------------- ----------------
Net cash used in operating activities (2,097,967) (995,731)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (43,260) --
---------------- ----------------
Net cash used in investing activities (43,260) --
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable to stockholder -- 100,000
Proceeds from issuance of convertible notes payable to others 181,000 650,000
Proceeds from issuance of nonconvertible notes payable to stockholder -- 510,000
Proceeds from issuance of convertible notes payable to others 1,335,000 --
Proceeds from issuance of convertible bridge notes to stockholder 595,000 --
Proceeds from issuance of convertible bridge notes to others 500,000 --
Proceeds from other notes payable -- 2,647
Repayment of loan to officer/stockholder (9,871) (57,727)
Repayment of capitalized lease obligations (25,723) (14,272)
Deferred financing costs -- (62,500)
Additional fees associated with private placements (49,839) --
---------------- ----------------
Net cash provided by financing activities 2,525,567 1,128,148
---------------- ----------------
NET INCREASE IN CASH 384,340 132,417
CASH - BEGINNING OF PERIOD 154,243 17,955
---------------- ----------------
CASH - END OF PERIOD $ 538,583 $ 150,372
================ ================
4
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
---------------- ----------------
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 18,191 $ 23,009
Income taxes $ 616 $ 722
Non-cash transactions:
Debt discount and beneficial conversion feature on convertible and
nonconvertible notes $ 968,710 $ 437,891
Issuance of warrants in connection with Software Distribution and Site agreement $ 332,693
Issuance of warrants in connection with convertible notes payable
extension $ 280,493
See notes to consolidated financial statements
5
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS, ORGANIZATION, BUSINESS AND LIQUIDITY
-------------------------------------------------------------------
The accompanying consolidated financial statements include the accounts
of Protocall Technologies Incorporated and its wholly owned subsidiaries,
Protocall Software Delivery Systems, Inc. ("PSD") and Precision Type,
Inc. (collectively, the "Company"). The Company has recently focused all
of its time and resources on its SoftwareToGo(R) product in its PSD
subsidiary. PSD was founded in 1998 to develop and commercialize a
proprietary system that enables software retailers to produce fully
packaged software CDs, on demand, at their stores and at their web site
fulfillment centers. SoftwareToGo(R) (the "System") is a software
display, storage and production system, similar in size to an ATM cash
machine. The System is designed to complement physical inventory systems
and enable traditional resellers to create "on demand" inventory at the
point of sale for walk-in as well as Internet customers. The Company
intends to market and distribute its System to major retailers.
The Company's Precision Type subsidiary, which marketed and distributed
font software products using its electronic software distribution system
to dealers and commercial end-users, was discontinued on June 30, 2004
(Note 6).
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern, which assumes the
realization of assets and satisfaction of liabilities in the normal
course of business.
The Company incurred losses for the six months ended June 30, 2004 and
2003 (Unaudited) of $3,163,911 and $2,028,278, respectively, and has a
working capital deficit, stockholders' deficit and accumulated deficit of
$12,918,128, $12,271,979 and $29,187,733, respectively, at June 30, 2004.
Significantly contributing to these amounts were the costs associated
with the expansion of the Company's electronic software distribution
system's capabilities to distribute additional digitally stored products.
The Company has been dependent upon borrowings through private placements
of convertible and non-convertible debt from related and non-related
parties to finance its business operations.
As described in Note 8, on July 22, 2004, the Company simultaneously
consummated a reverse merger with a public company, raised approximately
$6,400,000 (net of costs) in a private placement and converted
approximately $9,359,000 of liabilities as of July 22, 2004 to equity. In
addition, a major shareholder forgave approximately $1,100,000 in accrued
interest in connection with the conversion of his notes into equity. The
forgiven accrued interest was treated as a capital contribution.
Management of the Company believes that these transactions will enable it
to continue its business plan through at least March 31, 2005, although
there can be no assurances that this will be the case. It is unlikely
that the cash proceeds from the July 22, 2004 private placement will be
sufficient to meet the Company's ongoing liquidity requirements.
Therefore, the Company will likely need to seek additional financing to
meet its liquidity requirements.
As part of its business plan, the Company is in the process of
rolling out its enhanced software distribution system; however, its
ultimate success in the marketplace is uncertain.
NOTE 2 - ACCOUNTING POLICIES
----------------------------
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of
6
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
America for interim financial statements. Accordingly, they do
not include all of the information required by accounting principles
generally accepted in the United States of America for complete financial
statements. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company included in the Company's Form 8-K/A filed with the Securities
and Exchange Commission on September 20, 2004. Management acknowledges
its responsibility for the preparation of the accompanying interim
financial statements, which reflect all adjustments considered necessary,
in the opinion of management, for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the
results of operations for the entire year.
The accounting policies followed by the Company are set forth in Notes 1
and 2 to the Company's financial statements as filed in its Form 8-K/A
filed with the Securities and Exchange Commission on September 20, 2004.
These accounting policies conform to accounting principles generally
accepted in the United States of America, and have been consistently
applied in the preparation of the financial statements.
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 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. Such estimates include the
valuation of warrants issued in connection with various forms of
financing by the Company.
REVENUE RECOGNITION
The Company recognizes revenue from retailers' sales of product through
the Company's software delivery system, generally calculated as a
percentage of the product's selling price, upon delivery to the retail
customer.
Revenue from the license or sale of font software products is recognized
when the products are delivered or shipped to the customer, provided
there is persuasive evidence that an arrangement exists, the selling
price is fixed and determinable and collection of the resulting
receivable is reasonably assured. Revenue from the sales of font
reference guide books are recognized when the books are shipped.
LOSS PER COMMON SHARE
The Company's basic and diluted net loss per share is computed by
dividing net loss by the weighted average number of outstanding common
shares. Potentially dilutive securities, which were excluded from the
computation of diluted loss per share because their inclusion would have
been anti-dilutive, are as follows:
June 30, 2004 June 30, 2003
------------- -------------
Options 3,201,922 3,147,887
Warrants 19,033,595 15,509,971
Convertible notes 5,986,551 4,248,709
---------- ----------
Total dilutive shares 28,222,068 22,906,567
========== ==========
7
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
ACCOUNTING FOR STOCK OPTIONS:
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, in accounting for its stock
option grants and, accordingly, records compensation cost in the
financial statements for its stock options to employees equal to the
excess of the fair value of the Company's shares at the grant date over
the exercise price.
Had compensation costs for the Company's stock option grants been
determined based on the fair value at the grant dates consistent with the
methodology of SFAS No. 123, the Company's net loss per share for the
periods indicated would have been increased to the pro forma amounts
indicated as follows:
Six Months Ended June 30,
---------------------------
2004 2003
----------- ------------
Net loss as reported $(3,163,911) $(2,028,278)
Effect of expensing stock options (38,857) (194,780)
------------ ------------
Pro forma net loss $(3,202,768) $(2,223,058)
============ ============
Net loss per share (basic and diluted):
As reported $(.49) $(.31)
Pro forma $(.49) $(.34)
The weighted average fair value of stock options is estimated at the
grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Six Months Ended June 30,
----------------------------
2004 2003
------------ -------------
Risk-free interest rate 2.44% 1.75%
Expected life of options (in years) 3 3
Expected dividend yield 0.00% 0.00%
Expected volatility 50.00% 50.00%
Weighted average fair value $.45 $.45
============ =============
NOTE 3 - STOCK OPTION PLAN AND EMPLOYMENT AGREEMENTS
On March 24, 2000, the Company adopted the 2000 Stock Option Plan and
reserved for the issuance of up to 3,000,000 shares of common stock to
employees, directors and consultants. On July 22, 2004, the Company's
board of directors adopted the 2004 Stock Option Plan (the "2004 Plan")
under which a total of an additional 1,000,000 shares of common stock
have been reserved for issuance upon exercise of these stock options.
The 2004 Plan has not yet been ratified by the Company's stockholders.
At June 30, 2004, there were 3,201,922 options outstanding under the
Company's 2000 Stock Option plan, all of which are exercisable at an
average price of $1.83 per share. Pursuant to the 2004 Plan, in July
2004, options to purchase 1,058,000 shares of common stock were granted,
including 275,000 options to non-employee directors, each with an
exercise price of $1.25 per share. The Company expects to obtain
approval for the options granted in excess of the reserved amounts
under the two plans as soon as possible. The employee options vest and
become exercisable in equal annual installments over a three-year
period, and the non-employee director options vest quarterly for a
one-year period and are exercisable over a five-year period.
8
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
On July 22, 2004, the Company's Board of Directors approved five-year
employment agreements with its President and its Executive Vice-President
of Corporate Development providing for a base annual compensation of
$195,000 and $127,500, respectively, along with standard fringe benefits
available to all employees. The officers may also be entitled to bonus
compensation and/or stock options as determined by the Board of
Directors.
NOTE 4 - WARRANTS
In 2001, the Company issued 92,653 warrants exercisable at the lower of
$2.75 per share or the sale price of the common stock in subsequent
offerings, to settle an outstanding balance of $89,179 due to its then
legal counsel. The warrants expire on February 21, 2006.
On September 30, 2003, a stockholder/director opened a letter of credit
on behalf of the Company in the amount of $300,000, as required by its
agreement with a supplier. In exchange, the Company issued 150,000
warrants exercisable at the lower of $2.75 per share or the sales price
of common stock in subsequent offerings. The fair value of the warrants
was $77,321, utilizing the Black-Scholes option-pricing model with the
following assumptions: 50% volatility, seven-year expected life,
risk-free interest rate of 3.63% and dividend yield ratio of 0%. The
warrants were originally scheduled to expire on September 30, 2010 but
were converted into approximately 27,413 shares of common stock as part
of the reverse merger on July 22, 2004. The fair value of the warrants
has been recorded as deferred finance costs and is being amortized over
the term of the letter of credit.
On October 14, 2003, the same stockholder/director opened a letter of
credit on behalf of the Company as required by the Company's equipment
lease agreement in the amount of $1,040,000. In exchange, the Company
issued 520,000 warrants exercisable at the lower of $2.75 per share or
the sales price of common stock in subsequent offerings. The fair value
of the warrants was $269,470 utilizing the Black-Scholes option-pricing
model with the following assumptions: 50% volatility, seven-year expected
life, risk-free interest rate of 3.86% and dividend yield of 0%. The
warrants were originally scheduled to expire on October 14, 2010 but were
converted into approximately 95,047 shares of common stock as part of the
reverse merger on July 22, 2004. The fair value of the warrants has been
recorded as deferred lease costs and is being amortized over the term of
the lease obligation.
The Company is contingently liable for the amounts of these letters of
credit in the event the stockholder/director is obligated to make
payments thereunder as a result of the Company not complying with the
terms of the loan or lease agreements.
NOTE 5 - CONVERTIBLE NOTES AND PROMISSORY NOTES
From January 1 through June 10, 2004, the Company raised $2,601,000 in
debt financing. As described in Note 8, all of these notes
automatically converted into equity in the July 22, 2004 private
placement. These notes consisted of:
(i) $181,000 in 9% convertible promissory notes that were originally
scheduled to mature on September 30, 2004 and seven-year
warrants to purchase 85,500 shares of common stock at an
exercise price of $4.00 per share. The fair value of the
warrants was $62,857, utilizing the Black-Scholes option-pricing
model with the following assumptions: 50% volatility, seven year
expected life, risk-free interest rate ranging from 3.52% to
3.68% and a dividend yield ratio of 0%. In accordance with EITF
00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments," the Company allocated the net proceeds between the
convertible notes and the warrants based on the relative fair
value-based method. The
9
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
proceeds were allocated to the value of the warrants of $46,655
as debt discount, which along with the value of the beneficial
conversion feature (based on a $1.25 value per common share) of
$46,655, is being amortized over the life of the convertible
notes as additional interest expense. As of June 30, 2004, the
accrued interest on all of these outstanding notes amounted to
$6,985.
(ii) $500,000 in 10% convertible bridge promissory notes that
were originally scheduled to mature on December 31, 2004.
Initial individual investors purchasing $500,000 of these 10%
convertible promissory notes, in the aggregate, received
seven-year warrants to purchase 250,000 shares of common stock
at an exercise price of $4.00 per share. The fair value of the
warrants was $174,524, utilizing the Black-Scholes
option-pricing model with the following assumptions: 50%
volatility, seven year expected life, risk-free interest rate
ranging from 3.73% to 3.90% and a dividend yield ratio of 0%. In
accordance with EITF 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments," the Company allocated the net
proceeds between the convertible notes and the warrants based on
the relative fair value-based method. The proceeds were
allocated to the value of the warrants of $118,762 as debt
discount, which along with the value of the beneficial
conversion feature (based on a $1.25 value per common share) of
$118,762 is being amortized over the life of the convertible
notes as additional interest expense. As of June 30, 2004, the
accrued interest on all the outstanding notes amounted to
$9,891. Terms of the convertible promissory notes provide that
the notes would automatically convert into shares of a publicly
traded company on the date that the contemplated reverse merger
(see Note 8 below) closed. In addition, when the reverse merger
closed, each 10% convertible promissory note holder received a
premium equal to either 10% of the face amount of his note in
additional public company stock or warrants to purchase
additional public company stock equal to 10% of the face amount
of his note at $1.50 per share. This issuance was recorded by
the Company at the time of the merger as additional interest
expense on the notes of $43,635, based upon the fair value of
the shares and warrants issued.
(iii) $1,325,000 in 10% convertible bridge term notes that were
originally scheduled to mature on December 31, 2004. As of June
30, 2004 accrued interest on all the outstanding notes amounted
to $9,925. Terms of these promissory notes provide that the
notes would automatically convert into shares of a publicly
traded company on the date that the contemplated reverse merger
(see Note 8 below) closed. In addition, when the reverse merger
closed, each 10% convertible promissory note holder received a
premium equal to either 10% of the face amount of his note in
additional public company stock or warrants to purchase
additional public company stock equal to 10% of the face amount
of his note at $1.50 per share. This issuance was recorded by
the Company at the time of the merger as additional interest
expense on the notes of $68,852, based upon the fair value of
the shares and warrants issued.
(iv) $595,000 in 15% convertible bridge term notes and
seven-year warrants to purchase 297,500 shares of common stock
at $4.00 per share. The bridge term notes were originally
scheduled to mature on September 30, 2004. The fair value of the
warrants was $206,167, utilizing the Black-Scholes
option-pricing model with the following assumptions: 50%
volatility, seven year expected life, risk-free interest rate
ranging from 3.43% to 3.67% and a dividend yield ratio of 0%. In
accordance with EITF 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments," the Company allocated the net
proceeds between the convertible notes and the warrants based on
the relative fair value-based method. The proceeds were
allocated to the value of warrants of $153,113 as debt discount
which along with the value of the beneficial conversion feature
(based on a $1.25 value per common share) of $153,113 is being
amortized over the life of the convertible notes as additional
interest expense. Upon the conversion of the notes prior to
maturity into common stock, the unamortized debt discount will
be recognized as additional interest expense. As of June 30,
2004, the accrued interest on these outstanding notes amounted
to $32,425.
10
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTE 6 - DISCONTINUED OPERATIONS
--------------------------------
Since 1998, the Company has focused substantially all of its time and
resources on its SoftwareToGo product line. With the completion of the
development and the beginning of the commercialization of that product
line, effective June 30, 2004, the Company discontinued the operations of
its wholly owned subsidiary Precision Type, Inc. Accordingly, Precision's
assets and liabilities have been segregated from the assets and
liabilities of continuing operations in the consolidated balance sheet at
June 30, 2004 and its operating results have been segregated from
continuing operations and are reported as discontinued operations in the
consolidated statements of operations and cash flows for each of the six
month periods ended June 30, 2004 and 2003.
Summarized financial information of discontinued operations is as
follows:
Six Months Ended June 30,
---------------------------
2004 2003
----------- ------------
STATEMENT OF OPERATIONS:
Sales, net - Font Software Products $38,905 $108,207
Cost of sales 18,071 53,967
------- --------
Gross profit 20,834 54,240
------- --------
General, selling and administrative 15,027 6,621
------- --------
Net income from discontinued $ 5,807 $47,619
operations ======= ========
June 30, 2004
-------------
BALANCE SHEET:
Cash $ 1,962
Accounts receivable, net 4,049
--------
6,011
Other assets 2,832
--------
Total assets of discontinued operations 8,843
Accounts payable and accrued expenses 362,482
Notes payable, current 99,577
--------
Total liabilities of discontinued operations 462,059
--------
Net liabilities of discontinued operations $453,216
========
NOTE 7 - DEFERRED SALES FEE
---------------------------
On November 29, 2002, as amended on June 15, 2004, the Company and a
customer entered into an Electronic Software and Distribution and Site
Location Agreement ("Agreement"), which expires June 14, 2008. As part of
the Agreement, on June 15, 2004, the Company granted the customer a
warrant to purchase 1,456,142 shares of common stock at $.01 per share in
recognition of the sales benefit of the Agreement to the Company. Upon
consummation of the private placement and reverse merger-recapitalization
transactions (Note 8), in accordance with the terms of the Agreement,
this warrant was automatically exchanged for the right to acquire 266,154
shares of Company common stock. These shares are issuable 66,540 shares
upon consummation of the reverse
11
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
merger and, assuming the agreement remains in effect on each date, 66,540
shares on each of the two years subsequent to the anniversary date of the
agreement and 66,534 on the final anniversary date.
These shares have been valued at $1.25 per share (July 22, 2004 Private
Placement per share offering price) for an aggregate of $332,693. This
amount has been recorded as "Deferred Sales Fee" and reflected as a
reduction to equity, to be expensed ratably over the term of the
Agreement. For the period from June 15, 2004 to June 30, 2004, $3,466 has
been amortized as a selling expense.
NOTE 8 - PRIVATE PLACEMENT AND REVERSE MERGER
---------------------------------------------
On May 4, 2004, the Company issued a private placement memorandum
offering up to $10,000,000 in shares of its common stock at $1.25 per
share (the "Offering"). Warrants to purchase shares at $1.50 per share
were also offered to a limited number of lead investors as defined in the
Offering.
On July 22, 2004, concurrently with the closing of approximately
$7,300,000 (before related fees of approximately $900,000) of this
Offering, Quality Exchange, Inc. ("QEI"), a publicly traded Nevada
corporation, acquired the business of the Company in a reverse merger
transaction and, with the proceeds of the Offering, is continuing the
existing operations of the Company as a publicly traded company (the
"Reverse Merger"). QEI has issued 16,821,974 shares of its common stock
to the former security holders of the Company, representing 66.6% of the
outstanding QEI common stock following the Reverse Merger and giving
effect to the shares issued in the private placement and to the
conversion of indebtedness described herein in exchange for 100% of the
outstanding capital stock of the Company. Debt conversions, which were
all effected at $1.25 per share, included (i) $2,601,000 of debt incurred
in 2004 (see Note 5) and (ii) $6,577,744 of prior debt, $180,219 of
accrued interest thereon and approximately $800,000 of accounts payable
and accrued expenses. In addition, 17,647,377 of the Company's warrants
were exchanged for 3,384,793 shares of QEI common stock. In order to
facilitate the Reverse Merger, the Company's major shareholder forgave
approximately $1,100,000 of accrued interest on notes held by him, which
notes were included in the aforementioned prior debt. As part of the
Reverse Merger, warrants to purchase 1,774,219 shares of the Company's
common stock and stock options to purchase 2,951,922 shares of the
Company's common stock were converted into identical QEI instruments.
Following the closing of the Reverse Merger, QEI changed its corporate
name to Protocall Technologies Incorporated and Protocall's existing
management has assumed their same positions with the publicly traded
company. As promptly as practicable after satisfaction of the necessary
initial listing requirements, the Company intends to apply to list its
shares on the American Stock Exchange or the Nasdaq SmallCap Market.
As a result of the Reverse Merger, the Company has become a
publicly traded company trading on the NASD's OTC Bulletin Board
(PCLI.OB) and, accordingly, subject to the information and reporting
requirements of the U.S. securities laws. The public company costs of
preparing and filing annual and quarterly reports, proxy statements and
other information with the SEC and furnishing audited reports to
shareholders will cause the Company's expenses to be higher than they
would have been had it remained privately held. In addition, the Company
will incur additional expenses in connection with the preparation of the
registration statement and related documents with respect to the
registration of the shares issued in the Offering.
12
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTE 9 - DEFERRED OFFICERS' COMPENSATION
----------------------------------------
On July 31, 2002, the Company entered into the Salary Adjustment
Agreement (the "Agreement") with its President and certain of its
vice-presidents (the "Officers/Stockholders"). The Agreement provided
that the Officers/Stockholders (i) voluntarily accepted a 25% reduction
in salary for the period of August 2002 through January 2004 and (ii)
agreed to defer the receipt of $816,740 in accrued but unpaid salaries in
exchange for (w) an aggregate total of 777,167 five-year stock options
with an exercise price of $1.25 per share, (x) the monthly grant of an
aggregate of 24,147 five-year stock options at an exercise price of $1.25
per share for the period of August 2002 through January 2004, (y) the
automatic 100% vesting of any unvested previously held stock options and
(z) an exercise period of five-years from the date of the agreement for
any previously held stock options. This arrangement would cease upon the
return of the executives to their previous salaries. Conditions for
reinstatement of salaries were either (i) raising a minimum of $1,500,000
in gross proceeds in a fund raising (excluding any funding from the
Company's largest shareholder) or (ii) the Company achieving positive
cash flow in excess of $75,000 in any quarter from operations. As of
January 31, 2004, the Company had raised in excess of $1,500,000 in
defined gross proceeds, and consequently restored the officers to their
previous salaries. The deferred salaries have been charged to expense as
earned and are included in Accrued salaries-officers/stockholders, in the
accompanying balance sheet. The stock option grants and modifications
were accounted for in accordance with APB Opinion No 25 and FASB
Interpretation 44 "Accounting for Certain Transactions Involving Stock
Compensation-An Interpretation of APB Opinion No 25."
13
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
AS OF JUNE 30, 2004 AND FOR THE SIX MONTHS ENDED JUNE 30, 2004
AND YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
On July 22, 2004, Protocall Technologies Incorporated (the "Company") completed
a recapitalization of the company in the form of a "reverse acquisition"
transaction with Quality Exchange, Inc. ("QEI") in which QEI acquired all the
outstanding capital stock of the Company, in consideration for the issuance of a
majority of QEI's shares of common stock. The reverse acquisition was completed
pursuant to an Agreement of Purchase and Sale, dated as of July 22, 2004.
Immediately following the closing of the reverse acquisition, QEI changed its
name to Protocall Technologies Incorporated. Concurrent with the closing of the
reverse acquisition, the Company completed a private offering of 5,801,200
shares of common stock at a price of $1.25 per share, and received gross
proceeds of $7,251,500 (inclusive of $1,825,000 in proceeds of 10% bridge
convertible promissory notes issued between April 8, 2004 and June 10, 2004). In
addition, concurrent with the closing of the above transactions, creditors of
the Company converted an aggregate of approximately $10,000,000 of debt to
common stock of the Company. Prior to the completion of the reverse acquisition,
QEI redeemed and cancelled 7,875,000 shares of its outstanding common stock for
nominal consideration and sold all of its assets and transferred all of its
liabilities to its majority stockholder.
For accounting purposes, the Company is the acquirer in the reverse acquisition
transaction, and consequently, the financial statements of the Company going
forward will be the historical financial statements of Protocall Technologies
Incorporated and the reverse merger will be treated as a recapitalization of
Protocall Technologies Incorporated. The consideration and other terms of these
transactions were determined as a result of arm's-length negotiations between
the parties.
The unaudited pro forma condensed consolidated balance sheet and statement of
operations should be read in conjunction with the notes thereto and with the
historical financial statements of the Company for the year ended December 31,
2003, included in its Form 8K/A filed with the Securities and Exchange
Commission on September 20, 2004 and its unaudited interim financial information
as of June 30, 2004 and for the six months then ended filed herewith. The
unaudited pro forma condensed consolidated balance sheet as of June 30, 2004
reflects the merger and concurrent private placement as if they had occurred on
June 30, 2004. The statements of operations for the six months ended June 30,
2004 and the year ended December 31, 2003 reflect the transactions as if they
had occurred on January 1, 2004 and January 1, 2003, respectively. The pro forma
financial statements are not necessarily indicative of the Company's financial
position or results of operations that would have been achieved had the merger
been effected on such dates. The pro forma adjustments reflect the transactions
based on currently available information and certain estimates and assumptions
as set forth in the notes to the unaudited pro forma information. However,
actual amounts may differ from the pro forma amounts.
14
PROTOCALL TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
HISTORICAL PRO FORMA
JUNE 30, PRO FORMA JUNE 30,
2004 ADJUSTMENTS 2004
-------- ----------- ----------
ASSETS
Current assets:
Cash $538,583 $4,535,090 B $5,073,673
Accounts receivable, net 17,146 0 17,146
Inventory 38,157 0 38,157
Prepaid expenses and other current assets 96,707 0 96,707
---------- ----------- ----------
Total current assets 690,593 4,535,090 5,225,683
Property and equipment, net 432,458 0 432,458
Other assets 369,675 0 369,675
---------- ----------- ----------
TOTAL ASSETS $1,492,726 $4,535,090 $6,027,816
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $1,736,776 $ (433,857) A
(629,043) C
25,849 E $699,725
Notes payable to related parties, including accrued interest and net
of debt discount 6,839,068 (4,728,462) A
(1,697,948) B
(37,243) C
118,623 E 494,038
Notes payable - other, including accrued interest and net of debt
discount 3,526,689 (3,190,206) A
(192,011) C
(144,472) E 0
Accrued salaries - officers/stockholders 816,740 (200,000) C 616,740
Other current liabilities 191,511 0 191,511
Current portion of obligations under capital leases 44,721 0 44,721
Net liabilities from discontinued operations 453,216 0 453,216
---------- ----------- ----------
Total current liabilities 13,608,721 (11,108,770) 2,499,951
---------- ----------- ----------
Obligations under capital leases, less current portion 155,984 0 155,984
15
HISTORICAL PRO FORMA
JUNE 30, PRO FORMA JUNE 30,
2004 ADJUSTMENTS 2004
-------- ----------- ----------
Stockholders' deficit:
Common stock
6,480 9,412 A
7,640 B
815 C
1,125 D 25,472
Additional paid-in capital 17,242,666 8,848,243 A
6,225,398 B
1,057,482 C
(1,125) D 33,372,664
Stock subscription receivable (4,165) 0 (4,165)
Deferred sales fee, net (329,227) 0 (329,227)
Accumulated deficit (29,187,733) (505,130) A (29,692,863)
------------ ----------- ------------
Total stockholders' deficit (12,271,979) 15,643,860 3,371,881
------------ ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,492,726 $4,535,090 $6,027,816
=========== ========== ===========
A Reflects the conversion of notes payable and accrued interest into common stock of the Company and the conversion of
17,647,377 warrants into 3,384,793 shares of common stock. See Note 8 to the unaudited June 30, 2004 financial
statements included elsewhere in this Form 8K/A.
B Reflects the closing of the July 22, 2004 Private Placement.
C Reflects the conversion of accounts payable and accrued expenses into common stock of the Company.
D Reflects the common stock held by the stockholders of Quality Exchange, Inc.
E Reflects the conversion of accrued interest on certain notes payable into three year term notes payable.
16
PROTOCALL TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2004 PRO FORMA JUNE 30, 2004
HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ----------- --------------
Sales, net $51,091 $ 0 $51,091
Cost of sales 40,570 0 40,570
--------------- ----------- --------------
Gross profit 10,521 0 10,521
--------------- ----------- --------------
Selling, general and administrative expenses 2,038,259 2,038,259
Research and development expenses 75,163 0 75,163
--------------- ----------- --------------
OPERATING LOSS (2,102,901) 0 (2,102,901)
Interest expense, including amortization of debt
discount and beneficial conversion feature 1,381,421 (1,361,421) A 20,000
Other income, net (314,604) 0 (314,604)
--------------- ----------- ---------------
NET LOSS FROM CONTINUING OPERATIONS $(3,169,718) $ 1,361,421 ($1,808,297)
=============== ============ ===============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS - BASIC ($0.49) ($0.07)
AND DILUTED
=============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED
6,480,271 18,992,335 25,472,606
=============== ============ ===============
A Reflects the reversal of interest expense on liabilities that were converted
into common stock upon closing of the reverse acquisition.
17
PROTOCALL TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 PRO FORMA DECEMBER 31, 2003
HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ----------- ------------------
Sales, net $14,805 0 $14,805
Cost of sales 13,731 0 13,731
--------------- ----------- -------------
Gross profit 1,074 0 1,074
--------------- ----------- -------------
Selling, general and administrative expenses 2,108,685 0 2,108,685
Research and development expenses 560,912 0 560,912
--------------- ----------- -------------
OPERATING LOSS (2,668,523) 0 (2,668,523)
--------------- ----------- -------------
Interest expense, including amortization of debt
discount and beneficial conversion feature
1,728,468 (1,688,468) A 40,000
Other income, net (17,247) 0 (17,247)
--------------- ----------- -------------
NET LOSS FROM CONTINUING OPERATIONS $ (4,379,744) $ 1,688,468 $ (2,691,276)
=============== =========== ==============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS - BASIC
AND DILUTED ($.68) ($.11)
=============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 6,480,271 18,992,335 25,472,606
=============== =========== ==============
A Reflects the reversal of interest expense on liabilities that were converted
into common stock upon closing of the reverse acquisition.
18
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.
PROTOCALL TECHNOLOGIES INCORPORATED
Date: October 21, 2004 By: /s/ Bruce Newman
---------------------------------------
Bruce Newman
President and Chief Executive Officer