PRO TRAVEL NETWORK, INC - 10QSB - 20070521 - PART_I
PART
I—FINANCIAL INFORMATION
Item
1.
Financial
Statements.
PRO
TRAVEL NETWORK, INC.
BALANCE
SHEET
(Unaudited)
March
31,
June
30,
2007
2006
ASSETS
CURRENT
ASSETS
Cash
and cash equivalents
$
231,511
$
366,881
Accounts
receivable
46,952
56,175
Inventory
16,524
18,735
Investments
250,181
137,041
Prepaid
expenses
57,182
19,922
Total
current assets
602,350
598,754
PROPERTY
and EQUIPMENT, net of $47,400 and $31,479
accumulated
depreciation, respectively
66,069
40,531
OTHER
ASSETS
Security
deposits, net of allowance of $35,353
116,786
115,286
TOTAL
ASSETS
$
785,205
$
754,571
LIABILITIES
AND SHAREHOLDERS’ EQUITY
CURRENT
LIABILITIES
Accounts
payable
$
1,215
$
45,355
Accrued
expenses
230,860
206,770
Deferred
national event revenue
21,985
180,556
Total
current liabilities
254,060
432,681
SHAREHOLDERS’
EQUITY
Common
stock, $.001 par value; 50,000,000 shares authorized,
24,440,340
and 23,900,340 shares issued and outstanding
24,440
23,900
Additional
paid-in-capital
2,320,717
654,775
Retained
deficit
(1,800,394
)
(346,553
)
Accumulated
other comprehensive loss
(13,618
)
(10,232
)
Total
shareholders’ equity
531,145
321,890
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
785,205
$
754,571
The
accompanying notes are an integral part of the financial
statements.
1
PRO
TRAVEL NETWORK, INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
For
the Three Months Ended
For
the Nine Months Ended
March
31,
March
31,
2007
2006
2007
2006
REVENUE
Travel
agent products
$
684,324
$
637,014
$
1,720,277
$
1,464,162
National
events
206,579
418
437,909
252,729
Commissions
76,096
47,576
240,517
101,785
Total
revenues
966,999
685,008
2,398,703
1,818,676
Travel
agent products
331,852
377,045
756,754
760,186
National
events
190,158
-
385,254
224,238
COST
OF SALES
522,010
377,045
1,142,008
984,424
Gross
profit
444,989
307,963
1,256,695
834,252
OPERATING
EXPENSES
Compensation
expense
822,990
160,536
1,152,904
425,393
Professional
and consulting fees
1,146,119
35,546
1,230,278
58,411
General
and administrative expenses
120,045
96,716
327,450
239,061
Depreciation
expense
5,931
4,299
15,921
12,241
Total
operating expenses
2,095,085
297,097
2,726,553
735,106
Income
(loss) from operations
(1,650,096
)
10,866
(1,469,858
)
99,146
OTHER
INCOME (EXPENSE)
Interest
income, net
4,312
1,669
13,151
2,363
Gain
on sale of investment
-
1,353
3,722
1,353
Gain
(loss) on foreign currency
796
-
(856
)
-
Net
income (loss) applicable to common stock
(1,644,988
)
13,888
(1,453,841
)
102,862
OTHER
COMPREHENSIVE INCOME (EXPENSE)
Unrealized
gain (loss) on investment
(4,864
)
(1,488
)
(3,386
)
(5,781
)
Comprehensive
income (loss)
$
(1,649,852
)
$
12,400
$
(1,457,227
)
$
97,081
Basic
and Diluted Per Common Share Data
Basic
and diluted net income per share
$
(0.07
)
$
0.00
$
(0.06
)
$
0.00
Weighted
average shares outstanding
24,383,118
23,789,921
24,058,917
23,746,748
The
accompanying notes are an integral part of the financial
statements.
2
PRO
TRAVEL NETWORK, INC.
STATEMENT
OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
For
the Nine Months Ended March 31, 2007
Common
Shares
Common
Stock
Additional
Paid
in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Balances,
June 30, 2006
23,900,340
23,900
654,775
(346,553
)
(10,232
)
321,890
Stock
issued for:
Cash
-
-
-
-
-
-
Services
540,000
540
539,460
-
-
540,000
Warrants
issued for services
-
-
1,126,482
-
-
1,126,482
Unrealized
loss on investment
-
-
-
-
(3,386
)
(3,386
)
Net
income
-
-
-
(1,453,841
)
-
(1,453,841
)
Balances,
March 31, 2007
24,440,340
$
24,440
$
2,320,717
$
(1,800,394
)
$
(13,618
)
$
531,145
The
accompanying notes are an integral part of the financial
statements.
3
PRO
TRAVEL NETWORK, INC.
STATEMENTS
OF CASH FLOWS
(Unaudited)
For
the Nine Months Ended
March
31,
2007
2006
Cash
flows from operating activities
Net
income (loss)
$
(1,453,841
)
$
102,862
Adjustments
to reconcile net income to net
cash
provided by operating activities:
Share
based compensation
1,666,482
10,000
Depreciation
and amortization
15,921
12,241
Loss
(gain) on sale of investments
(3,722
)
(1,353
)
Changes
in assets and liabilities:
Accounts
receivable
9,223
(24,028
)
Inventory
2,211
(9,543
)
Prepaid
expenses and other
(37,260
)
21,068
Accounts
payable and accrued expenses
(20,050
)
104,957
Deferred
revenue
(158,571
)
(35,624
)
Net
cash provided by operating activities
20,393
180,580
Cash
flows from investing activities
Purchase
of property and equipment
(41,459
)
(11,838
)
Purchase
of investments
(122,097
)
(32,696
)
Sale
of investments
9,293
15,584
Deposits
(1,500
)
590
Net
cash flows used in investing activities:
(155,763
)
(28,360
)
Cash
flows from financing activities
Proceeds
from private placement
-
214,175
Net
increase (decrease) in cash and cash equivalents
(135,370
)
366,395
Cash
and cash equivalents
Beginning
of year
366,881
84,338
End
of year
$
231,511
$
450,733
Supplemental
Disclosures
Interest
paid
$
-
$
-
Income
taxes paid
$
-
$
-
The
accompanying notes are an integral part of the financial
statements.
4
PRO
TRAVEL NETWORK, INC.
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006
NOTE
A - BASIS OF PRESENTATION
The
accompanying unaudited interim financial statements of Pro Travel Network,
Inc.,
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission (“SEC”), and should be read in conjunction with the audited financial
statements and notes thereto contained in Pro Travel’s Annual Report filed with
the SEC on Form 10-KSB. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the financial statements which would substantially duplicate
the disclosure contained in the audited financial statements for fiscal 2006
as
reported elsewhere in this Form 10-QSB have been omitted.
NOTE
B - Stock-Based Compensation
Pro
Travel Network measures all share−based payments, including grants of employee
stock
options,
using a fair−value based method
in
accordance
with Statement of Financial Accounting
Standards
No. 1238, “Share−Based. Payments.” The cost of
services
received
in exchange for
awards
of
equity instruments is recognized in the statement of operations based on
the
grant date
fair
value of those awards amortized over the requisite service
period.
Pro Travel Network utilizes
a
standard option pricing
model,
the Black−Scholes model, to measure the fair value of stock
options
granted. Variables used in the Black Scholes warrant pricing model includes
(i)
risk-free
interest
rate (ii) expected option life (iii) expected volatility and (iv) expected
dividends.
NOTE
C - Common Stock
On
January 5, 2007, Pro Travel Network, Inc. issued 190,000 shares of common stock
to eleven (11) employees, these shares vest over a two year period. The market
value of the 190,000 shares was $190,000 as of January 12, 2007 based upon
the
closing price of the Pro Travel Stock on the date of grant.
On
January 12, 2007, Pro Travel Network, Inc. issued 350,000 shares of common
stock
to its President and CEO, as a bonus for services rendered. The market value
of
the 350,000 shares was $350,000 as of January 5, 2007 based upon the closing
price of the Pro Travel Stock on the date of grant..
NOTE
D- Stock Warrants
On
January 19, 2007, we entered into a consulting agreement with Donald W. Sapaugh.
In accordance with the terms and provisions of the consulting agreement: (i)
we
issued to Mr. Sapaugh 500,000 warrants to purchase up to 500,000 of our
restricted common stock (250,000 shares at $0.30 per share, 100,000 shares
at
$0.40 per share, 100,000 shares at $0.50 per share, 25,000 shares at $1.00
per
share and 25,000 shares at $1.50 per share) ; and (ii) Mr. Sapaugh shall perform
such consulting services involving general business matters and other business
consulting as mutually agreed upon. The weighted average share price of these
warrants is $0.46 per share. Compensation cost has been recognized in the
financial statements for warrants issued to Mr. Sapaugh for consulting services
in the amount of $563,241.
On
January 19, 2007, we entered into a consulting agreement with Hunter M. A.
Carr.
In accordance with the terms and provisions of the consulting agreement: (i)
we
shall issue to Mr. Carr 500,000 warrants to purchase up to 500,000 of our
restricted common stock (250,000 shares at $0.30 per share, 100,000 shares
at
$0.40 per share, 100,000 shares at $0.50 per share, 25,000 shares at $1.00
per
share and 25,000 shares at $1.50 per share) ; and (ii) Mr. Carr shall perform
such consulting services involving general business matters and other business
consulting as mutually agreed upon. The weighted average share price of these
warrants is $0.46 per share. Compensation cost has been recognized in the
financial statements for warrants issued to Mr. Carr for consulting services
in
the amount of $563,241
5
The
fair
value of the stock options and warrants granted during the period was computed
using the Black−Sholes option−pricing model.
Summary
information regarding warrants is as follows:
Weighted
Average
Warrants
Exercise
Price
Outstanding
at June 30, 2006
-
$
-
Issued
1,000,000
0.46
Exercised
-
-
Forfeited
-
-
Outstanding
at March 31. 2007
1,000,000
$
0.46
The
weighted average fair value of the warrants issued was $1.13. Variables used
in
the Black Scholes warrant pricing model includes (i) 5.1% risk-free interest
rate (ii) expected option life is the actual life of the warrants (iii) expected
volatility of 107% and (iv) zero expected dividends.
Warrants
outstanding and exercisable as of March 31, 2007:
Outstanding
Exercisable
Number
Remaining
Number
Exercise
Price
of
Warrants
Life
of
Shares
$
0.30
500,000
1
year
500,000
$
0.40
200,000
1
year
200,000
$
0.50
200,000
1
year
200,000
$
1.00
50,000
1
year
50,000
$
1.50
50,000
1
year
50,000
1,000,000
1,000,000
NOTE
E - Concentrations
From
time
to time, Pro Travel Network maintains cash balances at certain financial
institutions in excess of the Federal Deposit Insurance Corporation (“FDIC”)
limit of $100,000. At March 31, 2007, Pro Travel Network had cash balances
in
excess of this limit of approximately $106,000.
6
Item
2
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
In
addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and
Section 21E of the Securities Exchange Act of 1934. These statements include,
among other things, statements concerning our expectations regarding our future
financial performance, business strategy, milestones, projected plans and
objectives. Statements preceded by, followed by or that otherwise include the
words "believes", "expects", "anticipates", "intends", "projects", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future
or
conditional verbs such as "should", "would", "may" and "could" are generally
forward-looking in nature and not historical facts. These forward-looking
statements were based on various factors and were derived utilizing numerous
important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not
limited to, those discussed in this report, and in particular, the risks
discussed in this section under the heading "Risk Factors." Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements including milestones. Most of these factors are difficult to
predict accurately and are generally beyond our control. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements.
Overview
We
were
originally incorporated in Nevada as PTN Investment Group, Inc. on October
23,
2003. In May 2005, we amended our Articles of Incorporation to change our name
to Pro Travel Network, Inc. from PTN Investment Group, Inc. and reduce the
aggregate number of our authorized shares to 50,000,000 from 75,000,000. Prior
to the amendment, two non-employee shareholders returned an aggregate of
6,000,000 shares to us which we cancelled. Following this cancellation, we
had
69,000,000 shares issued and outstanding. We wanted to restructure our capital
structure in anticipation of going public. As our original employee stockholders
had spent substantial time and effort on the development of our business and
the
original non-employee stockholders were passive investors, the two passive
investors decided it would be more equitable for them to give up a portion
of
their share ownership to affect the proposed capital restructure.
Contemporaneous with the reduction of the number of authorized shares, we issued
new certificates for a total of 23,000,000 shares to replace the certificates
for the then outstanding 69,000,000 shares that were previously issued in the
name of PTN Investment Group, Inc.
Pro
Travel Network, Inc. is an Internet provider of online travel stores for travel
agencies and home-based representatives using our services and technology.
We
currently offer the following products:
·
Independent
Travel Agent Program or ITAP
-
$399.99 initial fee; $99 annual fee after first year - sold by our
Independent Representatives.
We
currently support over 8,100 independent travel agents and over 2,500
Independent Representatives throughout North America.
Critical
Accounting Estimates
The
financial statements include estimates made by management that impact the
amounts reflected for property and equipment as well as security deposits,
as
detailed below:
7
Property
& Equipment
Management
has estimated the useful lives as the basis for depreciating its property and
equipment. Estimated useful lives utilized for depreciating property and
equipment is three years for all computer equipment and software and seven
years
for furniture and fixtures. Management believes these estimates are very
conservative.
Security
Deposits
Security
deposits represent operating lease deposits and amounts on deposit with credit
card payment processing services that serve as collateral in case we were to
cease operations or experience significant chargebacks from customers.
Management has provided an allowance for unrecoverable deposits based on its
estimate of collectibility in the amount of $35,353 as of March 31, 2007 (See
the section entitled “Legal Proceedings,” below)
Warrant
Pricing
Stock-Based
Compensation
Pro
Travel Network measures all share−based payments, including grants of employee
stock options, using a fair−value based method in accordance with Statement of
Financial Accounting Standards No. 123R, “Share−Based Payments.” The cost of
services received in exchange for awards of equity instruments is recognized
in
the statement of operations based on the grant date fair value of those awards
amortized over the requisite service period. Pro Travel Network utilizes
a
standard option pricing model, the Black−Scholes model, to measure the fair
value of stock options granted. Variables used in the Black Scholes warrant
pricing model includes (i) risk-free interest rate (ii) expected option life
(iii) expected volatility and (iv) expected dividends.
Results
of Operations
Nine
Months Ended March 31, 2007 Compared to the Nine Months Ended March 31,
2006
For
the
nine months ended March 31, 2007, total revenues broke down as follows:
Independent Travel Agent Program or ITAP sales - 72%, National Training Events
-
18%, Travel Commissions - 10%. For the nine months ended March 31, 2006,
total revenues broke down as follows: Independent Travel Agent Program or ITAP
sales - 81%, National Training Events - 14%, and Travel Commissions- 6%.
We had total revenues of $2,398,703 for the nine months ended March 31,
2007, which is an increase of $580,027, or 32%, over our total revenues for
the
nine months ended March 31, 2006, which was $1,818,676. Total revenues increased
as a result of increased sales across the board, due to increased awareness
in
the marketplace and the increase in the number of Independent Representatives
marketing our products, with travel commission revenue showing the largest
percentage increase. We expect that as ITAP sales and the
number of active agents increase, the resulting travel commissions will continue
to increase as a percentage of our overall revenue.
Our
cost
of sales increased $157,584, or 16%, to $1,142,008 for the nine months ended
March 31, 2007, as compared to cost of sales of $984,424 for the nine months
ended March 31, 2006. Our cost of sales increased as a direct result of
National Training Events.
We
had
gross profit of $1,256,695 for the nine months ended March 31, 2007, which
was
an increase of $422,443, or 51%, when compared to our gross profit for the
nine
months ended March 31, 2006, which was $834,252. Our increase in gross profit
was primarily attributable to the increase in our sales which was slightly
offset by our increase in cost of sales.
Our
2007
operating expenses increased $1,991,447, or 271%, to $2,726,553 for the nine
months ended March 31, 2007, as compared to total operating expenses of $735,106
for the nine months ended March 31, 2006. The increase in total operating
expenses was mainly due to an increase in professional and consulting fees,
general and administrative expenses and compensation expense. Professional
and
consulting fees increased $1,171,867 to $1,230,278 for the nine months ended
March 31, 2007, as compared to professional and consulting fees of $58,411
for
the nine months ended March 31, 2006. The increase in professional and
consulting fees was primarily due to the issuance of 1,000,000 warrants to
two
consultants resulting in an expense to the company of $1,126,482. General and
administrative expenses increased $88,389 to $327,450 for the nine months ended
March 31, 2007, as compared to general and administrative expenses of $239,061
for the nine months ended March 31, 2006. The increase in general and
administrative expenses was primarily attributable to the start-up of our
Canadian office along with an increase in merchant fees. Compensation expense
increased $727,511 to $1,152,904 for the nine months ended March 31, 2007,
as
compared to compensation expense of $425,393 for the nine months ended March
31,
2006. The increase in compensation expense was primarily due to an increase
in
staff along with an increase in quarterly performance bonus and annual salary
to
Paul Henderson our President and CEO. Mr. Henderson provides management and
other services to us under an employment agreement pursuant to which we pay
Mr.
Henderson salary of $180,000 per year and a commission of 12% of the net Travel
Agent Product revenue, less all costs of sales expenses. Mr. Henderson’s
employment agreement was amended January 1, 2007 to increase his annual salary
from $108,000 to $180,000 per year.
8
Other
income and expenses included an increase in net interest income of $10,788,
to
$13,151 for the nine months ended March 31, 2007, as compared to net interest
income of $2,363 for the nine months ended March 31, 2006, along with a gain
on
sale of investments of $3,722 for the nine months ended March 31, 2007, compared
to gain on sale of investments of $1,353 for the nine months ended March 31,
2006, and a loss on foreign currency of $856, compared to a loss on foreign
currency of $0 for the nine months ended March 31, 2006.
We
had a
net loss applicable to common stock of $1,453,841 for the nine months ended
March 31, 2007, as compared to net income applicable to common stock of $102,862
for the nine months ended March 31, 2006. The increase in net loss applicable
to
common stock was primarily attributable to the issuance of 540,000 shares of
common stock to Paul Henderson and various employees along with the issuance
of
1,000,000 warrants to two consultants.
We
had
other comprehensive loss for the nine months ended March 31, 2007 consisting
of
unrealized loss on investments of $3,386 compared to an unrealized loss on
investment of $5,781 for the nine months ended March 31, 2006.
Our
comprehensive loss was $1,457,227 for the nine months ended March 31, 2007,
as
compared to comprehensive income of $97,081 for the nine months ended March
31,
2006.
Commitments
and Contingencies
Details
regarding the lease for our principal place of business are as follows:
·
Address:
City/State/Zip 516 W. Shaw Avenue #103, Fresno, CA
93704
·
Number
of Square Feet: 3,397
·
Name
of Landlord: J&D Properties
·
Term
of Lease: 7 years, commencing March
2005
·
Monthly
Rental: Escalating from $4,397 at commencement to $5,374 in the
final year
of the lease.
Our
lease
was amended in July, 2005, and monthly rent was reduced. The amount of reduction
was due to an agreement to allow in the future an adjacent tenant to have
access
to 140 square feet of our current 3,397 square feet. All other terms remain
the
same. The lease is non-cancelable. On June 27, 2006, we leased 1,000 square
feet
of office space in London, Ontario Canada under a one year non-cancelable
operating lease beginning in July 2006. On March 1, 2007, we leased 1,000
square
feet of office space in Mississauga, Ontario Canada under a one year
non-cancelable operating lease beginning in March 2007. Future minimum rental
payments for the fiscal year ending June 30, 2007 are $22,392 under these
leases.
Milestones
We
are in
the process of launching full Canadian operations. We opened a Canadian office
in Ontario in July 2006. The most major goal towards achieving our business
objectives over the next year is our goal of having 100% of our agents booking
travel. Continuing operations will always focus on ways to increase our
marketing sales force. As described below in “Liquidity and Capital Resources,”
we will need $250,000 of capital to expand our operations as outlined in
the
Milestone table below.
9
Milestone
or Step
Expected
Manner of
Occurrence
or Method
of
Achievement
Date
When Step Should
be
Accomplished
Estimated
Cost
of
Completion
Develop
Canadian infrastructure
Secure
office space in Toronto, office equipment and develop “specific” marketing
materials and hiring additional employees
3
months
$50,000
Launch
Canadian Marketing Phase
PTN
Canadian marketing tour and seminars designed to develop sales
force
4
-
12 months
$50,000
Creation
of Travel Marketing staff
Marketing
head and staff to drive bookings up
2
-
4 months
$50,000
Achieve
average ITAP sales of 1,000 per month
Aggressively
Recruit top leadership in the multi-level marketing
Industry
3
-
12 months
$100,000
All
steps
will be undertaken contemporaneously.
Our
marketing effort will be directed at expanding our representative network
through personal contact or seminars.
Liquidity
and Capital Resources
As
of
March 31, 2007, we had total current assets of $602,350 consisting of cash
and
cash equivalents of $231,511, accounts receivable of $46,952, inventory of
$16,524, investments of $250,181 and prepaid expenses of $57,182. Our cash
balances exceeded FDIC insurance protection levels by approximately $106,000
at
March 31, 2007 and at certain points throughout the year subjecting us to
risk
related to the un-protected balance. We have determined that the risk of
loss
associated with these un-protected balances is remote and therefore no
adjustment for the risk has been provided for the nine months ended March
31,
2007.
We
had
total current liabilities of $254,060 consisting of accounts payable of $1,215,
accrued expenses of $230,860 and deferred revenue of $21,985. We have no
long-term debt. Accrued expenses consisted of accrued employees salaries
and
benefits of $50,292, lease obligation of $4,174 and commissions and rewards
owed
our representatives in the amount of $176,394, of which approximately $85,012
was the estimated full potential value of PTN Reward Points owed Agents and
Managers and the reminder was primarily commissions held for payment at the
end
of every two weeks.
We
had
working capital of $348,290 as of March 31, 2007.
During
the nine months ended March 31, 2007, net cash decreased by $135,370 consisting
of $20,393 provided by operating activities and $155,763 used in investing
activities.
Net
cash
provided by operating activities during the nine months ended March 31, 2007,
consisted of a net loss from operations of $1,453,841, adjustments for
depreciation and amortization of $15,921 along with share base compensation
of
$1,666,482, and a decrease in inventory of $2,211 and a decrease in accounts
receivable of $9,223 which were offset by, a increase in prepaid expenses
and
other of $37,260, an adjustment for gain on sale of investments of $3,722,
a
decrease in deferred revenue of $158,571 and a decrease in accounts payable
and
accrued expenses of $20,050.
10
Net
cash
used in investing activities during the nine months ended March 31, 2007,
consisted of property and equipment purchases of $41,459, investments purchases
of $122,097 and an increase in deposits of $1,500 which were offset by sale
of
investments of $9,293.
We
believe our cash resources of $231,511 along with the $235,401 in certificate
of
deposits as of March 31, 2007, are sufficient to satisfy our current cash
requirements over the next 12 months. In addition, based upon our prior
experience, we believe we will generate sufficient cash flow from operations
to
also satisfy these requirements. We have expanded our business operations
in
Canada as outlined in the Milestone table, above. We estimate that we need
$250,000 of capital to expand our operations in Canada.. Currently, we have
generated sufficient cash flow from operations to satisfy the initial expansion.
Should we need additional capital over the amount generated from cash flow,
we
hope to be able to raise additional capital from an offering of our stock
in the
future. However, this offering may not occur, or if it occurs, we may not
raise
the required funding. At this time, we have not secured or identified any
additional financing. We do not have any firm commitments or other identified
sources of additional capital from third parties or from our officers or
directors or from shareholders. There can be no assurance that additional
capital will be available to us, or that, if available, it will be on terms
satisfactory to us. Any additional financing may involve dilution to our
shareholders. In the alternative, additional funds may be provided from cash
flow in excess of that needed to finance our day-to-day operations, although
we
may never generate this excess cash flow. If we raise additional capital
or
generate additional funds, we plan to use the funds to finance the minimum
steps
in the Milestone table that we would like to take to implement our business
plan
in the next 12 months; however, the amounts actually expended may vary
significantly. Accordingly, we will retain broad discretion in the allocation
of
any additional capital that we may receive or funds that we may generate.
If we
do not raise additional capital or generate additional funds, implementation
of
our business plans as set forth in the Milestone table will be
delayed.
Risk
Factors
Risk
Related To Our Business
Because
our Internet-based hosted home base travel agent and travel services company
is
a relatively new method to market travel services and to make travel
arrangements, we face significant barriers to acceptance of our services.
Our
sales
and revenues will not grow as we plan if people who want to become independent
travel agents do not purchase our Independent Travel Agent Program product
or
become independent representatives selling this program, if consumers and
businesses do not purchase significantly more travel products online than
they
currently do, or if the use of the Internet as a medium of commerce for travel
products does not continue to grow or grows more slowly than expected. Consumers
and businesses have traditionally relied on personal contact with travel
agents
and travel suppliers and are accustomed to a high degree of human interaction
in
purchasing travel products. The success of our business is dependent on a
significant increase in the number of people who want to become independent
travel agents who purchase our Independent Travel Agent Program product or
become independent representatives selling this program and consumers and
businesses who use the Internet to purchase travel products from our
agents.
Adverse
changes or interruptions in our relationships with travel suppliers could
affect
our access to travel offerings and reduce our revenues.
We
rely
on various arrangements with our airline, hotel and auto suppliers, and these
arrangements contain terms that could affect our access to inventory and
reduce
our revenues. All of the relationships we have are freely terminable by the
supplier upon notice. None of these arrangements are exclusive and any of
our
suppliers could enter into, and in some cases may have entered into, similar
arrangements with our competitors.
We
cannot
assure you that our arrangements with travel suppliers will remain in effect
or
that any of these suppliers will continue to supply us and our agents with
the
same level of access to inventory of travel offerings in the future. If access
to inventory is affected, or our ability to obtain inventory on favorable
economic terms is diminished, it could reduce our revenues.
11
Our
failure to establish and maintain representative relationships for any reason
could negatively impact sales of our products and reduce our revenues.
We
distribute our products through independent representatives, and we depend
upon
them for sales revenue. For the six months ended December 31, 2006, 12% of
our
revenues were comprised of commissions. To increase our revenue, we must
increase the number of, or the productivity of, our representatives.
Accordingly, our success depends in significant part upon our ability to
attract, retain and motivate a large base of representatives. There may be
a
high rate of turn-over among our representatives. Since our inception, we
have
had approximately 1,900 independent travel agents that have become inactive
for
non-payment of the annual fee after their first year as an agent. The loss
of a
significant number of representatives without replacements being secured
for any
reason could reduce sales of our products and could impair our ability to
attract new representatives.
If
we fail to attract and retain representatives in a cost-effective manner,
our
ability to grow and become profitable may be impaired.
Our
business strategy depends on increasing our overall number of customer
transactions in a cost-effective manner. In order to increase our number
of
transactions, we must attract new representatives. Although we have spent
significant financial resources on sales and marketing and plan to continue
to
do so, these efforts may not be cost effective in attracting new representatives
or increasing transaction volume. If we do not achieve our marketing objectives,
our ability to grow and increase revenues may be impaired.
Our
success depends on maintaining the integrity of our systems and infrastructure,
which if not maintained could reduce our revenues.
In
order
to be successful, we must provide reliable, real-time access to our systems
for
our representatives, customers and suppliers. As our operations grow in both
size and scope, we will need to improve and upgrade our systems and
infrastructure to offer an increasing number of people and travel suppliers
enhanced products, services, features and functionality. The expansion of
our
systems and infrastructure will require us to commit substantial financial,
operational and technical resources before the volume of business increases,
with no assurance that the volume of business will increase. Consumers and
suppliers will not tolerate a service hampered by slow delivery times,
unreliable service levels or insufficient capacity, any of which could reduce
our revenues.
Our
computer systems may suffer failures, capacity constraints and business
interruptions that could increase our operating costs and cause us to lose
customers and reduce our revenues.
Our
operations face the risk of systems failures. Our systems and operations
are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, computer hacking break-ins, earthquake, terrorism
and similar events. The occurrence of a natural disaster or unanticipated
problems at our facilities or locations of key vendors could cause interruptions
or delays in our business, loss of data or render us unable to process
reservations. In addition, the failure of our computer and communications
systems to provide the data communications capacity required by us, as a
result
of human error, natural disaster or other occurrence of any or all of these
events could adversely affect our reputation, brand and business. In these
circumstances, our redundant systems or disaster recovery plans may not be
adequate. Similarly, although many of our contracts with our service providers
require them to have disaster recovery plans, we cannot be certain that these
will be adequate or implemented properly. In addition, our business interruption
insurance may not adequately compensate us for losses that may
occur.
Rapid
technological changes may render our technology obsolete or decrease the
attractiveness of our products to representatives and consumers.
To
remain
competitive in the online travel industry, we must continue to enhance and
improve the functionality and features of our website. The Internet and the
online commerce industry are rapidly changing. In particular, the online
travel
industry is characterized by increasingly complex systems and infrastructures
and new business models. If competitors introduce new products embodying
new
technologies, or if new industry standards and practices emerge, our existing
website, technology and systems may become obsolete.
12
Our
future success will depend on our ability to do the following:
·
enhance
our existing products;
·
develop
and license new products and technologies that address the increasingly
sophisticated and varied needs of our prospective customers and
suppliers;
and
·
respond
to technological advances and emerging industry standards and practices
on
a cost-effective and timely basis.
Developing
our website and other technology entails significant technical and business
risks which could reduce our revenues.
We
may
use new technologies ineffectively or we may fail to adapt our website,
transaction processing systems and network infrastructure to consumer
requirements or emerging industry standards. For example, our website
functionality that allows searches and displays of ticket pricing and travel
itineraries is a critical part of our service, and it may become out-of-date
or
insufficient from our customers' perspective and in relation to the search
and
display functionality of our competitors' websites. If we face material delays
in introducing new services, products and enhancements, our representatives,
customers and suppliers may forego the use of our products and use those
of our
competitors.
Declines
or disruptions in the travel industry, such as those caused by general economic
downturns, terrorism, health concerns, strikes or bankruptcies within the
travel
industry could reduce our revenues.
Our
business is affected by the health of the travel industry. Travel expenditures
are sensitive to business and personal discretionary spending levels and
tend to
decline during general economic downturns. Since 2001, the travel industry
has
experienced a protracted downturn, and there is a risk that a future downturn,
or the continued weak demand for travel, could adversely affect the growth
of
our business. Additionally, travel is sensitive to safety concerns, and thus
may
decline after incidents of terrorism, during periods of geopolitical conflict
in
which travelers become concerned about safety issues, or when travel might
involve health-related risks. For example, the terrorist attacks of September
11, 2001, which included attacks on the World Trade Center and the Pentagon
using hijacked commercial aircraft, resulted in a decline in travel bookings
throughout the industry. The long-term effects of events such as these could
include, among other things, a protracted decrease in demand for air travel
due
to fears regarding terrorism, war or disease. These effects, depending on
their
scope and duration, which we cannot predict at this time, could significantly
reduce our revenues.
Other
adverse trends or events that tend to reduce travel and may reduce our revenues
include:
·
higher
fares and rates in the airline industry or other travel-related
industries;
·
labor
actions involving airline or other travel
suppliers;
·
political
instability and hostilities;
·
fuel
price escalation;
·
travel-related
accidents; and
·
bankruptcies
or consolidations of travel suppliers and vendors.
Evolving
government regulations could impose taxes or other burdens which increase
the
cost of travel or otherwise make travel less desirable, which could decrease
demand for travel and have the potential to materially reduce our revenues.
We
must
comply with laws and regulations applicable to online commerce and the sale
of
travel services. Increased regulation of the Internet or travel services
or
different applications of existing laws might slow the growth in the use
of the
Internet and commercial online services, or could increase the cost of travel
services, which could decrease travel and thus lead to reduced commission
revenues.
13
In
addition to federal regulation, state and local governments could impose
additional taxes on Internet-based sales or on travel services such as air
fares
and hotel room and car rental rates. We would not have to pay these taxes;
rather, they would be added to the room rates or other travel purchased and
paid
directly by the traveler. However, these taxes would increase travel costs.
Increased travel costs could decrease the demand for travel and thus lead
to
reduced commission revenues. Any state and local governments in any jurisdiction
in which we do business could, without us being aware, impose additional
taxes
on Internet-based sales or on travel services such as air fares and hotel
room
and car rental rates, including increased hotel occupancy taxes. If these
types
of taxes were imposed and travel and related hotel bookings materially
decreased, the amount of commissions we receive and thus our revenues could
be
materially reduced. The statutes and case law governing online commerce are
still evolving, and new laws, regulations or judicial decisions may impose
on us
additional risks which may lead to reduced revenues. In addition, new
regulations, domestic or international, regarding the privacy of our users'
personally identifiable information may impose on us additional costs and
operational constraints.
Because
our market is seasonal, our quarterly results could fluctuate.
Our
market experiences seasonal fluctuations, reflecting seasonal trends for
the
products offered by our representatives, as well as Internet services generally.
For example, traditional leisure travel bookings are higher in the first
two
calendar quarters of the year in anticipation of spring and summer vacations
and
holiday periods, but online travel reservations may decline with reduced
Internet usage during the summer months. In the last two quarters of the
calendar year, demand for travel products generally declines and the number
of
bookings flattens or decreases. These factors could cause our revenues to
fluctuate from quarter to quarter. Our results may also be affected by seasonal
fluctuations in the inventory made available to us by travel
suppliers.
Our
business is exposed to risks associated with online commerce security and
credit
card fraud which could reduce our revenues.
Consumer
concerns over the security of transactions conducted on the Internet or the
privacy of users may inhibit the growth of the Internet and online commerce.
To
transmit confidential information such as customer credit card numbers securely,
we rely on encryption and authentication technology. Unanticipated events
or
developments could result in a compromise or breach of the systems we use
to
protect customer transaction data. Our servers and those of our service
providers may be vulnerable to viruses or other harmful code or activity
transmitted over the Internet. A virus or other harmful activity could cause
a
service disruption.
In
addition, we bear financial risk from products or services purchased with
fraudulent credit card data. Although we have implemented anti-fraud measures,
a
failure to adequately control fraudulent credit card transactions could
adversely affect our business. Because of our limited operating history,
we
cannot assure you that our anti-fraud measures are sufficient to prevent
material financial loss. Since we cannot exert the same level of influence
or
control over our representatives as we could were they our own employees,
our
representatives could fail to comply with our policies and procedures, which
could result in claims against us that could harm our financial condition
and
operating results. We are not in a position to directly provide the same
direction, motivation and oversight for our representatives as we would if
such
representatives were our own employees. As a result, there can be no assurance
that our representatives will participate in our marketing strategies or
plans,
accept our introduction of new products and services, or comply with our
policies and procedures.
Because
it can be difficult to enforce policies and procedures designed to govern
the
conduct of our representatives and to protect the goodwill associated with
our
business because of the number of representatives and their independent status,
our revenues could be reduced if we fail to enforce these policies and
procedures.
Violations
by our representatives of applicable laws or our policies and procedures
in
dealing with customers could reflect negatively on our products and operations
and harm our business reputation. In addition, it is possible that a court
could
hold us civilly or criminally accountable based on vicarious liability because
of the actions of our representatives.
14
Adverse
publicity concerning any actual or purported failure of us or our
representatives to comply with applicable laws and regulations, whether or
not
resulting in enforcement actions or the imposition of penalties, could harm
the
goodwill of our company and could reduce our ability to attract, motivate
and
retain representatives, which would reduce our revenues. We cannot ensure
that
all representatives will comply with applicable legal requirements.
Our
marketing program could be found not to be in compliance with current or
newly
adopted laws or regulations in one or more markets, which could prevent us
from
conducting our business in these markets and reduce our revenues.
Our
network marketing program is subject to a number of federal and state
regulations administered by the Federal Trade Commission and various state
agencies in the United States. We are subject to the risk that, in one or
more
markets, our network marketing program could be found not to be in compliance
with applicable laws or regulations. Regulations applicable to network marketing
organizations generally are directed at preventing fraudulent or deceptive
schemes, often referred to as "pyramid" or "chain sales" schemes, by ensuring
that product sales ultimately are made to consumers and that advancement
within
an organization is based on sales of the organization's products rather than
investments in the organization or other non-retail sales-related criteria.
The
regulatory requirements concerning network marketing programs do not include
"bright line" rules and are inherently fact-based and thus, even in
jurisdictions where we believe that our network marketing program is in full
compliance with applicable laws or regulations governing network marketing
systems, we are subject to the risk that these laws or regulations or the
enforcement or interpretation of these laws and regulations by governmental
agencies or courts can change. The failure of our network marketing program
to
comply with current or newly adopted regulations could reduce our
revenues.
We
are
also subject to the risk of private party challenges to the legality of our
network marketing program. The multi-level marketing programs of other companies
have been successfully challenged in the past. An adverse judicial determination
with respect to our network marketing program, or in proceedings not involving
us directly but which challenge the legality of multi-level marketing systems,
in any market in which we operate, could reduce our revenues.
Because
insiders control our activities, they may block or deter actions that you
might
otherwise desire that we take and may cause us to act in a manner that is
most
beneficial to such insiders and not to outside
shareholders.
Our
CEO,
President and sole director, Mr. Paul Henderson, controls approximately 52.3%
of
our common stock, and we do not have any non-employee directors. As a result,
he
effectively controls all matters requiring director and stockholder approval,
including the election of directors, the approval of significant corporate
transactions, such as mergers and related party transaction. He also has
the
ability to block, by his ownership of our stock, an unsolicited tender offer.
This concentration of ownership could have the effect of delaying, deterring
or
preventing a change in control of our company that you might view favorably.
Our
management decisions are made by Paul Henderson, CEO and President; if we
lose
his services, our revenues may be reduced.
The
success of our business is dependent upon the expertise of Paul Henderson,
CEO
and President. Because Paul Henderson is essential to our operations, you
must
rely on his management decisions. Paul Henderson, CEO and President will
continue to control our business affairs after the filing. We have not obtained
any key man life insurance relating to Paul Henderson. Paul is currently
subject
to an IRS lien. If we lose his services, we may not be able to hire and retain
another CEO or President with comparable experience. As a result, the loss
of
the services of Paul Henderson could reduce our revenues.
15
Risk
Related To Our Common Stock
Pro
Travel Network, Inc. (Pink Sheets: PTVL) completed the necessary SEC filings
and
began trading as a publicly held company on November 27, 2006.
Because
the offering price of our most recent sales of common stock of $1.25 per
share
was arbitrarily set by our Board of Directors and accordingly does not indicate
the actual value of our business, investors may not be able to sell their
stock
for a price in excess of $1.25 per share and thus could suffer an investment
loss.
The
offering price of our most recent sales of common stock of $1.25 per share
was
not based upon earnings or operating history, does not reflect our actual
value,
and bears no relation to our earnings, assets, book value, net worth or any
other recognized criteria of value. No independent investment banking firm
was
retained to assist in determining the offering price for the shares.
Accordingly, the offering price should not be regarded as an indication of
any
future price of our stock. Any investors in our common stock, including those
who invest in our common stock at a price less than $1.25 per share, could
suffer an investment loss.
Because
sales of our common stock under Rule 144 could reduce the price of our stock
investors may not be able to sell their stock for a price in excess of the
price
they paid to acquire our stock and thus could suffer an investment loss.
As
of
November 13, 2006, there are 900,340 shares of our common stock held by
non-affiliates and 23,000,000 shares of our common stock held by officers,
directors and stockholders that currently own more than 5% of our securities
that Rule 144 of the Securities Act of 1933 defines as restricted securities.
We
registered 400,340 of these shares with the SEC on a registration statement
on
Form SB-2, as amended, File No. 333-132127, which was declared effective
on July
19, 2006. No Shares have been sold pursuant to Rule 144 of the Securities
Act of
1933.
In
addition to the registered shares that are available for resale, as a result
of
the provisions of Rule 144, restricted securities could be available for
sale in
a public market, if developed, generally beginning 90 days after the effective
date of the registration statement, assuming the holding period, volume and
method of sale limitations in Rule 144 can be satisfied to the extent required.
The availability for sale of substantial amounts of common stock under Rule
144
could reduce prevailing market prices for our securities.
Because
we do not have an audit or compensation committee, shareholders will have
to
rely on the entire Board of Directors, all of which are not independent,
to
perform these functions.
We
do not
have an audit or compensation committee comprised of independent directors.
Indeed, we do not have any audit or compensation committee. These functions
are
performed by the Board of Directors as a whole. All members of the Board
of
Directors are not independent directors. Thus, there is a potential conflict
in
that board members who are management will participate in discussions concerning
management compensation and audit issues that may affect management
decisions.
Item
3.
Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
Chief
Executive Officer and Principal Financial Officer, after evaluating the
effectiveness of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the
end of
the period covered by this report (the “Evaluation Date”), has concluded that as
of the Evaluation Date, our disclosure controls and procedures are in-effective
to provide reasonable assurance that information required to be disclosed
by us
in the reports that we file or submit under the Exchange Act (i) is accumulated
and communicated to our management, including our Chief Executive Officer
and
Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure, and (ii) is recorded, processed, summarized and reported
within the time periods specified in the Commission’s rules and
forms.
16
This
conclusion is based upon the number and magnitude of the adjusting entries
and
additional financial reporting disclosures identified by our independent
accountants.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II—OTHER INFORMATION
Item
1.
Legal
Proceedings.
There
are
no pending or threatened lawsuits against us.
We
are
currently pursuing an operating credit card processing service that failed
to
return our deposit of approximately $35,000. The credit card processing
service is currently pursing action against its bank to recover this sum
and has
orally agreed to pay us this amount if recovered. However, as the processor
is
not located in the U.S., if they do not pay us as orally agreed, we do not
intend to institute litigation due to the cost of litigation and uncertainty
of
collection. Although as the company is still in business and we may be able
to
collect, recovery is uncertain, so we have provided an allowance on our
financial statements for the entire balance in case it is not
collected.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
On
January 5, 2007, Pro Travel Network, Inc. issued 190,000 shares of common
stock
to eleven (11) employees based on a two year plus vesting with the company.
The
market value of the 190,000 shares was $190,000 as of January 5, 2007 based
upon
a closing price of $1.00 on that date.
On
January 12, 2007, Pro Travel Network, Inc. issued 350,000 shares of common
stock
to Paul Henderson, President and CEO, as a bonus for services rendered. The
market value of the 350,000 shares was $350,000 as of January 5, 2007 based
upon
a closing price of $1.00 on that date.
On
January 19, 2007, we entered into a consulting agreement with Donald W. Sapaugh.
In accordance with the terms and provisions of the consulting agreement:
(i) we
shall issue to Mr. Sapaugh 500,000 warrants to purchase up to 500,000 of
our
restricted common stock (250,000 shares at $0.30 per share, 100,000 shares
at
$0.40 per share, 100,000 shares at $0.50 per share, 25,000 shares at $1.00
per
share and 25,000 shares at $1.50 per share) ; and (ii) Mr. Sapaugh shall
perform
such consulting services involving general business matters and other business
consulting as mutually agreed upon. Compensation cost has been recognized
in the
financial statements for warrants issued to Mr. Sapaugh for consulting services
in the amount of $563,241.
On
January 19, 2007, we entered into a consulting agreement with Hunter M. A.
Carr.
In accordance with the terms and provisions of the consulting agreement:
(i) we
shall issue to Mr. Carr 500,000 warrants to purchase up to 500,000 of our
restricted common stock (250,000 shares at $0.30 per share, 100,000 shares
at
$0.40 per share, 100,000 shares at $0.50 per share, 25,000 shares at $1.00
per
share and 25,000 shares at $1.50 per share) ; and (ii) Mr. Carr shall perform
such consulting services involving general business matters and other business
consulting as mutually agreed upon. Compensation cost has been recognized
in the
financial statements for warrants issued to Mr. Carr for consulting services
in
the amount of $563,241
17
Item
3.
Defaults
Upon Senior Securities.
None
Item
4.
Submission
of Matters to a Vote of Security Holders.
None
Item
5.
Other
Information.
None
Item
6.
Exhibits.
Exhibit
No.
Description
of Exhibit
10.1
Consulting
Agreement between Pro Travel Network, Inc. and Donald W.
Sapaugh.
10.2
Consulting
Agreement between Pro Travel Network, Inc. and Hunter M. A.
Carr.
31*
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32*
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
SIGNATURES
In
accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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