form10qsb.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
FORM
10-QSB
(Mark
one)
x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended: December
31, 2007
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the
transition period from _________ to ___________
Commission
file number 000-08924
TWL
Corporation
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
73-0981865
|
|
(State
or other jurisdiction ofincorporation or organization)
|
(IRS
Employer Identification No.)
|
4101 International Parkway,
Carrollton, Texas 75007
(Address
of principal executive offices)
(972)
309-4000
(Issuer’s
telephone number)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
January 31, 2008, 11,843,902
shares of the issuer’s common stock were outstanding.
TWL
Corporation and Subsidiaries
Throughout
this report, we refer to TWL Corporation, together with its subsidiaries, as
“we”, “us”, “our company”, “TWL” or “the Company.”
THIS FORM
10-QSB FOR THE SIX MONTHS ENDED DECEMBER 31, 2007, CONTAINS FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS ABOUT THE CONTINUED STRENGTH OF OUR BUSINESS
AND OPPORTUNITIES FOR FUTURE GROWTH. IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”,
“EXPECT”, “PLAN”, “INTEND”, “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “PREDICT”,
“POTENTIAL” OR “CONTINUE”, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE
TERMINOLOGY. WE BELIEVE THAT OUR EXPECTATIONS ARE REASONABLE AND ARE BASED ON
REASONABLE ASSUMPTIONS. HOWEVER, SUCH FORWARD-LOOKING STATEMENTS BY
THEIR NATURE INVOLVE RISKS AND UNCERTAINTIES.
WE
CAUTION THAT A VARIETY OF FACTORS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING,
COULD CAUSE OUR BUSINESS AND FINANCIAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED IN FORWARD-LOOKING STATEMENTS: DETERIORATION IN
CURRENT ECONOMIC CONDITIONS; OUR ABILITY TO PURSUE BUSINESS STRATEGIES; PRICING
PRESSURES; CHANGES IN THE REGULATORY ENVIRONMENT; OUR ABILITY TO ATTRACT AND
RETAIN QUALIFIED PROFESSIONALS; INDUSTRY COMPETITION; CHANGES IN INTERNATIONAL
TRADE; MONETARY AND FISCAL POLICIES; OUR ABILITY TO INTEGRATE FUTURE
ACQUISITIONS SUCCESSFULLY; AND OTHER FACTORS DISCUSSED MORE FULLY IN
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS BELOW, AS WELL AS IN OTHER REPORTS SUBSEQUENTLY FILED FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
TWL Corporation and Subsidiaries
TABLE
OF CONTENTS
|
PART
I. FINANCIAL INFORMATION
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ITEM 1.
|
Financial
Statements
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4
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5
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6
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7
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ITEM 2.
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16
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ITEM 3.
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21
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PART
II. OTHER INFORMATION
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ITEM 2.
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22
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ITEM 5.
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22
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ITEM 6.
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22
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TWL Corporation and Subsidiaries
Consolidated
Balance Sheet
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
400,806 |
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$417,893
|
|
|
2,774,073 |
|
|
Inventory,
net
|
|
|
768,050 |
|
|
Prepaid
expenses and other current assets
|
|
|
952,653 |
|
|
Total
current assets
|
|
|
4,895,582 |
|
|
Property
and equipment, net
|
|
|
4,962,770 |
|
|
Loan
origination costs, net
|
|
|
724,670 |
|
|
Other
assets
|
|
|
70,589 |
|
|
Total
assets
|
|
$ |
10,653,611 |
|
|
|
|
|
|
|
|
Liabilities
and stockholders' deficit
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Line
of credit
|
|
$ |
1,133,582 |
|
|
Notes
payable, net of unamortized discount of $288,889
|
|
|
883,552 |
|
|
Notes
payable - related parties, net of unamortized discount of
$362,020
|
|
|
2,209,112 |
|
|
Accounts
payable
|
|
|
4,945,571 |
|
|
Accrued
expenses
|
|
|
6,159,475 |
|
|
Interest
payable, including amount due to related parties of
$1,422,789
|
|
|
1,765,490 |
|
|
Deferred
revenue
|
|
|
4,363,832 |
|
|
Current
portion of obligations under capital leases
|
|
|
1,372,597 |
|
|
Total
current liabilities
|
|
|
22,833,211 |
|
|
Long-term
liabilities:
|
|
|
|
|
|
Obligations
under capital leases
|
|
|
10,038,080 |
|
|
Notes
payable, net of unamortized discount of $192,593
|
|
|
1,047,407 |
|
|
Notes
payable - related parties, net of unamortized discount of
$890,005
|
|
|
2,938,120 |
|
|
Other
long-term liabilities
|
|
|
62,750 |
|
|
Total
long-term liabilities
|
|
|
14,086,357 |
|
|
Total
liabilities
|
|
|
36,919,568 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
Preferred
stock, 10,000,000 shares authorized
|
|
|
|
|
|
Series
A, 1,500,000 issued and outstanding; liquidated preference of $1.00 per
share, plus accrued unpaid dividends
|
|
|
1,875,000 |
|
|
Series
B, 2,800,000 shares to be issued and outstanding; liquidated preference of
$1.00 per share, plus accrued unpaid dividends
|
|
|
6,533,333 |
|
|
Common
stock, 750,000,000 shares authorized, $0.0001 par value; 11,843,902 shares
issued and outstanding
|
|
|
1,184 |
|
|
Additional
paid-in capital
|
|
|
51,168,416 |
|
|
Accumulated
deficit
|
|
|
(85,824,923 |
) |
|
Other
comprehensive loss
|
|
|
(18,967 |
) |
|
Total
stockholders' deficit
|
|
|
(26,265,957 |
) |
|
Total
liabilities and stockholders' deficit
|
|
$ |
10,653,611 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
TWL Corporation and Subsidiaries
Consolidated
Statements of Operations
|
|
|
Three months ended
|
|
|
Six months ended
|
|
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December 31,
|
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|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
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Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$ |
2,606,946 |
|
|
$ |
2,730,287 |
|
|
$ |
5,221,854 |
|
|
$ |
5,681,753 |
|
|
Single
event
|
|
|
2,035,983 |
|
|
|
2,253,205 |
|
|
|
3,672,698 |
|
|
|
5,241,896 |
|
|
Production
|
|
|
551,677 |
|
|
|
716,730 |
|
|
|
979,304 |
|
|
|
1,050,694 |
|
|
Other
|
|
|
1,011,608 |
|
|
|
642,338 |
|
|
|
1,586,866 |
|
|
|
1,146,907 |
|
|
Total
revenues, net
|
|
|
6,206,214 |
|
|
|
6,342,560 |
|
|
|
11,460,722 |
|
|
|
13,121,250 |
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty,
printing, delivery and communications costs
|
|
|
1,368,693 |
|
|
|
1,849,184 |
|
|
|
2,536,339 |
|
|
|
2,974,367 |
|
|
Salaries
and benefits
|
|
|
3,672,440 |
|
|
|
4,399,465 |
|
|
|
8,804,417 |
|
|
|
8,670,343 |
|
|
Selling,
general & administrative, excluding salaries and
benefits
|
|
|
2,651,105 |
|
|
|
2,098,519 |
|
|
|
4,227,172 |
|
|
|
3,648,214 |
|
|
Amortization
of program inventory
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
2,142,145 |
|
|
Depreciation
& amortization
|
|
|
342,794 |
|
|
|
250,774 |
|
|
|
594,211 |
|
|
|
500,645 |
|
|
Total
cost and expenses
|
|
|
8,035,032 |
|
|
|
8,597,942 |
|
|
|
16,162,139 |
|
|
|
17,935,714 |
|
|
Loss
from operations
|
|
|
(1,828,818 |
) |
|
|
(2,255,382 |
) |
|
|
(4,701,417 |
) |
|
|
(4,814,464 |
) |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
net
|
|
|
(456,955 |
) |
|
|
(619,193 |
) |
|
|
(921,686 |
) |
|
|
(4,819,692 |
) |
|
Interest,
net - related party
|
|
|
(285,495 |
) |
|
|
- |
|
|
|
(566,675 |
) |
|
|
- |
|
|
Loss
in non-consolidated affiliate
|
|
|
(93,342 |
) |
|
|
- |
|
|
|
(128,028 |
) |
|
|
- |
|
|
Loss
on refinancing of debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,633,840 |
) |
|
Other
income
|
|
|
- |
|
|
|
49,774 |
|
|
|
55,836 |
|
|
|
106,659 |
|
|
Total
other income (expense)
|
|
|
(835,792 |
) |
|
|
(569,419 |
) |
|
|
(1,560,553 |
) |
|
|
(6,346,873 |
) |
|
Loss
before income taxes
|
|
|
(2,664,610 |
) |
|
|
(2,824,801 |
) |
|
|
(6,261,970 |
) |
|
|
(11,161,337 |
) |
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net
loss
|
|
$ |
(2,664,610 |
) |
|
$ |
(2,824,801 |
) |
|
$ |
(6,261,970 |
) |
|
$ |
(11,161,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and dilutive
|
|
$ |
(0.23 |
) |
|
$ |
(1.30 |
) |
|
$ |
(0.61 |
) |
|
$ |
(5.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
11,418,902 |
|
|
|
2,170,776 |
|
|
|
10,312,734 |
|
|
|
2,159,076 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
TWL Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
| |
|
Six
months ended
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6,261,970 |
) |
|
$ |
(11,161,337 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
on property and equipment
|
|
|
594,211 |
|
|
|
500,645 |
|
|
Foreign
currency translation adjustments
|
|
|
(4,112 |
) |
|
|
(7,885 |
) |
|
Amortization
of program inventory
|
|
|
- |
|
|
|
2,142,145 |
|
|
Common
stock issued for services
|
|
|
1,626,667 |
|
|
|
126,000 |
|
|
Employee
stock-based compensation
|
|
|
814,399 |
|
|
|
353,036 |
|
|
Amortization
of debt origination costs
|
|
|
210,889 |
|
|
|
- |
|
|
Amortization
of debt discount
|
|
|
276,744 |
|
|
|
3,456,720 |
|
|
Loss
on refinancing of debt
|
|
|
- |
|
|
|
1,633,840 |
|
|
Gain
on settlement of accounts payable
|
|
|
(55,337 |
) |
|
|
(106,659 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
(135,342 |
) |
|
|
(672,262 |
) |
|
(Increase)
decrease in inventory
|
|
|
17,097 |
|
|
|
29,750 |
|
|
(Increase)
decrease in prepaid expenses and other
|
|
|
(386,867 |
) |
|
|
11,873 |
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
(105,055 |
) |
|
|
766,017 |
|
|
Increase
(decrease) in deferred revenue
|
|
|
473,650 |
|
|
|
471,535 |
|
|
Increase
(decrease) in interest payable
|
|
|
575,424 |
|
|
|
485,977 |
|
|
Net
cash used in operating activities
|
|
|
(2,359,602 |
) |
|
|
(1,970,605 |
) |
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(74,828 |
) |
|
|
(21,666 |
) |
|
Net
cash used in investing activities
|
|
|
(74,828 |
) |
|
|
(21,666 |
) |
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
Capital
lease payments
|
|
|
(632,949 |
) |
|
|
(588,813 |
) |
|
Net
borrowing on line of credit
|
|
|
73,467 |
|
|
|
1,600,000 |
|
|
Borrowings
under notes payable
|
|
|
521,426 |
|
|
|
2,500,000 |
|
|
Payments
on notes payable
|
|
|
(265,105 |
) |
|
|
(94,360 |
) |
|
Sale
of common stock
|
|
|
1,790,000 |
|
|
|
- |
|
|
Net
cash provided by financing activities
|
|
|
1,486,839 |
|
|
|
3,416,827 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(947,591 |
) |
|
|
1,424,556 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,348,397 |
|
|
|
181,339 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
400,806 |
|
|
$ |
1,605,895 |
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Total
cash paid during the period for interest
|
|
$ |
595,365 |
|
|
$ |
403,910 |
|
|
Common
stock issued for conversion of notes payable
|
|
|
280,000 |
|
|
|
- |
|
|
Beneficial
conversion on convertible debentures
|
|
|
292,302 |
|
|
|
3,725,166 |
|
|
Preferred
stock issued for debt origination costs
|
|
|
- |
|
|
|
833,333 |
|
|
Deemed
dividend on preferred stock
|
|
|
- |
|
|
|
250,000 |
|
|
Series
A preferred stock issued in connection with debt
transactions
|
|
|
- |
|
|
|
3,210,000 |
|
|
Warrants
surrendered in debt transaction
|
|
|
- |
|
|
|
(326,160 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
TWL Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Note
1 – Business and Basis of Presentation
TWL
Corporation (“TWL” or the “Company”) is creating a global learning company by
acquiring operating subsidiaries that specialize in educational and training
content, delivery, and services for particular industries or that target a
particular segment of the workforce. The Company believes that there
are product and service synergies between and among our various subsidiaries
that position us to create a global learning company that can provide integrated
learning services to corporations, organizations, educational institutions, and
individual learners, using a variety of delivery technologies, platforms and
methods to meet the growing need for global learning solutions. The
Company believes that it will be one of the first companies to be able to serve
major multinational employers at multiple levels of their organizations and
assist these customers to meet the challenges of a major turnover in the world’s
workforce over the coming decade. Factors such as demographics, technology, and
globalization will require enterprises, organizations and governments around the
world to invest in human capital to remain competitive.
We
operate through our primary operating subsidiary, TWL Knowledge Group, Inc.,
formerly Trinity Workplace Learning Corporation, located in our 205,000 square
foot digital multimedia production center in Carrollton, Texas, in the greater
Dallas metropolitan area. At this global learning center we create,
distribute, and archive rich media for workplace learning and certification for
approximately 2,000 corporate, institutional, and government customers in
healthcare, industrial services, and public safety including homeland security,
first responders, and federal agencies. We distribute content to our
customers through a variety of learning media including satellite, broadband,
e-learning, CD-ROM, and DVD. Our proprietary brands include the Law
Enforcement Training Network, HomelandOne, the Fire and Emergency Training
Network, and others. In our healthcare division, we participate in 17
distinct accreditations for medical-related continuing professional education
and certification. While our strategic focus is to grow our assets
and operations in North America, we continue to maintain ownership positions in
small operating subsidiaries in Australia.
These
financial statements include the accounts of TWL and its consolidated
subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.
The
accompanying unaudited interim consolidated financial statements and related
notes have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. However, in the
opinion of management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments that are necessary for a fair presentation of
the financial position, results of operations, and cash flows for the interim
periods presented. This includes normal and recurring adjustments.
The
results of operations for the three and six months ended December 31, 2007 are
not necessarily indicative of the results to be expected for the full
year. These unaudited interim consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes thereto included in the Company’s Annual Report on Form 10-KSB for the
year ended June 30, 2007.
Net
Loss per Share
Basic net
loss per share amounts are computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted net loss per share amounts are computed by
dividing net loss available to common stockholders by the weighted average
number of common shares and common stock equivalents outstanding during the
period. Diluted per share amounts assume the conversion, exercise, or
issuance of all potential common stock instruments unless the effect is
anti-dilutive, thereby reducing the loss per common share. Our common
stock equivalents include all common stock issuable upon conversion of preferred
stock and notes payable and the exercise of outstanding options and
warrants. As the Company incurred losses in all periods presented,
the inclusion of those potential common shares in the calculation of diluted
loss per share would have an anti-dilutive effect. Therefore, basic and
diluted per share amounts are the same in all periods presented. The
aggregate number of common stock equivalents excluded from the diluted net loss
per share calculation was 15,812,500 and 13,104,167 for the periods ended
December 31, 2007 and 2006, respectively.
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Use
of Estimates
The
preparation of the Company’s 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 balance sheet date and the reported amounts of revenues and costs during the
reporting periods. Actual results could differ from those
estimates. On an ongoing basis, the Company reviews its estimates
based on information that is currently available. Changes in facts
and circumstances may cause the Company to revise its
estimates. Significant estimates include revenue recognition,
valuation and allocation of the purchase consideration of the assets and
liabilities and assets acquired in business combinations and equity investments
in associated companies, our determination of fair value of common stock issued
in business combinations and equity investments in associated companies, and the
annual valuation and review for impairment of assets acquired and of long-lived
assets. Actual results could differ from estimates under different
assumptions and conditions, and such results may affect income, financial
position or cash flows.
Stock-Based
Compensation
Effective
July 1, 2005, the Company adopted the fair value based method of accounting for
stock-based employee compensation in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based Payment, which
replaces SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123R requires stock-based compensation
expense to be recognized for all share-based payments. Stock-based compensation
expense for the three and six month periods ended December 31, 2007 and 2006 is
as follows:
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Vested
shares
|
|
$ |
61,206 |
|
|
$ |
118,109 |
|
|
$ |
209,336 |
|
|
$ |
305,012 |
|
|
Unvested
shares
|
|
|
311,091 |
|
|
|
28,114 |
|
|
|
605,063 |
|
|
|
48,024 |
|
|
Total
|
|
$ |
372,297 |
|
|
$ |
146,223 |
|
|
$ |
814,399 |
|
|
$ |
353,036 |
|
The
estimated fair value of options and warrants is amortized to expense using the
straight-line method over the vesting period. The expense for options and
warrants was calculated using the Black-Scholes option pricing model with the
following assumptions:
|
|
|
Six
months ended
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free
interest rate
|
|
|
4.05
- 4.68 |
% |
|
|
3.53 |
% |
|
Dividend
yield
|
|
Nil
|
|
|
Nil
|
|
|
Volatility
|
|
|
157
- 193 |
% |
|
|
120 |
% |
|
Expected
life
|
|
2 -
7 years
|
|
|
3
yrs
|
|
The
Company accounts for the issuance of equity instruments to acquire goods and/or
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
determinable in accordance with the provisions of EITF Issue No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, and EITF Issue No. 00-18, Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees.
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Note
2 – Going Concern Uncertainty
During
the six month period ended December 31, 2007, the Company incurred a net loss of
$6,261,970 and experienced a cash flow deficit from its operations in the amount
of $2,359,602. As of December 31, 2007, the Company had a cash balance of
$400,806 and a negative working capital balance of $17,937,629. The
negative working capital is attributable to extending payments to vendors,
increased accrued expenses, and increased short-term borrowings. It is
anticipated that such losses and cash flow deficits will continue in the near
future. During the six months ended December 31, 2007, the Company received
gross cash proceeds from the sale of its common stock of $1,790,000 and issued
notes payable of $500,000. These proceeds will be used for general working
capital purposes.
Currently,
we do not have an established source of revenues sufficient to cover our
operating costs to allow us to continue as a going concern. We cannot
be certain that our existing sources of cash will be adequate to meet our
liquidity requirements. Based on our cash balance at February 1,
2008, we will not be able to sustain operations for more than one month without
additional sources of funding. To meet our present and future
liquidity requirements, we will continue to seek additional funding through
private placements, conversion of outstanding loans and payables into common
stock, and collections on accounts receivable. There can be no assurance that we
will be successful in obtaining more debt and/or equity financing in the future
or that our results of operations will materially improve in either the
short-term or the long-term. If we fail to obtain such financing and improve our
results of operations, we will be unable to meet our obligations as they become
due. This raises substantial doubt about our ability to continue as a
going concern.
Our
financial statements have been prepared using accounting principles generally
accepted in the United States of America generally applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets or classification of liabilities that might be
necessary should we be unable to continue as a going concern.
Note
3 – Common Stock Split
On
December 12, 2007, the Company effected a one-for-twenty reverse stock split to
common shareholders. All common share and per share information referenced
within this filing has been retroactively adjusted to reflect the reverse stock
split.
Note
4 – Notes Payable
Borrowings
under notes payable arrangements, net of unamortized discount, consisted of the
following:
|
|
|
December 31, 2007
|
|
|
Notes
payable:
|
|
|
|
|
$2,500,000
of senior secured term notes due August 31, 2009, bearing interest at
prime plus 3% but never less than 9% (11.25% interest rate as of December
31, 2007) (a)
|
|
$ |
1,508,518 |
|
|
$400,000
of 9% unsecured convertible notes due January 7, 2006, convertible into
common stock at $9 per share, past due
|
|
|
400,000 |
|
|
Other
notes payable
|
|
|
22,441 |
|
|
Total
notes payable
|
|
|
1,930,959 |
|
|
Less
current maturities
|
|
|
883,552 |
|
|
Long-term
notes payable
|
|
$ |
1,047,407 |
|
|
|
(a)
|
In
August 2006, the Company entered into agreements with Laurus Master Fund,
Ltd., ("Laurus"), one of which provided for a secured three-year term note
with a face amount of $2,500,000, and matures on August 31,
2009. The note carries an interest rate of prime plus three
percent (but never less than nine percent), and may be prepaid at any time
subject to certain redemption premiums, plus accrued
interest. The note is secured by a blanket lien on all of the
Company's assets and the assets of the Company's
subsidiaries.
|
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Note
5 – Notes Payable - Related Parties
Borrowings
under notes payable arrangements with related parties, net of unamortized
discount, consisted of the following:
|
|
|
December 31, 2007
|
|
|
Notes
payable - related parties:
|
|
|
|
|
$4,500,000
of 15% senior secured convertible notes due March 31, 2010 to TIGP,
convertible into common stock at $0.60 per share (a)
|
|
$ |
4,500,000 |
|
|
$1,125,000
of 15% senior secured convertible notes due March 31, 2011 to TIGP,
convertible into common stock at $0.60 per share (b)
|
|
|
296,599 |
|
|
$500,000
of 15% senior secured convertible notes due March 31, 2011 to TIGP,
convertible into common stock at $0.60 per share (c)
|
|
|
76,376 |
|
|
6%
unsecured notes due December 31, 2004, past due
|
|
|
22,809 |
|
|
8%
unsecured notes payable on demand
|
|
|
109,972 |
|
|
Non-interest
bearing unsecured notes payable on demand
|
|
|
76,476 |
|
|
$100,000
of non-interest bearing unsecured notes due December 31, 2006, past
due
|
|
|
25,000 |
|
|
$20,000
of non-interest bearing unsecured convertible notes due December 31, 2005,
convertible into common stock at $0.20 per share, past due
|
|
|
20,000 |
|
|
$20,000
of non-interest bearing unsecured convertible notes due December 31, 2006,
convertible into common stock at $0.20 per share, past due
|
|
|
20,000 |
|
|
Total
notes payable - related parties
|
|
|
5,147,232 |
|
|
Less
current maturities
|
|
|
2,209,112 |
|
|
Long-term
notes payable - related parties
|
|
$ |
2,938,120 |
|
|
|
(a)
|
In
March 2007, Trinity Investments GP (“TIGP”) acquired debt with a face
value of $4,500,000 previously issued to Palisades Master Fund,
Ltd. The notes mature March 31, 2010, bear interest at the rate
of 15% per annum, and are convertible into common stock at $0.60 per
share. The debt agreement includes an anti-dilution clause such
that incremental shares may be issuable in future financing
transactions. The notes are secured by all of the Company’s
assets (in junior position to Laurus), as well as the assets of its
wholly-owned subsidiary, TWL Knowledge Group, Inc. In April
2007, the board of directors of the Company appointed Laird Q. Cagan (Mr.
Cagan) as a director of the Company. Mr. Cagan is the general partner of
TIGP, and he is the cousin of Dennis J. Cagan, the Company’s Chief
Executive Officer, President, and member of the board of
directors.
|
|
|
(b)
|
Also
in March 2007, the Company entered into a debt financing transaction with
TIGP for the issuance of up to an aggregate of $4,000,000 in face amount
of convertible debentures, of which the Company ultimately received gross
proceeds of $1,125,000 pursuant to this agreement. The notes
mature March 31, 2011, bear interest at the rate of 15% per annum, and are
convertible into common stock at $0.60 per share. The notes are
secured by all of the Company’s assets (in junior position to Laurus), as
well as the assets of its wholly-owned subsidiary, TWL Knowledge Group,
Inc.
|
|
|
(c)
|
In
November 2007, the Company entered into a debt financing transaction with
TIGP, in which the Company issued $500,000 of convertible debentures. The
notes mature March 31, 2011, bear interest at the rate of 15% per annum,
and are convertible into common stock at $0.60 per share. The convertible
debentures were issued with four year warrants to purchase 333,333 shares
of common stock at $0.06 per share. The notes are secured by all of the
Company’s assets (in junior position to Laurus), as well as the assets of
its wholly-owned subsidiary, TWL Knowledge Group, Inc. The Company
recorded the fair value of the warrants as a debt discount of $130,636 and
is amortizing this discount to interest over the life of the debt.
Additionally, a beneficial conversion feature of $297,302 was recorded and
is being amortized to interest over the life of the
debt.
|
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Note
6 – Line of Credit
In August
2006, the Company entered into agreements with Laurus, one of which provided for
a secured three-year revolving note (line of credit) with a maximum amount of
$5,000,000, subject to borrowing base computations, and matures on August 1,
2009. The line carries an interest rate of prime plus two percent
(but never less than nine percent), and may be prepaid at any time without
penalty. The note is secured by a blanket lien on all of the
Company's assets and the assets of the Company's subsidiaries.
As of
December 31, 2007, the balance on the line of credit totaled $1,133,582, and
carried an interest rate of 9.25%.
Note
7 – Stock Option Plan
As of
December 31, 2007, an aggregate of 100,000,000 shares of common stock were
authorized for issuance pursuant to the Company’s 2002 Stock Plan (the “Plan”).
The Plan allowed for a maximum aggregate number of shares that may be optioned
and sold under the plan of (a) 150,000 shares, plus (b) an annual 25,000
increase to be added on the last day of each fiscal year beginning in 2003
unless a lesser amount is determined by the board of directors. The Plan became
effective with its adoption and remains in effect for ten years unless
terminated earlier. On December 30, 2003, the board of directors amended the
Plan to allow for a maximum aggregate number of shares that may be optioned and
sold under the plan of (a) 300,000 shares, plus (b) an annual 50,000 increase to
be added on the last day of each fiscal year beginning in 2004 unless a lesser
amount is determined by the board of directors. Options granted under the plan
vest pro rata over a 48 month period and are typically issued with a four to
seven year term. In some cases, selected officers and directors have
been given accelerated vesting schedules.
The
Company issued stock options to employees, officers and directors, and the
following schedule summarizes the activity for the six months ended December 31,
2007:
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding
at June 30, 2007
|
|
|
3,546,507 |
|
|
$ |
1.80 |
|
|
Granted
|
|
|
1,311,532 |
|
|
|
1.20 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Canceled
/ forfeited
|
|
|
(128,389 |
) |
|
|
2.00 |
|
|
Outstanding
at December 31, 2007
|
|
|
4,729,650 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,521,866 |
|
|
$ |
2.20 |
|
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
The following schedule summarizes
stock option information as of December 31, 2007:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Range of Exercise
Price
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Average
Remaining
Contractual
Life (Yrs)
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
1.00
- 1.80 |
|
|
|
4,430,451 |
|
|
$ |
1.40 |
|
|
|
7 |
|
|
|
1,243,330 |
|
|
$ |
1.20 |
|
| |
3.20
- 5.40 |
|
|
|
185,749 |
|
|
|
4.20 |
|
|
|
3 |
|
|
|
165,086 |
|
|
|
4.20 |
|
| |
10.00
- 10.00 |
|
|
|
108,450 |
|
|
|
10.00 |
|
|
|
2 |
|
|
|
108,450 |
|
|
|
10.00 |
|
| |
17.00
- 17.00 |
|
|
|
5,000 |
|
|
|
17.00 |
|
|
|
2 |
|
|
|
5,000 |
|
|
|
17.00 |
|
| |
|
|
|
|
4,729,650 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
1,521,866 |
|
|
$ |
2.20 |
|
Note
8 – Warrants
The
Company has issued warrants for purchase of its common stock to investors and
service providers in connection with its financing activities. The activity for
the six months ended December 31, 2007, and the principal terms of the warrants
are summarized below:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
at June 30, 2007
|
|
|
2,250,884 |
|
|
$ |
5.80 |
|
|
Granted
|
|
|
333,333 |
|
|
|
0.60 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Canceled
|
|
|
(1,324,830 |
) |
|
|
2.51 |
|
|
Outstanding
at December 31, 2007
|
|
|
1,259,387 |
|
|
$ |
8.09 |
|
The
following schedule summarizes warrant information as of December 31,
2007:
|
Range of Exercise Price
|
|
|
Number of Warrants
Outstanding
|
|
|
Weighted Average Exercise
Price
|
|
Exercisable Through
|
| $ |
0.60
- 2.80 |
|
|
|
333,333 |
|
|
$ |
0.60 |
|
March
2008 - November 2012
|
| |
3.00
- 3.80 |
|
|
|
12,500 |
|
|
|
3.00 |
|
March
2008
|
| |
4.00
- 4.80 |
|
|
|
46,875 |
|
|
|
4.00 |
|
March
2008 - March 2010
|
| |
5.00
- 5.80 |
|
|
|
462,923 |
|
|
|
5.20 |
|
March
2008 - March 2010
|
| |
6.00
- 6.80 |
|
|
|
30,091 |
|
|
|
6.20 |
|
March
2008 - July 2010
|
| |
16.00
- 20.00 |
|
|
|
373,665 |
|
|
|
19.20 |
|
March
2008 - October 2010
|
| |
|
|
|
|
1,259,387 |
|
|
$ |
8.09 |
|
|
Note
9 – Common Stock and Preferred Stock
During
November 2007, the Company executed a migratory merger effectively relocating
the Company’s state of incorporation from Utah to Nevada. The accompanying
financial statements have been retroactively restated to reflect the merger
including the change from no par value common stock to $0.0001 par value common
stock.
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Common Stock:
For the
three months ended December 31, 2007, the Company sold 833,334 shares of common
stock at a price of $0.60 per share and received gross proceeds of
$500,000.
For the
six months ended December 31, 2007, the Company sold 2,983,334 shares of common
stock at a price of $0.60 per share and received gross proceeds of
$1,790,000.
In
conjunction with the resignation of Doug Cole, former Executive Vice President,
on September 5, 2007, the Company issued 166,667 shares of common stock, at a
fair value of $1.00 per share, for consideration of $166,667 in lieu
of compensation that would have otherwise been owed to Mr. Cole under a
three-year employment agreement entered on February 1, 2006.
During
the six months ended December 31, 2007, a note holder converted $280,000 into
466,667 common shares. In addition, the Company issued 150,000 shares
of common stock, with a fair value of $210,000, and 1,250,000 shares of common
stock, with a fair value of $1,250,000, both in exchange for professional
services.
Preferred
Stock:
During
April, 2007, the Company executed an agreement to exchange 2,800,000 Series B
preferred shares for the return of 2,800,000 Series A preferred shares. The
Company is in the process of issuing the Series B shares. The Series A preferred
shares bear 7% per annum cumulative dividends and are convertible into common
shares at $1.60 per share. The Series B preferred shares bear 7%
cumulative dividends and are convertible into common shares at $0.60 per
share. The Series A and Series B shares are
non-voting. Dividends accrued but not paid on the Series A and B
shares totaled $417,667 as of December 31, 2007.
Note
10 – Comprehensive Loss
The
components of comprehensive loss are as follows:
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders
|
|
$ |
(2,664,610 |
) |
|
$ |
(2,824,801 |
) |
|
$ |
(6,261,970 |
) |
|
$ |
(11,161,337 |
) |
|
Foreign
currency translation gain (loss)
|
|
|
2,267 |
|
|
|
(5,609 |
) |
|
|
(4,112 |
) |
|
|
(7,885 |
) |
|
Comprehensive
loss
|
|
$ |
(2,662,343 |
) |
|
$ |
(2,830,410 |
) |
|
$ |
(6,266,082 |
) |
|
$ |
(11,169,222 |
) |
Note
11 – Severance
During
the three month period ended December 31, 2007, the Company recorded severance
and related benefit charges in the amount of $142,517 in connection with its
previously announced reduction in staff. This is a component of the Company’s
comprehensive restructuring effort as part of its overall profitability recovery
plan. The severance charge included a cash component, two weeks of salary which
was paid during October, and a common stock component, which is expected to be
issued in the third quarter of fiscal 2008. These charges were
reported as “salaries and benefits” in the accompanying statements of
operations. There is no other severance accrual recorded as of December 31, 2007
as no additional costs are expected to be incurred as a result of the reduction
in staff.
Note
12 – Commitments and Contingencies
In the
ordinary course of business, TWL Corporation or its subsidiaries may be named a
party to various claims and/or legal proceedings. Neither TWL
Corporation nor its subsidiaries have been named in and are not aware of any
matters which will result, either individually or in the aggregate, in a
material adverse effect upon their financial condition or results of
operations.
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
Note
13 – Recent Accounting Pronouncements
In July
2007, we adopted the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for
Uncertainty in Income
Taxes – an Interpretation of FASB Statement
No. 109 (“FIN 48”). This interpretation clarifies the accounting for
uncertainty in income taxes recognized in a Company’s financial statements. FIN
48 requires companies to determine whether it is “more likely than not” that a
tax provision will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial
statements. It also provides guidance on the recognition, measurement and
classification of income tax uncertainties, along with any related interest and
penalties. We did not recognize any adjustments to our financial statements as a
result of our implementation of FIN 48.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 does not impose fair value measurements on items not
already accounted for at fair value; rather it applies, with certain exceptions,
to other accounting pronouncements that either require or permit fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company is currently evaluating the impact of adopting this
pronouncement on its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value and establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. SFAS 159 is effective for fiscal
years beginning after December 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on its consolidated financial
statements.
Note
14 – Subsequent Events
On
January 28, 2008, the Company entered into a debt financing transaction with
TIGP, a related party, in which the Company issued $1,000,000 of convertible
debentures. The debentures mature March 31, 2011, bear interest at the rate of
15% per annum, and are convertible into common stock at $0.60 per
share. The notes are secured by all of the Company’s assets (in
junior position to Laurus), as well as the assets of its wholly-owned
subsidiary, TWL Knowledge Group, Inc.
Note
15 – Restated Quarterly Financial Statements
The
executive officers of the Company, after completing discussions with KBA Group
LLP, its independent registered public accountants, concluded that the Company’s
previously issued financial statements issued for the three months ended
September 30, 2007 should no longer be relied upon as two transactions involving
the issuance of common shares for services and compensation were not
recorded.
During
July 2007, the Company issued 150,000 shares of common stock, at $1.40 per
share, in exchange for professional services. The $210,000 fair value of the
common stock issued should have been included as general and administrative
expense within the net loss reported on Form 10-QSB for the three months ended
September 30, 2007.
During
September 2007, the Company issued 166,667 shares of common stock, at a fair
value of $1.00 per share, for consideration of $166,667 in lieu
of compensation that would have otherwise been owed to Doug Cole, former
Executive Vice President, under a three-year employment agreement entered on
February 1, 2006. The fair value of the common stock issued should have been
included as salaries and benefits expense within the net loss reported on Form
10-QSB for the three months ended September 30, 2007.
TWL
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
(unaudited)
The
Company has determined that it will not issue an amended Form 10-QSB for the
three months ended September 30, 2007. Instead, the restated net loss and net
loss per share amounts are presented below:
|
|
|
As of September 30, 2007
|
|
|
|
|
As Previously
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,220,693 |
) |
|
$ |
(3,597,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and dilutive
|
|
|
(0.36 |
) |
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
9,026,509 |
|
|
|
9,227,070 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our
fiscal year ends June 30. The following discussion analyzes the
historical financial condition and results of operations of the Company and
should be read in conjunction with our historical financial statements and notes
thereto, and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
presented in our Annual Report on Form 10-KSB for the fiscal year ended June 30,
2007.
Forward-Looking
Statements
This
report contains “forward-looking statements” intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1995. Statements included in this quarterly report that are not
historical facts (including any statements concerning plans and objectives of
management for future operations or economic performance, or assumptions or
forecasts related thereto), including, without limitation, the information set
forth in Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
are forward-looking statements. These statements can be identified by the use of
forward-looking terminology including “may,” “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “continue,” “project,” “plan,” or other similar words.
These statements discuss future expectations, contain projections of results of
operations or of financial condition, or state other “forward-looking”
information. We and our representatives may from time to time make other oral or
written statements that are also forward-looking statements.
Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct.
Important factors that could cause our actual results to differ materially from
the expectations reflected in these forward-looking statements include, among
other things, those set forth in the Risk Factors section of the Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2007, and those set forth from
time to time in our filings with the Securities and Exchange Commission (“SEC”),
which are available through the Press Releases link at www.twlk.com and through
the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at
http://www.sec.gov.
All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this report.
Overview
We are a
publicly held global learning company with geographic locations in the United
States and Australia. We specialize in providing technology-enabled learning and
certification solutions for corporations, organizations, and individuals in
multiple global industries. Historically, we have focused our marketing on
medium to large businesses and organizations that wish to provide workplace
training and certification to their employees in a cost effective and efficient
manner.
Revenues
TWL
derives its revenues primarily from service-related contracts, including
operations and maintenance services and a variety of technical assistance
services. The Company’s revenue consists of four main categories –
Subscription, Single Event, Production, and Other. Subscription revenue is
generated from contracts with customers who receive products or services for a
specified time period. Subscription products include satellite
subscriptions, monthly videotape subscriptions, monthly CD-ROM subscriptions,
Internet subscriptions, and training-on-demand subscriptions (tape library).
Single event revenue involves the sale of products (videotapes, CD-ROM’s, etc.)
to customers on a non-subscription basis. Production revenue is generated from
live events or specialized production work performed for a customer, including
use of studios, taping and editing services. Other revenue is derived primarily
from service income which includes rents received on the sublease of unused
space within our facility as well as charges to our customers for
subcontractors, tape duplication, and the use of our transponder.
Costs
and expenses
Costs and
expenses consist of costs specifically associated with client programs and other
operational expenses. The main categories of costs and expenses
follow. Royalty, printing, delivery and communications costs include
production costs, transponder lease and product development
costs. Salaries and benefits are generally the largest component of
expenses, and include compensation, benefits and payroll taxes of the TWL
employee base. Selling, general and administrative, excluding
salaries and benefits, costs are comprised of such expenses as professional
fees, utilities, maintenance and repairs, insurance, personal and real property
taxes, travel and lodging, marketing and general administrative costs.
Depreciation expense is generally computed by applying the straight-line method
over the estimated useful lives of assets, which consists of three to seven
years for furniture and fixtures. Amortization expense for leasehold
improvements and assets held under capital leases is computed using the
straight-line method over the remaining lease term or the estimated useful life
of the asset, whichever is shorter, ranging from three to seven
years.
Other
(income) expense
Other
(income) expense consists of the sum of interest expense (including related
party), loss in non-consolidated affiliate, loss on refinancing of debt, and
other income. Interest expense includes interest expense and
amortization of debt issuance costs associated with our indebtedness under notes
payable and credit line obligations. Loss in non-consolidated affiliate
relates to a 50%-owned joint venture in which we have significant influence and
therefore record our proportionate share of equity income/losses. We
entered into the joint venture agreement in November, 2006, with operations
beginning in February, 2007. Loss on refinancing of debt relates to the fiscal
2007 write-off of debt discount on the Palisades convertible debt instrument in
connection with the Laurus financing offset by gains recognized on the
forfeiture of warrants.
Results
of Operations
The
following table summarizes the financial results of the Company for the three
and six months ended December 31, 2007 and 2006:
|
|
|
Three months ended
|
|
|
|
|
|
Six months ended
|
|
|
|
|
| |
|
December
31,
|
|
|
2007
- 2006
|
|
|
December
31,
|
|
|
2007
- 2006
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Percent
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$ |
6,206,214 |
|
|
$ |
6,342,560 |
|
|
$ |
(136,346 |
) |
|
|
-2 |
% |
|
$ |
11,460,722 |
|
|
$ |
13,121,250 |
|
|
$ |
(1,660,528 |
) |
|
|
-13 |
% |
|
Cost
and expenses
|
|
|
8,035,032 |
|
|
|
8,597,942 |
|
|
|
(562,910 |
) |
|
|
-7 |
% |
|
|
16,162,139 |
|
|
|
17,935,714 |
|
|
|
(1,773,575 |
) |
|
|
-10 |
% |
|
Other
income (expense)
|
|
|
(835,792 |
) |
|
|
(569,419 |
) |
|
|
(266,373 |
) |
|
|
47 |
% |
|
|
(1,560,553 |
) |
|
|
(6,346,873 |
) |
|
|
4,786,320 |
|
|
|
-75 |
% |
|
Net
loss
|
|
$ |
(2,664,610 |
) |
|
$ |
(2,824,801 |
) |
|
$ |
160,191 |
|
|
|
-6 |
% |
|
$ |
(6,261,970 |
) |
|
$ |
(11,161,337 |
) |
|
$ |
4,899,367 |
|
|
|
-44 |
% |
Three
Months Ended December 31, 2007 Compared to the Three Months Ended December 31,
2006
Revenues, net. Revenues, net
were $6,206,214 for the three months ended December 31, 2007 compared to
$6,342,560 for the three months ended December 31, 2006, a decrease of $136,346,
or 2%. Decreases in subscription, single event, and production revenue were
partially offset by an increase in other revenue.
Subscription-based
revenues decreased $123,341, or 5%, to $2,606,946 for the three months ended
December 31, 2007 compared to $2,730,287 for the three months ended December 31,
2006. This decrease was primarily the result of lower renewal rates for our
healthcare and government customers. The renewal rates did not decrease as
significantly as the decrease experienced in fiscal 2007 and first quarter
fiscal 2008 as we have instituted a proactive customer retention
program.
Single
event revenue decreased $217,222, or 10%, to $2,035,983 for the three months
ended December 31, 2007 compared to $2,253,205 for the three months ended
December 31, 2006. This decrease was primarily attributable to budgetary
constraints in late 2007 of several large repeat customers that resulted in
lower safety product sales when compared to the prior year. We believe that
these constraints will lessen during the remainder of fiscal 2008 resulting in
improved safety product revenue.
Production
revenue decreased $165,053, or 23%, to $551,677 for the three months ended
December 31, 2007 compared to $716,730 for the three months ended December 31,
2006. This decrease was attributable to lower studio rentals revenue due to
fewer third party inquiries and a decrease in the seasonal volume of studio
bookings for education and advertising programs.
Other
revenue increased $369,270, or 57%, to $1,011,608 for the three months ended
December 31, 2007 compared to $642,338 for the three months ended December 31,
2006. This increase was attributable to an agreement to sponsor a seminar for
one of our customers. Revenue from this event was approximately $343,000 during
the three month period ended December 31, 2007. There was no corresponding
transaction during the prior year.
Cost and expenses. Cost and
expenses were $8,035,032 for the three months ended December 31, 2007 compared
to $8,597,942 for the three months ended December 31, 2006, a decrease of
$562,910, or 7%. A primary driver behind these decreases was the comprehensive
restructuring effort the Company initiated in late September, 2007, as part of
its overall profitability recovery plan. The restructuring involved
more than a 21% reduction in staff effective September 28, 2007, along with
plans to further reduce expenses associated with capital expenditures, travel
and entertainment, sales commissions, outside contractors, employee benefits and
online advertising.
Royalty,
printing, delivery and communications costs decreased $480,491, or 26%, to
$1,368,693 for the three months ended December 31, 2007 compared to $1,849,184
for the three months ended December 31, 2006. This decrease was primarily
attributable to lower royalties paid, lower satellite broadcasting costs, and
lower delivery costs incurred as a result of the decrease in single event sales
and live broadcast events for the 2007 period.
Salaries
and benefits decreased $727,025, or 17%, to $3,672,440 for the three months
ended December 31, 2007 compared to $4,399,465 for the three months ended
December 31, 2006, due in large part to the reduction in work force that took
place in late September, 2007.
Selling,
general and administrative, excluding salaries and benefits, increased $552,586,
or 26%, to $2,651,105 for the three months ended December 31, 2007 compared
to $2,098,519 for the three months ended December 31, 2006. This increase was
primarily attributable to $1,250,000 in expense incurred during the 2007
period for consultants who provided the Company with investor
communications and public relations with existing shareholders, brokers,
dealers, and other investment professionals. In addition, the consultants
assisted the Company in raising capital and enhancing the market recognition of
the Company. This increase was partially offset by a decrease in overhead and
support costs related to the 2007 reduction in work force.
Other income
(expense). Net other expense increased $266,373, or
47%, to $835,792 for the three months ended December 31, 2007 compared to
$569,419 for the three months ended December 31, 2006. This increase was
primarily attributable to an increase in interest expense, net (including
related party) of $123,257, along with a loss in a non-consolidated affiliate of
$93,342. The increase in interest expense was primarily due to an increase in
amortization of debt discounts and loan origination costs that resulted from
modifications of debt terms and incremental financing transactions that occurred
subsequent to the second quarter of fiscal 2007 and, as such, these additional
expenses were absent from the comparable 2006 period. Likewise, the loss in
non-consolidated affiliate in the 2007 period related to the joint venture which
did not commence operations until February of 2007. As such, no gain or loss
from the non-consolidated affiliate was recognized in the comparable 2006
period.
Six
Months Ended December 31, 2007 Compared to the Six Months Ended December 31,
2006
Revenues, net. Revenues, net
were $11,460,722 for the six months ended December 31, 2007 compared to
$13,121,250 for the six months ended December 31, 2006, a decrease of
$1,660,528, or 13%. Decreases namely in subscription and single event revenue
were partially offset by an increase in other revenue.
Subscription
revenue decreased $459,899, or 8%, to $5,221,854 for the six months ended
December 31, 2007 compared to $5,681,753 for the six months ended December 31,
2006. This decrease was primarily the result of lower renewal rates for our
healthcare and government customers. The renewal rates did not decrease as
significantly as the decrease experienced in fiscal 2007 as we have instituted a
proactive customer retention program.
Single
event revenue decreased $1,569,198, or 30%, to $3,672,698 for the six months
ended December 31, 2007 compared to $5,241,896 for the six months ended December
31, 2006. This decrease was driven by two factors. First, several large one-time
sales occurred in 2006 which did not continue during 2007. Second, several of
our large repeat customers experienced budgetary constraints during late 2007,
and as a result, demand for safety products for these customers was lower during
the six months ended December 31, 2007 when compared to the same period in the
prior year.
Other
revenue increased $439,959, or 38%, to $1,586,866 for the six months ended
December 31, 2007 compared to $1,146,907 for the six months ended December 31,
2006. This increase was primarily attributable to an agreement to sponsor a
seminar for one of our customers. Revenue from this event was approximately
$343,000 during the 2007 period with no corresponding transaction during the
prior year.
Cost and expenses. Cost and expenses were $8,035,032 for the three
months ended December 31, 2007 compared to $8,597,942 for the three months ended
December 31, 2006, a decrease of $562,910, or 7%. A primary driver behind these
decreases was the comprehensive restructuring effort the Company initiated in
late September, 2007, as part of its overall profitability recovery
plan. The restructuring involved more than a 21% reduction in staff
effective September 28, 2007, along with plans to further reduce expenses
associated with capital expenditures, travel and entertainment, sales
commissions, outside contractors, employee benefits and online
advertising.
Royalty,
printing, delivery and communications costs decreased $438,028, or 15%, to
$2,536,339 for the six months ended December 31, 2007 compared to $2,974,367 for
the six months ended December 31, 2006. This decrease was partially the result
of lower royalties paid and lower delivery costs incurred as a result of the
decrease in single event sales for the second quarter of fiscal 2008 as
discussed above. These reductions were partially offset by higher broadcast
costs in fiscal 2008 related to a greater number of live broadcast
events.
Selling,
general and administrative, excluding salaries and benefits, increased $578,958,
or 16%, to $4,227,172 for the six months ended December 31, 2007 compared to
$3,648,214 for the six months ended December 31, 2006. This increase was
primarily attributable to $1,250,000 in expense incurred during the 2007 period
for consultants who provided the Company with investor communications and public
relations with existing shareholders, brokers, dealers, and other investment
professionals. In addition, the consultants assisted the Company in raising
capital and enhancing the market recognition of the Company. This increase was
partially offset by a decrease in overhead and support costs related to the 2007
reduction in work force.
Other income
(expense). Net other expense decreased $4,786,320, or
75%, to $1,560,553 for the six months ended December 31, 2007 compared to
$6,346,873 for the six months ended December 31, 2006, primarily the result of
several significant items which occurred in the 2006 period for which there was
no corresponding amount in the comparable 2007 period. The most significant
portion of this decrease was attributable to the recording of $3,725,166 of debt
discount on a note payable in the 2006 period. This discount represented a
beneficial conversion feature on the note payable which was expensed during the
2006 period as the note became due. The loss on refinancing of debt relates to
preferred stock issued to Palisades to subordinate its convertible debt security
interest to Laurus. The preferred stock was valued at $1,960,000 and was
recorded in July, 2006 as a debt discount and expensed immediately as the debt
was due currently. This was offset by a gain on the forfeiture of warrants by
Palisades of $326,160. Finally, the aforementioned decreases were partially
offset by the loss in non-consolidated affiliate during the 2007 period of
$128,028 which was not recognized during the comparable period during
2006.
Liquidity
and Capital Resources
The
Company’s working capital needs have historically been satisfied through
financing activities including private loans, third-party and related-party
debt, and raising capital through equity investments from accredited investors.
Historically, the primary uses of cash for TWL have been working capital
requirements and the repayment of debt obligations.
Since
inception, TWL has incurred significant net losses from operations, with an
accumulated deficit as of December 31, 2007 of $85,824,923. Currently, we do not
have an established source of revenues sufficient to cover our operating costs
to allow us to continue as a going concern. We cannot be certain that
our existing sources of cash will be adequate to meet our liquidity
requirements. To meet our present and future liquidity requirements,
we are continuing to seek additional funding through private placements,
conversion of outstanding loans and payables into common stock, collections on
accounts receivable, and through additional acquisitions that have sufficient
cash flow to fund subsidiary operations. There can be no assurance
that we will be successful in obtaining more debt and/or equity financing in the
future or that our results of operations will materially improve in either the
short- or the long-term. If we fail to obtain such financing and improve our
results of operations, we will be unable to meet our obligations as they become
due. This raises substantial doubt about our ability to continue as a
going concern.
As of
December 31, 2007, TWL had cash and cash equivalents of $400,806, and working
capital (measured by current assets less current liabilities) was a deficit of
$17,937,629.
During
the quarter, the Company raised $1,000,000 through the issuance of equity and
subordinated debt. The proceeds were used for general working capital purposes.
Due to the seasonality of our business, we will continue to require additional
third party investments to support its short term working capital
needs.
As a
professional services organization, we are not capital
intensive. Capital expenditures historically have been for
computer-aided instruction, accounting and project management information
systems, and general-purpose computer equipment to accommodate our growth, and
are currently being kept to a minimum.
Six
Months Ended December 31, 2007 Compared to the Six Months Ended December 31,
2006
Net cash
used in operating activities totaled $2,359,602 for the six months ended
December 31, 2007, an increase of $388,997 compared to the same period in
2006. This change was primarily driven by a $4,899,367 improvement in
net loss in 2007, which was more than offset by a reduction in 2007 in non-cash
operating charges of $4,634,381 and a $871,072 decrease in accounts payable and
accrued expenses in the 2007 period when compared to 2006, largely the
consequence of liabilities remaining stable in fiscal 2008 and by utilizing the
cash from the equity and debt issuances to pay vendor and other operating
obligations.
Net cash
used in investing activities totaled $74,828 for the six months ended
December 31, 2007, as compared to $21,666 used during the six months ended
December 31, 2006, which are attributable to capital expenditures in the normal
course of business.
Net cash provided by financing activities totaled
$1,486,839 for the six months ended December 31, 2007, a $1,929,988 decrease
compared to the same period in 2006. Net borrowings on the line of
credit decreased $1,526,533 during 2007 when compared to the same period in
2006, due to the availability of cash through another source as noted below. In
addition, borrowings under note payable arrangements decreased $1,978,574 to
$521,426 in 2007 from $2,500,000 in 2006. These decreases were
partially offset by the issuance of additional shares of common stock for cash
that resulted in gross proceeds of $1,790,000 in 2007. There were no
issuances of common stock in the comparable 2006 period.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that will have a current or future
effect on our financial condition, revenues, operating results, liquidity or
capital expenditures.
ITEM 3. CONTROLS AND PROCEDURES
(a) Management’s
Evaluation of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
us in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable assurance of achieving
the desired control objectives, and we necessarily are required to apply our
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures.
Our Chief
Executive Officer and Chief Financial Officer, together with other members of
management, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2007 and concluded that
the disclosure controls and procedures were effective.
(b) Changes
In Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2007 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
PART
II
OTHER
INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
Issuance
of Unregistered Securities
In July
2007, the Company issued 150,000 shares of common stock, at a price of $1.40 per
share, in exchange for professional services.
In
September 2007, the Company issued 166,667 shares of common stock, at a fair
value of $1.00 per share, to a former Executive Vice President of the Company in
lieu of compensation that would have otherwise been owed under an
employment agreement.
In
October 2007, the Company issued 1,250,000 shares of common stock, at a price of
$1.00 per share, in exchange for professional services.
In
October 2007, the Company issued 833,334 shares of common stock, at a price of
$0.60 per share, to investors in exchange for cash.
All of
the above offerings and sales were deemed to be exempt under rule 506 of
Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of TWL Corporation or executive
officers of TWL Corporation and transfer was restricted by TWL Corporation in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 5. OTHER INFORMATION
On
December 12, 2007, the Company effected a one-for-twenty reverse stock split to
common shareholders, along with a migratory merger that relocated the Company’s
state of incorporation from Utah to Nevada. Both the reverse stock
split and the migratory merger were approved on October 18, 2007 by the Board of
Directors and by written consent by the holders of a majority of TWL’s
outstanding common stock.
The
following exhibits are filed herewith:
|
|
Certification
of Periodic Financial Reports by Dennis J. Cagan, the Company’s Chief
Executive Officer, in satisfaction of Section 302 of the Sarbanes-Oxley
Act of 2002. *
|
|
|
Certification
of Periodic Financial Reports by Patrick R. Quinn, the Company’s Chief
Financial Officer, in satisfaction of Section 302 of the Sarbanes-Oxley
Act of 2002. *
|
|
|
Certification
of Periodic Financial Reports by Dennis J. Cagan, the Company’s Chief
Executive Officer, in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002 and 18 U.S.C. Section 1350.
*
|
|
|
Certification
of Periodic Financial Reports by Patrick R. Quinn, the Company’s Chief
Financial Officer, in satisfaction of Section 906 of the Sarbanes-Oxley
Act of 2002 and 18 U.S.C. Section 1350.
*
|
* Filed
Herewith
SIGNATURES
In
accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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|
TWL
CORPORATION
|
| |
|
|
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February
14, 2008
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By:
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/s/ Dennis J.
Cagan
|
|
|
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Dennis
J. Cagan
|
|
|
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Chief
Executive Officer
|
|
|
|
|
|
February
14, 2008
|
By:
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/s/
Patrick R. Quinn
|
|
|
|
Patrick
R. Quinn
|
|
|
|
Chief
Financial Officer
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23