U.S. 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, 2006
------------------
|_| 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
-----------------
Formerly Trinity Learning Corporation
(Exact name of small business issuer as specified in its charter)
Utah 73-0981865
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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
sections 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of January 23, 2007, 43,415,513 shares of the issuer's Common Stock and
4,300,000 shares of the issuer's Preferred Stock , no par value per share,
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, 2006, 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 AND RISK FACTORS 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.
2 of 25
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at December 31, 2006 . . . . . .4
Consolidated Statements of Operations and
Comprehensive Losses for the Six Months Ended
December 31, 2006 and 2005. . . . . . . . . . . . . . . . .5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) and Comprehensive Income (Loss)
For the Period July 1, 2005 through December 1, 2006. . . .6
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2006 and 2005 . . . . . . . .8
Notes To Consolidated Financial Statements. . . . . . . . .9
ITEM 2 Management's Discussion and Analysis or
Plan of Operation . . . . . . . . . . . . . . . . . . . . 16
ITEM 3 Controls and Procedures . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 1 Legal proceedings . . . . . . . . . . . . . . . . . . . . 21
ITEM 2 Unregistered Sales of Equity Securities and
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3 Defaults Upon Senior Securities . . . . . . . . . . . . . 22
ITEM 4 Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . . . . . 22
ITEM 5 Other Information . . . . . . . . . . . . . . . . . . . . 22
ITEM 6 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 22
3 of 25
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Balance Sheet
December 31
2006
-------------
(Unaudited)
Assets
Current Assets
Cash and Cash Equivalents $ 1,605,895
Accounts Receivable, net 3,352,817
Inventory, net 890,308
Prepaid Expenses and other Current Assets 179,898
-------------
Total Current Assets 6,028,918
Property and Equipment, net 4,735,832
Program Inventory, net 395,672
Other Assets 71,590
-------------
Total Assets $ 11,232,012
=============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts Payable $ 4,345,085
Accrued Expenses 8,332,982
Interest Payable 654,727
Deferred Revenue 3,980,516
Capital Lease Current 1,243,430
Line of Credit 1,600,000
Notes Payable Current 511,038
Notes Payable Related Parties 525,649
-------------
Total Current Liabilities 21,193,427
-------------
Long Term Liabilities
Obligations under Capital Leases 11,410,678
Convertible Notes Payable 4,500,000
Note Payable 2,500,000
Other Long-term Liabilities 62,750
-------------
Total Long-term Liabilities 18,473,428
-------------
Total Liabilities 39,666,855
Contingently Redeemable Equity 800,000
-------------
Stockholders' Equity (Deficit)
Preferred Stock, 10,000,000 Shares Authorized
at No Par Value, 4,300,000 Shares Issued and
Outstanding 3,460,000
Common Stock, 750,000,000 Shares Authorized at
No Par Value, 43,415,513 Shares Issued and
Outstanding 36,964,132
Accumulated Deficit (69,592,820)
Deferred Financial Advisor Fees (62,400)
Other Comprehensive Gain (Loss) (3,755)
-------------
Total Stockholders' Equity (Deficit) (29,234,843)
-------------
Total Liabilities and Stockholders' Equity (Deficit) $ 11,232,012
=============
The accompanying notes are an integral part of these financial statements.
4 of 25
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Operations and Comprehensive Loss
Unaudited
For the For the
Three Months ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue
Subscription revenue $ 2,730,287 $ 4,513,716 $ 5,681,753 $ 7,327,485
One-time sales 2,253,205 2,849,534 5,241,896 4,487,889
Production revenue 716,730 484,210 1,050,694 713,707
Other revenue 642,338 828,288 1,146,907 1,495,424
------------ ------------ ------------ ------------
Total Revenues, net 6,342,560 8,675,748 13,121,250 14,024,505
Cost of sales (1,849,184) (2,184,869) (2,974,367) (2,735,342)
------------ ------------ ------------ ------------
Gross Profit 4,493,376 6,490,879 10,146,883 11,289,163
Expense
Salaries and Benefits 4,399,465 3,826,685 8,670,343 9,337,498
Professional Fees 859,751 719,259 1,138,727 1,085,473
Selling, General &
Administrative 2,120,661 2,780,675 3,405,780 7,143,011
Depreciation & Amortization 971,313 171,075 2,136,841 312,481
------------ ------------ ------------ ------------
Total Expenses 8,351,190 7,497,694 15,351,691 17,878,463
Loss from Operations (3,857,814) (1,006,815) (5,204,808) (6,589,300)
Other Income (Expense)
Interest, net (563,027) (2,087,174) (1,362,972) (2,581,754)
Financing Costs - - (3,460,000) -
Loss on Debt Conversion - 672,247 - (1,314,064)
Gain on forfeiture of
warrants - - 254,011 -
Gain on change in
derivative valuation - - 119,925 -
Other income (expense) 49,774 1,091 106,659 816
------------ ------------ ------------ ------------
Total Other Income and (Expense) (513,253) (1,413,836) (4,342,377) (3,895,002)
------------ ------------ ------------ ------------
Minority Interest - - - 10,801
------------ ------------ ------------ ------------
Loss from Continuing
Operations Before Taxes (4,371,067) (2,420,651) (9,547,185) (10,495,103)
Income Taxes - - - -
------------ ------------ ------------ ------------
Net Loss $(4,371,067) $(2,420,651) $(9,547,185) $(10,495,103)
============ ============ ============ ============
Net (Income) Loss per Common
Share Basic and Dilutive
Net Earnings (Loss)
Per Share $(0.10) $(0.06) $(0.22) $(0.26)
============ ============ ============ ============
Weighted Average Shares
Outstanding 43,415,513 40,018,013 43,415,513 40,018,013
============ ============ ============ ============
For the For the
Three Months ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Comprehensive Income (Loss)
Net Loss (4,371,067) (2,420,651) (9,547,185) (10,495,103)
Foreign Currency Translation
Gain (Loss) (5,609) - (7,885) (22,534)
Comprehensive Loss (4,376,676) (2,420,651) (9,555,070) (10,517,637)
The accompanying notes are an integral part of these financial statements.
5 of 25
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation and Subsidiaries)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
and Comprehensive Income (Loss)
For the Period July 1, 2005 through December 1, 2006
Shares of Shares of
Preferred Preferred Common Common
Stock Stock Stock Stock
------------ ------------ ------------ ------------
Balance at July 1, 2005 - - 37,719,889 32,000,792
Shares Issued for Partial
Conversion of Note Payable
at $0.24 per Share - - 1,198,124 287,550
Shares Issued for Conversion
of Note at $0.45 per Share - - 1,100,000 500,000
Employee Stock Based
Compensation - - - 828,308
Amortization of Deferred
Financial Advisory Fees - - - -
Shares Issued for Services
at $0.25 per Share - - 100,000 25,374
Shares Issued for Services at
Market rate of $0.24 per share - - 560,000 134,400
Shares Issued for Cash at
$0.16 per share - - 937,500 150,000
Valuation of warrants from
equity financing - - - -
Foreign Currency Translation - - - 348,673
Divestiture of Associated
Companies - - - 2,210,000
Net Loss for the Year Ended
June 30, 2006 - - - -
------------ ------------ ------------ ------------
Balance at June 30, 2006 - - 41,615,513 36,485,096
Shares Issued for Services
at $0.07 per share - - 1,800,000 126,000
Employee Stock Based
Compensation - - - 353,036
Amortization of Deferred
Financial Advisory fees - - - -
Shares Issued for Services
at $0.07 per Share 2,800,000 1,960,000 - -
Shares Issued for Services
at $0.10 per Share 1,500,000 1,500,000 - -
Foreign Currency Translation - - - -
Net Loss for the Six Months
Ending December 31, 2006 - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2006
(unaudited) 4,300,000 3,460,000 43,415,513 36,964,132
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
6 of 25
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation and Subsidiaries)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
and Comprehensive Income (Loss)
For the Period July 1, 2005 through December 1, 2006
Accumulated Comprehensive Advisory
Deficit Gain (Loss) Fees Total
------------ ------------ ------------ ------------
Balance at July 1, 2005 (38,266,018) 10,818 (142,920) (6,397,328)
Shares Issued for Partial
Conversion of Note Payable
at $0.24 per Share - - - 287,550
Shares Issued for Conversion
of Note at $0.45 per Share - - - 500,000
Employee Stock Based
Compensation - - - 828,308
Amortization of Deferred
Financial Advisory Fees - - 142,920 142,920
Shares Issued for Services
at $0.25 per Share - - - 25,374
Shares Issued for Services at
Market rate of $0.24 per share - - (91,200) 43,200
Shares Issued for Cash at
$0.16 per share - - - 150,000
Valuation of warrants from
equity financing - - - 348,673
Foreign Currency Translation - (6,688) - (6,688)
Divestiture of Associated
Companies - - - 2,210,000
Net Loss for the Year Ended
June 30, 2006 (21,779,617) - - (21,779,617)
------------ ------------ ------------ ------------
Balance at June 30, 2006 (60,045,635) 4,130 (91,200) (23,647,609)
Shares Issued for Services
at $0.07 per share - - - 126,000
Employee Stock Based
Compensation - - - 353,036
Amortization of Deferred
Financial Advisory Fees - - 28,800 28,800
Shares Issued for Services
at $0.07 per Share - - - 1,960,000
Shares Issued for Services
at $0.10 per Share - - - 1,500,000
Foreign Currency Translation - (7,885) - (7,885)
Net Loss for the Six Months
Ending December 31, 2006 (9,547,185) - - (9,547,185)
------------ ------------ ------------ ------------
Balance at December
31, 2006 (unaudited) (69,592,820) (3,755) (62,400) (29,234,843)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
7 of 25
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months
Ended December
----------------------------
2006 2005
------------- -------------
Cash flows from operating activities:
Net loss $(9,547,185) $(10,495,103)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on disposal of assets
Depreciation and amortization 2,136,841 1,076,189
Bad debt expense - 361,700
Non-cash interest expense - 1,642,864
Stock issued for services 126,000 -
Employee stock based compensation 353,036 200,000
Non-cash financial advisory fees 28,800 142,920
Preferred stock issued for financing costs 3,460,000 -
Gain on forfeiture of warrants (254,011) -
Gain on change in derivative valuation (119,925) -
Debt conversion expenses - 1,314,064
Gain on settlement of accounts payable (106,659) -
Changes in current assets and liabilities,
net of businesses acquired and sold:
Accounts receivable (672,262) (2,147,315)
Prepaid expenses and other current assets (160,040) (650,479)
Decrease in deposits 109,163 -
Accounts payable and accrued expenses 1,852,391 3,866,462
Accounts payable related party (218,881) -
Inventory 29,750 121,676
Deferred revenue 471,535 1,276,336
Increase in security deposits 62,750 -
Interest payable 485,977 (23,379)
Minority interest - 22,149
------------- -------------
Net cash provided (used) by operating activities (1,962,720) (3,291,916)
------------- -------------
Cash flow from investing activities:
Restricted cash - 5,073,914
Capital expenditures (21,666) -
------------- -------------
Net cash provided (used) by investing activities: (21,666) 5,073,914
------------- -------------
Cash flow from financing activities
Payment for capital leases (588,813) (547,754)
Proceeds from lines of credit 6,800,000 -
Payments on lines of credit (5,200,000) -
Borrowings under notes 2,500,000 -
Repayments under notes (94,360) (5,039,442)
Borrowings under long-term liabilities - 4,500,000
------------- -------------
Net cash provided (used) by investing activities 3,416,827 (1,087,196)
------------- -------------
Effect of foreign exchange on cash (7,885) 184
Net cash provided by (used in) continuing operations 1,432,441 694,802
Net cash provided by (used in) discontinued operations - -
------------- -------------
Net increase (decrease) in cash 1,424,556 694,986
Cash at beginning of period 181,339 752,261
------------- -------------
Cash at end of period $ 1,605,895 $ 1,447,247
============= =============
Supplemental information:
Interest paid 403,910 159,000
------------- -------------
Income taxes - -
------------- -------------
Conversion of notes to common stock - 787,550
------------- -------------
Preferred stock issued for financing costs 3,460,000 -
------------- -------------
Common stock issued for services 126,000 -
------------- -------------
The accompanying notes are an integral part of these financial statements
8 of 25
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
December 31, 2006
(unaudited)
GENERAL
TWL Corporation has elected to omit substantially all footnotes to the
consolidated financial statements for the six months ended December 31,
2006 since there have been no material changes (other than indicated in
other footnotes) to the information previously reported by the Company in
their Annual Report filed with the Securities and Exchange Commission on
Form 10-KSB for the fiscal year ended June 30, 2006.
UNAUDITED INFORMATION
The information furnished herein was taken from the books and records of
the Company without audit. 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.
NOTE 1. ACCOUNTING POLICIES
Overview
--------
TWL Corporation (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 DVDs. 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 and Norway.
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. These
financial statements include the accounts of TWL and its consolidated
subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
9 of 25
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, 2006. The results of operations for the six months ended December
31, 2006, are not necessarily indicative of the operating results for the
full year and future operating results may not be comparable to historical
operating results due to our April 1, 2005 acquisition of Primedia
Workplace Learning.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all normal recurring adjustments
that are necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented.
Lines of Credit
---------------
The Company maintains and utilizes a revolving loan or open line of credit
for $5,000,000 with Laurus Master Fund, Ltd. At the end of the six month
period ending December 31, 2006, borrowings of $6,800,000 offset by
repayments of $5,200,000 left a balance of $1,600,000 drawn against the
revolving loan balance. Interest on the unpaid balance is accrued daily
and paid monthly. The current rate of interest is 10.25%. The revolving
loan is secured by 90% the eligible accounts receivable of the Company's
domestic operations and 30% of eligible inventory not to exceed $1,000,000.
Convertible Debt
----------------
The Company records its convertible debt net of the debt discount. From
time to time, the Company has debt with conversion options that provide for
a rate of conversion that is below market value. This feature is normally
characterized as a beneficial conversion feature ("BCF"), which is recorded
by the Company pursuant to EITF Issue No. 98-5 ("EITF 98-05"), "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," and EITF Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments." If
a BCF exists, the Company records it as a debt discount. Debt discounts
are amortized to interest expense over the life of the debt on a straight-
line basis, which approximates the effective interest method. The
convertible debt held by the Company at December 31, 2006 did not contain
beneficial conversion features.
Stock Options
-------------
The Company has elected to measure and record compensation cost relative to
stock option costs in accordance with SFAS 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," which requires the Company to use the Black-Scholes pricing
model to estimate the fair value of the options at the option grant date.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per common share is computed by dividing net income
(loss) available for common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) per
common share ("DEPS") is computed giving effect to all potential dilutive
shares including shares held in escrow, common stock issuable upon the
conversion of notes payable or the exercise of stock options and warrants.
DEPS is computed by dividing net income (loss) available for common
stockholders by the weighted-average common shares and dilutive potential
common shares that were outstanding during the period. Shares from release
of escrow shares, the conversion of notes payable or the exercise of
options and warrants of 21,105,900 and 30,017,684, respectively, were not
included in the computation of DEPS, because their inclusion would have
been anti-dilutive for the six months ended December 31, 2006 and fiscal
year ended June 30, 2005. Basic and diluted net loss per common share for
the fiscal periods ended June 30, 2006 and 2005 were calculated as follows:
For the Six Months Ended
December 31,
----------------------------
2006 2005
------------- --------------
Numerator-Basic / Diluted
Net loss available for common stockholders $ (9,547,185) $(10,495,103)
============= =============
Denominator-Basic / Diluted
Weighted-average common stock outstanding 43,415,513 40,018,013
============= =============
Basic / Diluted loss per share $ (0.22) $ (0.26)
============= =============
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires it 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 dates 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 policy, 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.
Note 2 - Stock Option Plan
The following schedule summarizes the activity during the periods ended
December 31, 2006 and June 30, 2006, respectively:
December 31, 2006 June 30, 2006
------------------------ ------------------------
(Unaudited)
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ---------- ------------ ----------
Outstanding at beginning of year 10,628,000 $ 0.30 11,665,000 $ 0.33
Granted 14,100,300 0.06 2,004,000 0.18
Canceled (3,622,400) 0.25 (3,041,000) 0.45
------------ ---------- ------------ ----------
Outstanding at end of period 21,105,900 $ 0.15 10,628,000 $ 0.30
============ ========== ============ ==========
Exercisable at period-end 9,340,837 $ 0.23 6,614,393 $ 0.33
============ ========== ============ ==========
11 of 25
Weighted Average Number of Weighted
Range of Number of Average Remaining Options Average
Exercise Options Exercise Contractual Vested Exercise
Price Outstanding Price Life (Years) (Exercisable) Price
------------------------- ------------ ------------ ------------- ------------
$ 0.05 350,000 $ 0.05 0.77 350,000 $ 0.05
$ 0.05 12,000 0.05 6.93 3,000 0.05
$ 0.06 14,006,400 0.06 6.75 3,501,600 0.06
$ 0.07 4,500 0.07 6.84 1,125 0.07
$ 0.16 250,000 0.16 4.34 62,500 0.16
$ 0.16 250,000 0.16 4.35 250,000 0.16
$ 0.19 975,000 0.19 4.11 787,500 0.19
$ 0.22 1,725,000 0.22 3.30 1,165,928 0.22
$ 0.25 500,000 0.25 0.92 500,000 0.25
$ 0.27 125,000 0.27 3.38 82,011 0.27
$ 0.50 25,000 0.50 1.25 25,000 0.50
$ 0.50 1,010,000 0.50 1.67 1,000,000 0.50
$ 0.50 625,000 0.50 2.00 625,000 0.50
$ 0.50 250,000 0.50 2.09 244,905 0.50
$ 0.50 898,000 0.50 3.08 658,887 0.50
$ 0.85 100,000 0.85 2.67 83,381 0.85
------------- -------------
21,105,900 9,340,837
============= =============
We recognized stock option expense in the amount of $353,036 and $828,308
for the six months ending December 31, 2006 and for the fiscal year ending
June 30, 2006, respectively. The option expense was calculated using the
Black Scholes valuation model.
NOTE 3 Warrants
During the six months ended December 31, 2006, 7,200,000 warrants for the
purchase of its common stock were surrendered. As a result of the
surrender, the principle terms of the warrants are summarized as follows:
2006
--------------------------------------------
Exercise
Price Per Exercisable
Description Shares Share Through
-------------------------------------------------------------------------------------
Granted
-------
October 2002 Equity Private Placement 500,000 $ 0.25 September 2007
October 2002 Equity Private Placement
Bonus Warrants (1) 250,000 1.00 September 2010
May 2003 Equity Private Placement 2,438,000 0.25 September 2007
May 2003 Equity Private Placement 7,708,600 0.25 October 2007
May 2003 Equity Private Placement
Bonus Warrants (1) 1,219,000 1.00 September 2010
May 2003 Equity Private Placement
Bonus Warrants (1) 3,854,300 1.00 October 2010
Warrants issued to Mr. Swindells on
note conversion 850,000 0.25 November 2007
Bonus warrants to Mr. Swindells (1) 425,000 1.00 November 2007
2004 Bridge Loan Warrant 1,549,000 0.25 May 2010
2004 Bridge Loan Warrant 1,146,000 0.25 February 2010
Warrants Issued to Financial Advisors 125,000 1.00 July 2009
Warrants Issued to Financial Advisors 1,600,000 0.81 August 2009
Warrants issued to Financial Advisors 20,000 0.25 July 2008
Warrants issued to Financial Advisors 190,050 0.25 October 2008
Warrants issued to Financial Advisors 10,000 0.25 October 2008
2005 Convertible Loan Warrants 1,476,027 0.25 January 2009
Warrants Issued to Financial Advisors 150,000 0.31 August 2008
Warrants Issued to Financial Advisors 376,818 0.31 July 2010
12 of 25
Warrants Issued to Financial Advisors 3,391,362 0.27 July 2010
Warrants Issued to Debt Private Placement 250,000 0.15 March 2008
Warrants Issued to Equity Private Placement 937,500 0.20 March 2008
Warrants Issued to debt holders that
converted debt during calendar 2005 1,476,027 0.25 January 2008
Warrants Issued to Creditors 75,000 0.30 March 2008
-------------------------
Total Granted 30,017,684 0.43
Exercised -
------------
Total Outstanding 30,017,684
============
On July 31, 2006 the Company entered into a subsequent Letter Agreement
with Palisades whereby Palisades surrendered 7,200,000 warrants issued in
connection with the March 2006 financing. We recognized a gain of $254,011
in the quarter ending September 30, 2006 as a result of this surrender and
also a gain on the change in derivative valuation on these warrants of
$119,925 for the valuation change from July 1, 2006 to July 31, 2006.
(1) Bonus warrants are issuable upon exercise of the original warrant.
NOTE 4 Stockholders' Equity
On July 24, 2006, the Company issued 1,800,000 shares of common stock for
services rendered on behalf of the Company. The services were valued at
$0.07 per share. Accordingly, $126,000 has been recorded to the common
stock account of the Company.
On July 27, 2006, the Company issued 2,800,000 shares of preferred stock
with a coupon rate of 7% convertible into 10 shares of common stock at
$0.10 per share. The shares were valued at the then current common stock
market value of $0.07 per share. Accordingly, $1,960,000 has been recorded
to the preferred stock account of the Company. The shares were issued as
consideration to its financing partner for subordinating its security
interest in its long-term loan.
On August 31, 2006, the Company issued 1,500,000 shares of preferred stock
with a coupon rate of 7% convertible into 10 shares of common stock at
$0.10 per share. The shares were valued at the then current common stock
market value of $0.10 per share. Accordingly, $1,500,000 has been recorded
to the preferred stock account of the Company. The shares were issued in
connection with additional long-term financing outlined in other notes.
NOTE 5 - GOING CONCERN
To meet our present and future liquidity requirements, we are developing
our business through collections on accounts receivable, and growing our
revenues. There can be no assurance that our results of operations will
materially improve in either the short or the long-term. Based upon our
cash balance at February 1, 2007 we will not be able to sustain operations
for more than three months without an improvement in our revenues and cost
reducing initiatives. If we fail to improve our results of operations, we
will be unable to meet our obligations as they become due. That would
raise substantial doubt about our ability to continue as a going concern.
NOTE 6 SUBSEQUENT EVENTS
On January 5, 2007, the Company determined that it could not pay certain
obligations as and when they shall become due and payable. The Company's
inability to meet its obligations as they become due represents an event of
default under, and accelerates its payment obligations in connection with,
the 15% senior secured convertible debenture (the "Debenture") causing it
to become due and payable immediately, together with interest and other
amounts owing in respect thereof. Specifically, the Company's
determination with respect to the Debenture is as follows:
Accrued interest of $337,500 was due January 1, 2007 on the Debenture in
the principal amount of $4,500,000, and as of January 10, 2007 a late fee
at the rate of 18% on the accrued interest in the amount of $3,750.
The Company is currently negotiating to extend the terms of this debt
instrument; however, there can be no assurance that the Company will be
able to extend such term with the investor.
13 of 25
NOTE 7 MATERIAL EVENTS
On July 27, 2006, we entered into a Letter Agreement (the "Letter Agreement
#1") with Palisades Master Fund LP ("Palisades") pursuant to which
Palisades agreed to waive an Event of Default for the Company's failure to
timely file a registration statement with the SEC (the "Waiver") in
connection with the March 2006 financing with Palisades (the "March 2006
Financing"), and further agreed to subordinate its security interest to the
Company's loan in the amount of $4,500,000 to Laurus (the "Subordination").
Furthermore, Palisades agreed to modify certain provisions of the
Registration Rights Agreement and Securities Purchase Agreement, dated
March 31, 2006, see Note 4. Furthermore, at our sole option, we have the
right to redeem the Palisades Preferred Stock at $0.10 per share at any
time on or before the 5th anniversary of the Palisades Closing Date (as
defined below).
We also agreed to file a registration statement registering the resale of
the shares issuable upon the conversion of the Palisades Preferred Stock no
later than 210 days after the Palisades Closing Date (as defined below).
We further agreed to issue an additional 82,800,000 warrants to Palisades
(the "Additional Warrants") as consideration for the Waiver, such that
Palisades would have the right to substitute the Additional Warrants for
Preferred Stock of the Company under similar terms and conditions as any
Preferred Stock that would be issued to Laurus (as defined below),
predicated upon the Company agreeing to a financing agreement with Laurus
on or before August 31, 2006.
On July 31, 2006 (the "Palisades Closing Date"), the Company entered into a
subsequent Letter Agreement with Palisades (the "Letter Agreement #2")
whereby Palisades and the Company agreed to modify the Letter Agreement #1,
such that Palisades would subordinate its security interest in all of the
assets of the Company and its subsidiaries to Laurus (as defined below).
As consideration for the Waiver, the Subordination and Palisades' agreement
to surrender the 7,200,000 warrants issued in connection with the March
2006 Financing and in lieu of the Company issuing the additional 82,800,000
warrants as agreed to pursuant Letter Agreement #1, see Note 4.
On August 31, 2006 (the "Closing Date"), the Company entered into
agreements with Laurus Master Fund, Ltd., a Cayman Islands corporation
("Laurus") and Palisades Equity Fund ("PEF"), pursuant to which the Company
sold debt and issued preferred stock of the Company to Laurus in a private
offering pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. As a part of this financing, PEF
agreed to return all of its warrants issued under the March 31, 2006
Securities Purchase Agreement. In return, they were issued 1,800,000
shares of convertible preferred stock. PEF was also issued 1,000,000
shares of convertible stock as part of this transaction. The securities
being sold and issued to Laurus included the following:
- A secured three-year term note (the "Secured Note") with a
principal amount of $2,500,000 (the "Secured Note Amount"), which
matures on August 31, 2009 (the "Maturity Date");
- A secured three-year revolving note with a principal amount of
$5,000,000 (the "Revolving Note"; the Revolving Note and the
Secured Note shall be collectively referred to as the "Notes");
see Note 4.
Of the Secured Note, net proceeds of $2,173,000 were received by the
Company on the Closing Date. Any proceeds of the Revolving Note will be
deposited in a restricted account with Cole Taylor Bank as security for the
total loan amount and for use by us to make acquisitions as approved by
Laurus. We also agreed to pay, out of the Loan proceeds, the sum of
$270,000 to Laurus Capital Management, LLC, the manager of Laurus, the sum
of $60,000 to Laurus as reimbursement for Laurus' legal fees, due diligence
fees and expenses incurred in connection with the transaction, and $2,000
to Loeb & Loeb LLP as escrow agent fees.
14 of 25
The Notes are secured by a blanket lien on all of the Company's assets, the
assets of the Company's subsidiaries and the cash held in the restricted
account at Cole Taylor Bank. The Company pledged its ownership interests
in TWL Knowledge Group, Inc., its subsidiary, to Laurus in connection with
the aforementioned financing. In the event of a default, Laurus has the
right to accelerate payments under the Notes and, in addition to any other
remedies available to it, to foreclose upon the assets securing the Notes.
The principal amount of the Secured Note carries an interest rate of prime
plus three percent (the "Secured Note Rate"), subject to adjustment, and we
must make monthly amortizing payments of $42,500, commencing January 1,
2007 and with said monthly amortizing payments increasing to $62,500
commencing on January 1, 2008, toward the outstanding non-restricted
principal amount. Furthermore, the Secured Note Rate shall not at any time
be less than nine percent (9.0%). The Company may prepay the Secured Note
at any time by paying Laurus 105% of the Secured Note Amount if such
prepayment occurs prior to the first anniversary of the Closing Date, 103%
if such prepayment occurs on or after the first anniversary of the Closing
Date and prior to the second anniversary of the Closing Date, or 101% of
the Secured Note Amount outstanding at such time if such prepayment occurs
thereafter but prior to the Maturity Date, plus any accrued but unpaid
interest thereon.
The principal amount of the Revolving Note carries an interest rate of
prime plus two percent (the "Revolving Note Rate"), subject to adjustment,
and we must make said monthly interest payments, payable in arrears,
commencing September 1, 2006. Furthermore, the Revolving Note Rate shall
not at any time be less than nine percent (9.0%). This monthly interest
payment amount will be increased proportionately if and when funds are
released from the restricted account. The Company may prepay the May 2006
Revolving Note at any time without penalty.
In consideration of the foregoing and so long as no Event of Default, as
defined in the Security Agreement entered into by and between the Company,
Laurus and TWL Knowledge Group, Inc., has occurred and is continuing,
Laurus agreed not to directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the U.S. Securities Exchange Act of 1934, as amended,
or otherwise dispose of any Shares or publicly announce an intention to do
any of the foregoing, for a period of no less than twelve (12) months from
the Closing Date.
The Shares of Preferred Stock are convertible into shares of our common
stock at a price of $0.10 per share, subject to anti-dilution adjustments.
Laurus has contractually agreed to restrict its ability to convert the
Shares of Preferred Stock and receive shares of the Company's Common Stock
such that the number of shares of the Company common stock held by it after
such exercise does not exceed 4.99% of the Company's then issued and
outstanding shares of common stock. Such restriction shall automatically
become null and void following notice to the Company upon occurrence of an
event of default under the agreements with Laurus or upon 61days prior
notice to the Company.
We also have granted Laurus a right of first refusal with respect to any
debt or equity financings, with such restriction being in effect for no
longer then 2 years after the Closing Date.
The Company is obligated to file a registration statement registering the
resale of shares of the Company's Common Stock issuable upon the conversion
of the Shares. If the registration statement is not filed within 60 days
of Closing Date, or declared effective within 180 days of Closing Date, or
if the registration is suspended other than as permitted, in the
registration rights agreement between the Company and Laurus, the Company
is obligated to pay Laurus certain fees and the obligations may be deemed
to be in default.
On September 26, 2006, the Company held a Special Shareholders meeting (the
"Meeting"), for the Company's shareholders of record as of August 11, 2006
(the "Record Date"), as was previously disclosed by the Company in its
definitive Proxy Statement filed on Schedule 14(a) with the SEC on August
18, 2006. During the Meeting, the affirmative vote of the Company's
shareholders holding the majority of the Company's outstanding shares as of
the Record Date approved the following proposals:
15 of 25
1. Amending the Company's Articles of Incorporation to change the
name of the Company from Trinity Learning Corporation to TWL
Corporation; and
2. Amending the Company's Articles of Incorporation to increase the
authorized number of Common Stock from 100,000,000 shares to
750,000,000 shares.
The Company filed a Certificate of Amendment with the Secretary of State of
the State of Utah, effective as of September 29, 2006, to effect a name
change the Company from Trinity Learning Corporation to TWL Corporation and
to increase the authorized common stock of the Company from 100,000,000
shares to 750,000,000 shares.
In addition, the Company filed a Certificate of Amendment with the
Secretary of State of Delaware, effective as of September 12, 2006, to
effect a name change of its subsidiary Trinity Workplace Learning to TWL
Knowledge Group, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our fiscal year ends on June 30. This management's discussion and analysis
of financial condition and results of operations and other portions of this
Quarterly Report on Form 10-QSB contain forward looking information that
involves risks and uncertainties. Our actual results could differ
materially from those anticipated by this forward looking information.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed or referred to in the Annual Report on Form
10-KSB for the fiscal year ended June 30, 2006 under the heading
Information Regarding Forward-Looking Statements and elsewhere. Investors
should review this quarterly report on Form 10-QSB in combination with our
Annual Report on Form 10-KSB in order to have a more complete understanding
of the principal risks associated with an investment in our common stock.
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our unaudited
condensed consolidated financial statements and related notes included
elsewhere in this document.
Overview
Our financial statements are 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. Currently, we do not have an
established source of revenues sufficient to cover our operating costs and
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 upon our cash balance at February 1, 2007, we will not
be able to sustain operations for more than three months without additional
sources of funding. To meet our present and future liquidity requirements,
we will continue to seek conversion of outstanding loans and payables into
common stock, development of the business of our newly-acquired
subsidiaries, 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- 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. That would raise substantial doubt
about our ability to continue as a going concern.
Results of Operations
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2006 TO THE THREE MONTHS
ENDED DECEMBER 31, 2005
Our revenue for the second quarter of 2007 was $6,342,560, as compared to
$8,675,748 for the second quarter of 2006. This decrease in revenue is due
to decreased subscription revenue $1,783,429, one-time sales $596,329 and
other revenue $185,950 offset by increased production revenue $232,520.
16 of 25
Cost of sales, which consist of labor, hardware costs, cost of goods sold
and other incidental expenses, was $1,849,184 for the three months ending
December 31, 2006 as compared to $2,184,869 for the three months ending
December 31, 2005, resulting in gross profit of $4,493,376 for the three
months ending December 31, 2006 as compared to $6,490,879 for the three
months ending December 31, 2005.
Operating expenses for the three months ending December 31, 2006 were
$8,351,190 as compared to $7,497,694 for the three months ending December
31, 2005. Salaries and benefits increased $572,780 from $3,826,685 for the
three month period ending 2005 to $4,399,465 for the three month period
ending 2006. Professional fees increased slightly to $859,751 for the
three months ending December 31, 2006 as compared to $719,259 for the three
months ending December 31, 2005. Selling, general and administrative
expenses decreased $660,014 from $2,780,675 for the three month period
ending December 31, 2006 to $2,120,661 for the three months ending December
31, 2005. Depreciation and amortization increased from $171,075 for the
three months ending December 31, 2005 to $971,313 for the three months
ending December 31, 2006.
Other expenses of $513,253 were $900,583 less than that for the three
months ending December 31, 2005. This decrease in other expenses was due
primarily to a decrease in interest expense.
We reported net loss available for common stockholders of $4,371,067 or
$0.10 per share for the three months ended December 31, 2006, compared to a
net loss of $2,420,651 or $0.06 per share for the three months ended
December 31, 2005.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2006 TO THE SIX MONTHS
ENDED DECEMBER 31, 2005
Our revenue for the second quarter of 2007 was $13,121,250, as compared to
$14,024,505 for the second quarter of 2006. This decrease in revenue is
due primarily to decreased subscription $1,645,732 and other $348,517
revenue offset by increases in one-time sales $754,007 and production
revenue $336,987.
Cost of sales, which consist of labor, hardware costs, cost of goods sold
and other incidental expenses, was $2,974,367 for the six months ending
December 31, 2006 as compared to $2,735,342 for the six months ending
December 31, 2005, resulting in gross profit of $10,146,883 for the six
months ending December 31, 2006 as compared to $11,289,163 for the six
months ending December 31, 2005.
Operating expenses for the six months ending December 31, 2006 were
$15,351,691 as compared to $17,878,463 for the six months ending December
31, 2005. Salaries and benefits decreased $667,155 from $9,337,498 for the
six month period ending 2006 to $8,670,343 for the six month period ending
2005. Professional fees increased slightly to $1,138,727 for the six
months ending December 31, 2006 as compared to $1,085,473 for the six
months ending December 31, 2005. Selling, general and administrative
expenses decreased $3,737,231 from $7,143,011 for the six month period
ending December 31, 2005 to $3,405,780 for the six months ending December
31, 2006. Depreciation and amortization increased from $312,481 for the
six months ending December 31, 2005 to $2,136,841 for the six months ending
December 31, 2006.
Other expenses for the six months ending December 31, 2006 were $4,342,377
compared to $3,895,002 for the six months ending December 31, 2005. This
increase is attributable to the issuance of preferred stock $3,460,000
offset by decreases in net interest expense $1,218,782, loss on debt
conversion $1,314,064 and other $479,779.
We reported net loss available for common stockholders of $9,547,185 or
$0.22 per share for the six months ending December 31, 2006, compared to a
net loss of $10,495,103 or $0.26 per share for the six months ending
December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our expenses are currently greater than our revenues. We have a history of
losses and our accumulated deficit as of December 31, 2006 was $69,592,820
as compared to $48,321,856 as of December 31, 2005.
17 of 25
At December 31, 2006, we had an unrestricted cash balance of $1,605,895
compared to $1,447,247 at December 31, 2005. Net cash used by operating
activities during the six months ended December 31, 2006 was 1,962,720
attributable primarily to our adjusted loss from operations offset by our
increase in accounts payable. Net cash provided by financing activities
was $3,416,827 for the six months ended December 31, 2006 representing
borrowings long-term notes and short-term loans.
Accounts receivable decreased from $5,687,730 at December 31, 2005 to
$3,352,817 at December 31, 2006. This decrease is attributable to our
increased collection efforts.
Accounts payable decreased from $5,500,518 at December 31, 2005 to
$4,345,085 at December 31, 2006. Accrued expenses increased from
$3,126,252 at December 31, 2005 to $8,332,982 at December 31, 2006. The
net increase in accounts payable and accrued expenses was attributable to
negative cash flow.
As a professional services organization we are not capital intensive.
Capital expenditures historically have been for computer-aided instruction,
accounting and project management systems and general-purpose computer
equipment to accommodate our growth.
On July 27, 2006, we entered into a Letter Agreement (the "Letter Agreement
#1") with Palisades Master Fund LP ("Palisades") pursuant to which
Palisades agreed to waive an Event of Default for the Company's failure to
timely file a registration statement with the SEC (the "Waiver") in
connection with the March 2006 financing with Palisades (the "March 2006
Financing"), and further agreed to subordinate its security interest to the
Company's loan in the amount of $4,500,000 to Laurus (the "Subordination").
Furthermore, Palisades agreed to modify certain provisions of the
Registration Rights Agreement and Securities Purchase Agreement, dated
March 31, 2006, see Note 4. Furthermore, at our sole option, we have the
right to redeem the Palisades Preferred Stock at $0.10 per share at any
time on or before the 5th anniversary of the Palisades Closing Date (as
defined below).
We also agreed to file a registration statement registering the resale of
the shares issuable upon the conversion of the Palisades Preferred Stock no
later than 210 days after the Palisades Closing Date (as defined below).
We further agreed to issue an additional 82,800,000 warrants to Palisades
(the "Additional Warrants") as consideration for the Waiver, such that
Palisades would have the right to substitute the Additional Warrants for
Preferred Stock of the Company under similar terms and conditions as any
Preferred Stock that would be issued to Laurus (as defined below),
predicated upon the Company agreeing to a financing agreement with Laurus
on or before August 31, 2006.
On July 31, 2006 (the "Palisades Closing Date"), the Company entered into a
subsequent Letter Agreement with Palisades (the "Letter Agreement #2")
whereby Palisades and the Company agreed to modify the Letter Agreement #1,
such that Palisades would subordinate its security interest in all of the
assets of the Company and its subsidiaries to Laurus (as defined below).
As consideration for the Waiver, the Subordination and Palisades' agreement
to surrender the 7,200,000 warrants issued in connection with the March
2006 Financing and in lieu of the Company issuing the additional 82,800,000
warrants as agreed to pursuant Letter Agreement #1, see Note 4.
On August 31, 2006 (the "Closing Date"), the Company entered into
agreements with Laurus Master Fund, Ltd., a Cayman Islands corporation
("Laurus") and Palisades Equity Fund ("PEF"), pursuant to which the Company
sold debt and issued preferred stock of the Company to Laurus in a private
offering pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. As a part of this financing, PEF
agreed to return all of its warrants issued under the March 31, 2006
Securities Purchase Agreement. In return, they were issued 1,800,000
shares of convertible preferred stock. PEF was also issued 1,000,000
shares of convertible stock as part of this transaction. The securities
being sold and issued to Laurus included the following:
- A secured three-year term note (the "Secured Note") with a
principal amount of $2,500,000 (the "Secured Note Amount"), which
matures on August 31, 2009 (the "Maturity Date");
- A secured three-year revolving note with a principal amount of
$5,000,000 (the "Revolving Note"; the Revolving Note and the
Secured Note shall be collectively referred to as the "Notes");
see Note 4.
18 of 25
Of the Secured Note, net proceeds of $2,173,000 were received by the
Company on the Closing Date. Any proceeds of the Revolving Note will be
deposited in a restricted account with Cole Taylor Bank as security for the
total loan amount and for use by us to make acquisitions as approved by
Laurus. We also agreed to pay, out of the Loan proceeds, the sum of
$270,000 to Laurus Capital Management, LLC, the manager of Laurus, the sum
of $60,000 to Laurus as reimbursement for Laurus' legal fees, due diligence
fees and expenses incurred in connection with the transaction, and $2,000
to Loeb & Loeb LLP as escrow agent fees.
The Notes are secured by a blanket lien on all of the Company's assets, the
assets of the Company's subsidiaries and the cash held in the restricted
account at Cole Taylor Bank. The Company pledged its ownership interests
in TWL Knowledge Group, Inc., its subsidiary, to Laurus in connection with
the aforementioned financing. In the event of a default, Laurus has the
right to accelerate payments under the Notes and, in addition to any other
remedies available to it, to foreclose upon the assets securing the Notes.
The principal amount of the Secured Note carries an interest rate of prime
plus three percent (the "Secured Note Rate"), subject to adjustment, and we
must make monthly amortizing payments of $42,500, commencing January 1,
2007 and with said monthly amortizing payments increasing to $62,500
commencing on January 1, 2008, toward the outstanding non-restricted
principal amount. Furthermore, the Secured Note Rate shall not at any time
be less than nine percent (9.0%). The Company may prepay the Secured Note
at any time by paying Laurus 105% of the Secured Note Amount if such
prepayment occurs prior to the first anniversary of the Closing Date, 103%
if such prepayment occurs on or after the first anniversary of the Closing
Date and prior to the second anniversary of the Closing Date, or 101% of
the Secured Note Amount outstanding at such time if such prepayment occurs
thereafter but prior to the Maturity Date, plus any accrued but unpaid
interest thereon.
The principal amount of the Revolving Note carries an interest rate of
prime plus two percent (the "Revolving Note Rate"), subject to adjustment,
and we must make said monthly interest payments, payable in arrears,
commencing September 1, 2006. Furthermore, the Revolving Note Rate shall
not at any time be less than nine percent (9.0%). This monthly interest
payment amount will be increased proportionately if and when funds are
released from the restricted account. The Company may prepay the May 2006
Revolving Note at any time without penalty.
In consideration of the foregoing and so long as no Event of Default, as
defined in the Security Agreement entered into by and between the Company,
Laurus and TWL Knowledge Group, Inc., has occurred and is continuing,
Laurus agreed not to directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the U.S. Securities Exchange Act of 1934, as amended,
or otherwise dispose of any Shares or publicly announce an intention to do
any of the foregoing, for a period of no less than twelve (12) months from
the Closing Date.
The Shares of Preferred Stock are convertible into shares of our common
stock at a price of $0.10 per share, subject to anti-dilution adjustments.
Laurus has contractually agreed to restrict its ability to convert the
Shares of Preferred Stock and receive shares of the Company's Common Stock
such that the number of shares of the Company common stock held by it after
such exercise does not exceed 4.99% of the Company's then issued and
outstanding shares of common stock. Such restriction shall automatically
become null and void following notice to the Company upon occurrence of an
event of default under the agreements with Laurus or upon 61days prior
notice to the Company.
We also have granted Laurus a right of first refusal with respect to any
debt or equity financings, with such restriction being in effect for no
longer then 2 years after the Closing Date.
The Company is obligated to file a registration statement registering the
resale of shares of the Company's Common Stock issuable upon the conversion
of the Shares. If the registration statement is not filed within 60 days
of Closing Date, or declared effective within 180 days of Closing Date, or
if the registration is suspended other than as permitted, in the
registration rights agreement between the Company and Laurus, the Company
is obligated to pay Laurus certain fees and the obligations may be deemed
to be in default.
19 of 25
On September 26, 2006, the Company held a Special Shareholders meeting (the
"Meeting"), for the Company's shareholders of record as of August 11, 2006
(the "Record Date"), as was previously disclosed by the Company in its
definitive Proxy Statement filed on Schedule 14(a) with the SEC on August
18, 2006. During the Meeting, the affirmative vote of the Company's
shareholders holding the majority of the Company's outstanding shares as of
the Record Date approved the following proposals:
1. Amending the Company's Articles of Incorporation to change the
name of the Company from Trinity Learning Corporation to TWL
Corporation; and
2. Amending the Company's Articles of Incorporation to increase the
authorized number of Common Stock from 100,000,000 shares to
750,000,000 shares.
The Company filed a Certificate of Amendment with the Secretary of State of
the State of Utah, effective as of September 29, 2006, to effect a name
change the Company from Trinity Learning Corporation to TWL Corporation and
to increase the authorized common stock of the Company from 100,000,000
shares to 750,000,000 shares.
In addition, the Company filed a Certificate of Amendment with the
Secretary of State of Delaware, effective as of September 12, 2006, to
effect a name change of its subsidiary Trinity Workplace Learning to TWL
Knowledge Group, Inc.
On January 5, 2007, the Company determined that it could not pay certain
obligations as and when they shall become due and payable. The Company's
inability to meet its obligations as they become due represents an event of
default under, and accelerates its payment obligations in connection with,
the 15% senior secured convertible debenture (the "Debenture") causing it
to become due and payable immediately, together with interest and other
amounts owing in respect thereof. Specifically, the Company's
determination with respect to the Debenture is as follows:
Accrued interest of $337,500 was due January 1, 2007 on the Debenture in
the principal amount of $4,500,000, and as of January 10, 2007 a late fee
at the rate of 18% on the accrued interest in the amount of $3,750.
The Company is currently negotiating to extend the terms of this debt
instrument; however, there can be no assurance that the Company will be
able to extend such term with the investor.
To meet our present and future liquidity requirements, we are continuing to
seek conversion of outstanding loans and payables into common stock,
developing the business of our subsidiaries 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- or the
long-term. Based upon our cash balance at February 1, 2006 we will not be
able to sustain operations for more than three months without additional
sources of financing or improved operating results. 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. That would raise substantial
doubt about our ability to continue as a going concern.
20 of 25
ITEM 32. CONTROLS AND PROCEDURES
(a) Management's Evaluation of Disclosure Controls and Procedures
-----------------------------------------------------------------
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its reports pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, 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 Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.
Our Chief Executive Officer and Chief Financial Officer, after conducting
an evaluation, together with other members of management, of the
effectiveness of the design and operation of our disclosure controls and
procedures at the end of the period covered by this report, have concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
SEC. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to
that evaluation, and there were no significant deficiencies or material
weaknesses in such controls requiring corrective actions.
(b) Changes In Internal Controls
---------------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to that
evaluation, and there were no significant deficiencies or material
weaknesses in such controls requiring corrective actions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See section Item 3 "Legal Proceedings" in our Annual Report filed with the
SEC on Form 10-KSB on November 13, 2006.
ITEM 2. ISSUANCE OF UNREGISTERED SECURITIES
In July of 2006, we issued to certain accredited investors 1,800,000 shares
of preferred stock convertible at $0.10 per share in exchange for the
7,200,000 warrants previously issued to these accredited investors
exercisable at $0.21 per share. In addition, on August 31, 2006, we issued
to this accredited investor 1,000,000 shares of preferred stock convertible
at $0.10 per share in consideration of the investor agreeing to subordinate
its senior secured interest to Laurus Master Fund, Ltd., in all of the
assets of the Company and further agreed to modify their conversion price
from $0.25 to $0.10.
In July of 2006, the Company issued to a certain individual 1,800,000
shares of common Stock pursuant to an agreement entered into in March 2006,
as a performance bonus stock award.
On August 31, 2006, we issued to Laurus Master Fund, Ltd., 1,500,000 shares
of preferred stock convertible at $0.10 per share in consideration of the
sale of a secured three-year term note with a principal amount of
$2,500,000 and a secured three-year revolving note with a principal amount
of $5,000,000 to Laurus Master Fund, Ltd.
21 of 25
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 3. DEFAULTS UPON SENIOR SECURITIES
On January 5, 2007, the Company determined that it could not pay certain
obligations as and when they shall become due and payable. The Company's
inability to meet its obligations as they become due represents an event of
default under, and accelerates its payment obligations in connection with,
the 15% senior secured convertible debenture (the "Debenture") causing it
to become due and payable immediately, together with interest and other
amounts owing in respect thereof. Specifically, the Company's
determination with respect to the Debenture is as follows:
Accrued interest of $337,500, due January 1, 2007 on the Debenture in the
principal amount of $4,500,000, and as of January 10, 2007 a late fee at
the rate of 18% on the accrued interest in the amount of $3,750.
The Company is currently negotiating to extend the terms of this debt
instrument; however, there can be no assurance that the Company will be
able to extend such term with the investor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See section Item 4 "Submission of Matters to a Vote of Security Holders" in
our Annual Report filed with the SEC on Form 10-KSB on November 13, 2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
31.1 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. *
31.2 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. *
32.1 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. *
32.2 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
22 of 25
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.
TWL CORPORATION
February 14, 2007 By: /S/ DENNIS J. CAGAN
---------------------------------------
Dennis J. Cagan
Chief Executive Officer
February 14, 2007 By: /S/ Patrick R. Quinn
---------------------------------------
Patrick R. Quinn
Chief Financial Officer
23 of 25