U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Amendment Number 1)
Quarterly Report under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2004
Commission File No. 0-8924
Trinity Learning Corporation
(Exact name of small business issuer as specified in its charter)
Utah 73-0981865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Second Street, Berkeley, California 94710
(Address of principal executive offices)
(510) 540-9300
(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 [ ]
As of November 15, 2004 31,402,643 shares of the issuer's Common Stock, no par
value per share, were outstanding.
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TRINITY LEARNING CORPORATION AND SUBSIDIARIES
Throughout this report, we refer to Trinity Learning Corporation, together with
its subsidiaries, as "we," "us," "our company," "Trinity" or "the Company."
THIS FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2004, 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: OUR ABILITY TO
SUCCESSFULLY INTEGRATE TOUCHVISION, INC. ("TOUCHVISION"), RIVER MURRAY TRAINING
PTY LTD ("RMT"), TRINITY LEARNING AS (F/K/A VIRTUAL LEARNING PARTNERS AS) SA
("VILPAS") , AND OUR MAJORITY INTERESTS IN AYRSHIRE TRADING LIMITED ("AYRSHIRE")
AND DANLAS LIMITED ("DANLAS"); DETERIORATION IN CURRENT ECONOMIC CONDITIONS; OUR
ABILITY TO PURSUE BUSINESS STRATEGIES; PRICING PRESSURES; CHANGES IN THE
REGULATORY ENVIRONMENT; OUTCOMES OF FUTURE LITIGATION; 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.
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The Company is filing this Form 10-QSB/A as a result of its determination that
warrants it previously classified as equity should be reclassified as a
liability and to attribute a beneficial conversion discount to the note. As a
result of the reclassification, the value originally attributed to the warrants
of $1,883,363 increases to $2,863,363. The value attributable to the beneficial
conversion is $2,070,784. As a result of these changes, net loss as previously
reported for the quarter ended September 30, 2004 of $(1,776,832) increases to
$(1,861,586).
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets September 30, 2004 (Unaudited)
and June 30, 2004 (Audited).
Consolidated Statements of Operations and Comprehensive Loss
Three Months Ended September 30, 2004 and 2003. (Unaudited)
Consolidated Statements of Cash Flows Three Months Ended
September 30, 2004 and 2003 (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Trinity Learning Corporation and Subsidiaries
Consolidated Balance Sheets
September 30,
2004 June 30,
(Unaudited 2004
& Restated) (Audited)
------------- -------------
Assets
------
Current Assets
Cash and Cash Equivalents $ 846,860 $ 892,739
Accounts Receivable 391,269 243,164
Prepaid Expense and Other Current Assets 231,356 229,802
------------- -------------
Total Current Assets 1,469,485 1,365,705
Equity Investment in and Advances to Associated Companies 1,617,680 1,922,935
Property & Equipment, net 33,502 37,160
Goodwill 1,855,405 1,849,526
Intangible Assets, net 390,333 434,958
Restricted Cash 4,992,522 500,000
Other Assets, net 397,731 142,856
------------- -------------
Total Assets $ 10,756,658 $ 6,253,140
============= =============
Liabilities, Minority Interest, Contingently Redeemable Equity and Stockholders' Equity
---------------------------------------------------------------------------------------
Liabilities
-----------
Accounts Payable $ 880,359 $ 814,651
Accounts Payable-Related Parties 86,321 77,988
Accrued Expenses 614,937 721,192
Interest Payable 5,865 21,124
Deferred Revenue 325,551 85,685
Notes Payable - Current 677,797 418,954
Notes Payable - Related Parties 584,289 740,476
------------- -------------
Current Liabilities 3,175,119 2,880,070
------------- -------------
Notes Payable - Long Term 530,906 71,829
Notes Payable - Long Term, Related Parties 221,408 40,000
------------- -------------
Long Term Liabilities 752,314 111,829
Equity Investment in and Advances to Associated Company 343,246 -
Warrants to Purchase Common Stock 2,863,363 -
------------- -------------
Total Liabilities 7,134,042 2,991,899
------------- -------------
Minority Interest 263,483 306,721
----------------- ------------- -------------
Contingently Redeemable Equity 2,510,000 2,510,000
------------------------------ ------------- -------------
Stockholders' Equity
--------------------
Preferred Stock, 10,000,000 Shares Authorized at No Par
Value, No Shares Issued and Outstanding in 2004 or 2003 - -
Common Stock, 100,000,000 Shares Authorized at No Par
Value, 31,040,143 shares Issued and Outstanding at
September 30 and June 30, 2004 25,331,567 23,092,957
Accumulated Deficit (24,512,562) (22,650,976)
Other Comprehensive Income 30,128 2,539
------------- -------------
Total Stockholders' Equity 849,133 444,520
------------- -------------
Total Liabilities, Minority Interest, Contingently
Redeemable Equity and Stockholders' Equity $ 10,756,658 $ 6,253,140
============= =============
The accompanying notes are an integral part of these financial statements
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Trinity Learning Corporation and Subsidiaries
Consolidated Statement of Operations and Comprehensive Loss
Three Months Ended
September 30,
2004 2003
(Unaudited)
(Restated)
----------------------------
Revenue
-------
Sales Revenue $ 902,854 $ 253,993
Cost of Sales (180,905) (32,497)
------------ ------------
Gross Profit 721,949 221,496
------------ ------------
Expenses
--------
Salaries & Benefits 889,302 567,719
Professional Fees 296,587 216,565
Selling, General & Administrative 489,162 269,594
Depreciation & Amortization 47,962 88,838
------------ ------------
Total Expense 1,723,013 1,142,716
------------ ------------
Loss from Operations (1,001,064) (921,220)
------------ ------------
Other Expense
-------------
Interest, net 229,703 23,288
Debt Issuance 7,194 -
Equity Losses in Associated Companies 648,501 995
Foreign Currency Gain (Loss) - 407
------------ ------------
Total Other Expense 885,398 24,690
Minority Interest 24,876 -
----------------- ------------ ------------
Loss before Income Taxes (1,861,586) (945,910)
Income Taxes - -
------------ ------------
Net Loss $ (1,861,586) $ (945,910)
============ ============
Net Loss Per Common Share
Basic and Diluted $ (0.06) $ (0.06)
============ ============
Weighted Average Shares Outstanding 30,377,643 15,652,516
============ ============
A summary of the components of other comprehensive loss for the three months
ended September 30, 2004 and 2003 is as follows:
Three Months Ended
September 30,
2004 2003
(Unaudited)
(Restated)
----------------------------
Net Loss $ (1,861,586) $ (945,910)
Foreign Currency Translation Gain (Loss) 27,589 (2,961)
------------ ------------
Comprehensive Loss $ (1,833,997) $ (948,871)
============ ============
The accompanying notes are an integral part of these financial statements
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Trinity Learning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended September 30,
2004 2003
------------ ------------
(Unaudited (Unaudited)
& Restated)
Cash flows from operating activities:
Net loss $ (1,861,586) $ (945,910)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 47,962 88,838
Debt issuance 7,194 -
Non cash interest 205,753 -
Equity losses of associated companies 648,501 995
Employee stock based compensation 104,997 98,514
Minority interest (24,876) -
Changes in current assets and liabilities:
Accounts receivable (148,105) (14,434)
Prepaid expenses and other current assets (4,623) (34,238)
Accounts payable and accrued expenses (47,497) 19,517
Accounts payable - related parties 8,333 (7,822)
Deferred revenue 239,866 45,217
Interest payable (9,394) 21,590
------------ ------------
Net cash used by operating activities (833,475) (727,733)
------------ ------------
Cash flows from investing activities:
Payment for business acquisitions - (64,868)
Payment for business acquisitions - related party (4,815) (160,501)
Restricted cash (4,491,000) -
Advances to associated companies - (274,959)
Capital expenditures - (10,635)
------------ ------------
Net cash used by investing activities (4,495,815) (510,963)
------------ ------------
Cash flows from financing activities:
Repayments under short-term notes (500,000) -
Repayments under short-term notes - related party (50,000) (500,000)
Borrowings under short-term notes 6,120,000 -
Fees paid to issue debt (259,000) -
Payments for financing fees - (360,242)
Payments for financing fees - related party - (68,000)
Proceeds from sale of common stock - 3,004,500
------------ ------------
Net cash provided by financing activities 5,311,000 2,076,258
Effect of foreign exchange on cash (27,589) 2,961
------------ ------------
Net (decrease)increase in cash (45,879) 840,523
Cash at beginning of period 892,739 86,511
------------ ------------
Cash at end of period $ 846,860 $ 927,034
============ ============
Supplemental information:
Interest paid $ 19,795 $ 2,716
============ ============
Warrants Issued with Convertible Notes $ 2,863,363 $ -
============ ============
Beneficial Conversion Value of Note Payable $ 2,070,784 $ -
============ ============
Issuance of Common Stock for Business Acquisitions $ - $ 975,000
============ ============
Issuance of Conditionally Redeemable Equity $ - $ 1,000,000
============ ============
The accompanying notes are an integral part of these financial statements
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Trinity Learning Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2004
NOTE 1. ACCOUNTING POLICIES
Overview
Trinity Learning 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. Trinity Learning 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. Trinity Learning 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.
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 Trinity and its consolidated subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
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, 2004. The results of operations for the three months ended September 30,
2004, 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 September 1, 2003 acquisitions of TouchVision, Inc.
("TouchVision"); River Murray Training Pty Ltd ("RMT"); and 51% of the issued
and outstanding shares of Ayrshire Trading Limited ("Ayrshire"), as well as our
December 1, 2003 acquisition of Danlas Limited ("Danlas") and March 1, 2004
acquisition of Trinity Learning AS ("VILPAS"). Ayrshire owns 95% of the issued
and outstanding shares of Riverbend Group Holdings (Pty.) Ltd. ("Riverbend").
These companies are collectively referred to as Riverbend. Danlas owns 51% of
IRCA (Proprietary) Limited ("IRCA"). These companies are collectively referred
to as IRCA.
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.
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.
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Principles of Consolidation and Basis of Presentation
On August 6, 2003, our board of directors approved a change in our fiscal
year-end from September 30 to June 30 to align with those of the companies we
had already acquired or were at that time in the process of acquiring. Our
consolidated financial statements include the accounts of the Company and our
controlled subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
Our 51% ownership in IRCA and our 51% ownership in Ayrshire, which owns 95% of
Riverbend, have been accounted for in the financial statements included with
this report using the equity method of accounting. Emerging Issues Task Force
Issue 96-16, "Investor's Accounting for an Investee When the Investor Has a
Majority Voting Interest but the Minority Shareholders Have Certain Approval or
Voting or Veto Rights" (EITF 96-16) provides guidance as to the distinction
between protective rights of the minority shareholder which do not overcome the
presumption of consolidation and substantive participating rights of the
minority shareholder. Substantive participating rights that allow the minority
shareholder to participate in establishing operating and capital decisions in
the ordinary course of business, overcome the presumption that the investor
should consolidate the investee.
o In the Riverbend transaction, Section 20.2.11.3 of the Definitive
Agreement ("the Agreement") between Trinity, the majority owner in
Ayrshire, and Great Owl Limited ("Great Owl"), the minority owner in
Ayrshire, prevents Ayrshire and its subsidiaries from approving,
canceling or effecting "material changes to the annual budget or any
modification thereof" or "incur(ring) unbudgeted capital expenditure
of US$150,000 per item or US$500,000 per annum." Also, pursuant to
Section 18.3 of the Agreement, Trinity and Great Owl are "each
entitled to appoint an equal number of directors to the board of
directors" of Ayrshire. These substantive participating rights of the
minority shareholder preclude consolidation of this investment and
will remain in effect until Trinity owns 100% of Ayrshire.
o In the IRCA transaction, Section 20.1.19.3 of the Sale of Shares
Agreement ("SOS Agreement") between Danlas Limited, a wholly owned
subsidiary of Trinity, and IRCA Investments (Pty.) Ltd. ("IRCA
Investments"), the minority shareholder in IRCA, prevents IRCA and its
subsidiaries from approving, canceling or effecting "material changes
to the annual budget or any modification thereof, or to its strategic
plans or marketing strategy or incur(ring) unbudgeted capital
expenditure in excess of R200,000 (two hundred thousand Rand) per item
or R800,000 (eight hundred thousand Rand) in total per annum." Also,
pursuant to Section 19 of the SOS Agreement, Danlas and IRCA
Investments are "each entitled to appoint equal number of directors to
the board of directors" of IRCA. These substantive participating
rights of the minority shareholder will remain in effect until Danlas
owns 60% of IRCA.
Purchase Accounting
The Company accounts for its investments in its subsidiaries using the purchase
method of accounting. Intangible assets are recognized apart from goodwill if
they are contractual in nature or separately identifiable. Acquisitions are
measured on the fair value of consideration exchanged and, if the consideration
given is not cash, measurement is based on the fair value of the consideration
given or the fair value of the assets acquired, whichever is more reliably
measurable. The excess of cost of an acquired entity over the net amounts
assigned to identifiable acquired assets and liabilities assumed is recognized
as goodwill. The valuation and allocation process relies on significant
assumptions made by management, in particular, the value of the shares issued to
effect the purchase prior to the Company having established a trading market for
its stock.
Revenue Recognition
We earn our revenues primarily from service-related contracts, including
operations and maintenance services and a variety of technical assistance
services. Revenue is generally recognized on a straight-line basis, unless
evidence suggests that the revenue is earned or obligations are fulfilled in a
different pattern over the contractual term of the arrangement or the expected
period, during which those specified services will be performed, whichever is
longer. Four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. The Company determines whether criteria (3) and (4) are
met based on judgments regarding
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the nature of the fee charged for services rendered and products delivered and
the collectibility of those fees. The Company also earns revenue from the sale
of hardware containing software, and accounts for this revenue in accordance
with SOP 97-2, Software Revenue Recognition in accordance with EITF 03-5. To
date, such revenues have not been significant.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit
risk, consist principally of trade receivables. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of clients
that comprise our customer base and their dispersion across different business
and geographic areas. We estimate and maintain an allowance for potentially
uncollectible accounts and such estimates have historically been within
management's expectations. Our cash balances, restricted cash and short-term
investments are maintained in accounts held by major banks and financial
institutions located primarily in the United States, Norway, South Africa and
Australia. No single customer accounts for revenues or receivables greater than
10% of Company totals.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three
months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value due to the short-term maturity of these
instruments. The carrying value of notes payable approximates fair value because
negotiated terms and conditions are consistent with current market rates.
Determination of the fair value of notes payable to related parties cannot be
estimated because of the favorable conditions given to the Company by these
parties not otherwise available from third parties. It is not practicable to
estimate the fair value of notes payable issued for acquisitions and equity
investments because they were issued at a substantial conversion premium and
contain no stated payment terms. The carrying value of equity investments and
advances to associated companies approximates fair value. We evaluate such
assets on a regular basis by looking at cash flows, market conditions and
current and anticipated future performance. In September 2004, we incurred an
impairment charge of $80,000. At September 30, 2004, we had a negative value in
our investment in IRCA as losses and impairment charges have exceeded our
original investment. Losses will continue to be recorded in the statement of
operations up to the value of our $500,000 deposit as collateral for the IRCA
operating line of credit.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal
trade terms. Management regularly evaluates the need for an allowance for
uncollectible accounts by taking into consideration factors such as the type of
client; governmental agencies or private sector; trends in actual and forecasted
credit quality of the client, including delinquency and late payment history;
and current economic conditions that may affect a client's ability to pay.
Management has determined that there is no need for an allowance as of September
30 and June 30, 2004.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method using estimated lives ranging from three to five years for
property and equipment. Leasehold improvements are amortized over the length of
the lease or estimated useful life, whichever is less. Property and equipment is
periodically reviewed for impairment. When such loss is identified, it is
recorded as a loss in that period.
Deferred Charges
The Company capitalizes costs associated with the issuance of debt instruments.
These costs are amortized on a method that approximates the interest method over
the term of the debt agreements. Amortization expenses for deferred charges were
$5,630 and $0 for the three months ended September 30, 2004 and 2003,
respectively.
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Restricted Cash
Restricted cash within noncurrent assets consists primarily of $4,492,522 on
deposit in a restricted account as security for the $5.5 million convertible
term note with Laurus Master Fund, Ltd. In addition, $500,000 is on deposit with
Standard Bank and restricted for use as collateral for an operating line of
credit at IRCA. This provision is part of the Company's contractual arrangement
with IRCA. Should IRCA default on its line of credit with Standard Bank, these
funds may be seized by Standard Bank.
Fair Value of Common Stock
Contingently redeemable equity represents the value of shares of our common
stock issuable upon the conversion of notes payable in excess of the face value
of these notes issued in the acquisition of VILPAS and the acquisition of equity
interest in each of the Riverbend and IRCA transactions. The stock arrangements
are dependent on the satisfaction of certain conditions by us, most notably the
listing of our common stock a major stock exchange in the United States of
America, for which there are financial requirements for listing. The valuation
and allocation process relies on significant assumptions made by management, in
particular, the value of the shares to be issued as described above to effect
the purchase prior to the Company having established a trading market for its
stock. When it becomes probable that redemption will occur, the Company will
record changes in fair value in the Statement of Operations.
Allocation of Purchase Consideration in Business Combinations
The Company accounts for its investments in its subsidiaries using the purchase
method of accounting. The excess of the consideration paid for subsidiaries over
the fair value of acquired tangible assets less the fair value of acquired
liabilities is assigned to intangible assets and goodwill. The Company obtains
an independent third party valuation to ascertain the amount to allocate to
identifiable intangible assets, and the useful lives of those assets. The
Company amortizes identifiable intangible assets over their useful life unless
that life is determined to be indefinite. The useful life of an intangible asset
that is being amortized is evaluated each reporting period as to whether events
and circumstances warrant a revision to the remaining period of amortization.
Goodwill is not amortized and is tested for impairment on an annual basis. The
implied fair value of goodwill is determined by allocating fair value to all
assets and liabilities acquired; the excess of the price paid over the amounts
assigned to assets and liabilities acquired is the implied fair value of
goodwill.
Allocation of Purchase Consideration for Equity Investments in Associated
Companies
The excess of the consideration paid for equity investments in associated
companies over our pro rata share of the investee's net assets is allocated to
intangibles and goodwill similar to a purchase business combination. The Company
obtains an independent third party valuation to ascertain the amount to allocate
to identifiable intangible assets and the useful lives of those assets. The
Company amortizes identifiable intangible assets over their useful life unless
that life is determined to be indefinite. In each of the Riverbend and the IRCA
transactions, the Company received an option, exercisable under certain
conditions, to acquire the additional 49% of each of those companies. Using the
Black Scholes option valuation model, a value was assigned to each of the
intangible assets associated with those options. The useful life of an
intangible asset that is being amortized is evaluated each reporting period as
to whether events and circumstances warrant a revision to the remaining period
of amortization. The value of the Equity Investments in Associated Companies is
tested for impairment on an annual basis. At June 30, 2004, based on actual
performance and forecasts for future performance, the value of the IRCA
investment after application of current year losses and amortization of
intangible assets, was written down to $0 and impairment expense of $884,963 was
recorded in the statement of operations. An allowance for doubtful loan
receivable in the amount of $80,000 was established at September 30, 2004 for
our loan to IRCA Australia.
Software Development Costs
Software development costs related to software that the company licenses to
customers are charged to expense as incurred until technological feasibility is
attained. Technological feasibility is attained when the Company's software has
completed system testing and has been determined viable for its intended use.
The time between the attainment of technological feasibility and completion of
software development has been short with immaterial amounts of development costs
incurred during this period. Accordingly, software costs have not been
capitalized
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other than product development costs acquired through technology business
combinations and technology purchases.
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 dilutive potential 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 for common
shares were not included in the computation of DEPS, because their inclusion
would have been antidilutive for the three months ended September 30, 2004 and
2003, respectively.
If the company were to include all potential shares in the calculation, the
following items would be included:
o Stock options to purchase 5,670,000 shares of common stock at prices
ranging from $0.05 to $0.60 per share were outstanding at September
30, 2004; 3,182,000 options were outstanding at September 30, 2003 at
purchase prices varying from $0.05 to $0.50 per share.
o Warrants to purchase 21,884,950 shares of common stock at prices
ranging from $0.50 to $2.00 per share were outstanding September 30,
2004; warrants to purchase 5,677,000 shares of common stock at prices
ranging from $0.05 to $2.00 per share were outstanding at June 30,
2004.
o At September 30, 2004 and 2003, we held 662,500 and 1,662,500 shares
in escrow, respectively.
o At September 30, 2004, we had the following convertible notes
outstanding: (i) a convertible non-interest-bearing promissory note in
the amount of $20,000 was convertible into 2,000,000 shares of our
common stock for our investment in Ayrshire, (ii) a convertible
non-interest-bearing promissory note in the amount of $20,000 was
convertible into 2,500,000 shares of our common stock for our
investment in Danlas / IRCA, (iii) a convertible promissory note in
the amount of $500,000 convertible into 1,000,000 shares of our common
stock for our investment in VILPAS, (iv) a convertible promissory note
totaling $70,000 convertible into an indeterminable amount of shares
of our common stock and (v) a convertible promissory note totaling
$5,500,000 convertible into an indeterminable amount of shares of our
common stock.
o At September 30, 2003, the following convertible notes were
outstanding: (i) $425,000 convertible note payable convertible into an
indeterminable number of shares of our common stock and (ii)
$1,000,000 convertible note payable convertible into 500,000 shares of
our common stock.
For the Three For the Three
Months Ended Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Numerator-Basic / Diluted
Net (loss) available for common stockholders $ (1,861,586) $ (945,910)
================== ==================
Denominator-Basic / Diluted
Weighted-average common stock outstanding 30,377,643 15,652,516
================== ==================
Basic / Diluted (loss) per share $ (0.06) $ (0.06)
================== ==================
Stock-Based Compensation
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends FASB
Statement 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent disclosure in both annual and interim financial statements of the
method of accounting for employee stock option grants and the effect of the
method used on reported results.
-11-
The Company has adopted the fair value based method of accounting for
stock-based employee compensation in accordance with Statement of Financial
Accounting Standards Number 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). In accordance with SFAS 123, option expense of $104,997 and
$98,514 was recognized for the three months ended September 30, 2004 and 2003,
respectively. The expense was calculated using the Black Scholes valuation model
with the following assumptions:
September 30, September 30,
2004 2003
------------- -------------
Five-Year Risk Free Interest Rate 3.33% 3.63%
Dividend Yield Nil Nil
Volatility 70% 70%
Average Expected Term (Years to Exercise) 5 5
Goodwill and Other Intangibles Resulting from Business Acquisitions
The Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," at the beginning of fiscal 2003.
As required, the Company identified its reporting units and the amounts of other
intangible assets, and other assets and liabilities allocated to those reporting
units. This Statement addresses the accounting and reporting of goodwill and
other intangible assets subsequent to their acquisition. SFAS No.142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized, (ii) impairment will be measured using various valuation techniques
based on discounted cash flows, (iii) goodwill will be tested for impairment at
least annually at the reporting unit level, (iv) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually, and (v)
intangible assets with finite lives will be amortized over their useful lives.
The Company does not have any intangible assets with indefinite lives.
Recently Issued Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46"),
Consolidation of Variable Interest Entities ("VIE"). Fin No. 46 requires that if
a company holds a controlling interest in a VIE, the assets, liabilities and
results of the VIE's activities should be consolidated in the entity's financial
statements. In December 2003, the FASB revised FIN No. 46 which, among other
revisions, resulted in the deferral of the effective date of applying the
provisions of FIN No. 46 to the first interim or annual period ending after
December 15, 2004 for qualifying VIE's. The Company believes it has no VIE's and
adoption of FIN 46, as revised, did not have a material impact on our
consolidated financial condition or results of operations for the quarters ended
September 30, 2004 and 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SFAS 150"), "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity." SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As permitted, the Company
adopted SFAS 150 on September 1, 2003. Adoption of SFAS 150 did not have a
significant impact on the Company's financial statements for the quarters ended
September 30, 2004 and 2003.
On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC
or the Staff) issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue
Recognition," which supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the
SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been incorporated into
SAB 104. While the wording of SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. SAB 104 applies to our service related
contracts. We do not have material multiple element arrangements and thus SAB
104 does not impact our financial statements nor is adoption of SAB 104
considered a change in accounting principle.
-12-
On April 9, 2004, FASB issued FASB Staff Position No. FAS 129-1, "Disclosure of
Information about Capital Structure, Relating to Contingently Convertible
Securities" ("FSP 129-1"). FSP 129-1 clarifies that the disclosure requirements
of Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" applies to all contingently convertible
securities and to their potentially dilutive effects on earnings per share
("EPS"), including those for which the criteria for conversion have not been
satisfied, and thus are not included in the computation of diluted EPS. The
guidance in FSP 129-1 is effective immediately and applies to all existing and
newly created securities. Our required FSP 129-1 disclosures are included above
under "Earnings (Loss) Per Share." Our contingently redeemable equity is
convertible to shares of our common stock; however, the conversion would be
anti-dilutive.
Reclassifications
Certain reclassifications have been made to the 2003 consolidated financial
statements and notes to conform to the 2004 presentation with no effect on
consolidated net loss, or accumulated deficit.
NOTE 2 - ACQUISITIONS AND DIVESTITURES
We commenced a strategy in 2002 to acquire operating companies in strategic
markets that have developed proprietary technology-enabled learning, training
and certification services targeted at major customers in worldwide industries.
Our mission is to become a leading global learning solution corporation through
acquisition, business development and strategic relationships.
On September 1, 2003, we completed the acquisition of all of the issued and
outstanding shares of TouchVision, a California corporation that is in the
business of providing technology-enabled information and learning systems to
healthcare providers, financial services companies and other industry segments.
In consideration for the TouchVision shares, we issued an aggregate of 1,250,000
restricted shares of our common stock, of which 312,500 shares are subject to
the terms of an escrow agreement as collateral for the indemnification
obligations of the former TouchVision shareholders. The determination of
purchase price was based on, among other things, annual revenue for the two
preceding years relative to comparable market based values for publicly traded
companies. We also agreed to loan to TouchVision the sum of $20,000 per month
for the twelve-month period following closing, to be used for working capital.
As of September 30, 2004, we had loaned TouchVision a total of $260,000 pursuant
to this agreement. This loan has been eliminated in consolidation at September
30, 2004. We had previously loaned TouchVision the sum of $50,000 in June and
July, 2003 by way of bridge financing pending completion of the acquisition.
This loan has also been eliminated in consolidation at September 30, 2004.
The following table summarizes the TouchVision assets acquired and liabilities
assumed as of the closing date in connection with $625,000 common stock issued
and acquisition related costs of $85,417 ($4,815 of which was incurred in the
quarter ended September 30, 2004):
Cash acquired $ 102,357
Tangible assets acquired 269,213
Intangible assets acquired 350,281
Goodwill 914,815
-----------
Total assets acquired 1,636,666
Liabilities assumed 926,249
-----------
Net assets acquired $ 710,417
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets are being amortized over varying periods, as indicated by
independent valuations, using the straight-line method. Allocation of the excess
of merger consideration over the net book value of assets acquired between
goodwill and intangible assets was determined by an independent, third-party
professional valuation firm. As the merger consideration was paid entirely in
shares of the Company's common stock, the goodwill acquired may not be amortized
for federal income tax purposes. The goodwill arising from the acquisition is
allocated to the United States geographic segment.
On September 1, 2003, we completed the acquisition of all of the issued and
outstanding shares of RMT, an Australian company that is in the business of
providing workplace training programs for various segments of the
-13-
food production industry, including viticulture and horticulture. In
consideration for the shares of RMT we issued 700,000 restricted shares of our
common stock, of which 350,000 shares are subject to the terms of an escrow
agreement as collateral for the indemnification obligations of the former RMT
shareholders. The determination of purchase price was based on, among other
things, annual revenue for the two preceding years relative to comparable market
based values for publicly traded companies.
The following table summarizes the RMT assets acquired and liabilities assumed
as of the closing date in connection with $350,000 common stock issued and
acquisition related costs of $15,425:
Cash acquired $ 37,979
Tangible assets acquired 78,673
Intangible assets acquired 18,000
Goodwill 376,517
----------
Total assets acquired 511,169
Liabilities assumed 145,744
----------
Net assets acquired $ 365,425
==========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets are being amortized over varying periods, as indicated by
independent valuations, using the straight-line method. Allocation of the excess
of merger consideration over the net book value of assets acquired between
goodwill and intangible assets was determined by an independent, third-party
professional valuation firm. As the merger consideration was paid entirely in
shares of the Company's common stock, the goodwill acquired may not be amortized
for federal income tax purposes. The goodwill arising from the acquisition is
allocated to the Australian geographic segment.
On March 1, 2004, we completed the acquisition of all the issued and outstanding
shares of VILPAS (f/k/a Virtual Learning Partners AS). In consideration for the
VILPAS shares we issued a convertible non-interest-bearing promissory note in
the principal amount of $500,000, which note is convertible from time to time
but no later than August 5, 2005 into a maximum of 1,000,000 shares of our
common stock. The value of shares issuable upon conversion (based upon a $0.80
per share value) in excess of the note amount has been classified as
contingently redeemable equity. Of these shares, up to 20% may be withheld in
satisfaction for any breach of warranties by the former shareholders of VILPAS.
The determination of purchase price was based on, among other things, annual
revenue for the two preceding years relative to comparable market based values
for publicly traded companies. The VILPAS shares are subject to escrow and
pledge agreements and will be reconveyed to the former shareholders in the event
of a default by us of certain terms and conditions of the acquisition
agreements, including, among other things, a voluntary or involuntary bankruptcy
proceeding involving us or the failure by us to list our shares of common stock
on a major stock exchange by February 5, 2005, subject to a six-month extension
in the event a listing application is in process on such date.
The following table summarizes the VILPAS assets acquired and liabilities
assumed as of the closing date in connection with the $500,000 convertible note
payable issued, the $300,000 recorded as conditionally redeemable equity in our
balance sheet and acquisition related costs of $53,933 ($1,064 of which was
incurred during the quarter ended September 30, 2004):
Cash acquired $ 1,052,270
Tangible assets acquired 339,986
Intangible assets acquired 210,177
Goodwill 564,073
-----------
Total assets acquired 2,166,506
Liabilities assumed 1,017,937
Minority interest 294,636
-----------
Net assets acquired $ 853,933
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets are being amortized over varying periods, as indicated by an
independent valuation, using the straight-line method. Allocation of the excess
of merger consideration over the net book value of assets acquired between
goodwill and intangible assets
-14-
was determined by an independent, third-party professional valuation firm. As
the merger consideration was paid entirely with a promissory note with no
payment terms and convertible into shares of the Company's common stock, the
goodwill acquired may not be amortized for federal income tax purposes. The
goodwill arising from the acquisition is allocated to the European geographic
segment.
On September 1, 2003, we completed the acquisition of 51% of the issued and
outstanding shares of Ayrshire that owns 95% of Riverbend, a South African
company that provides learning services to corporations and individuals in South
Africa. We also acquired the option to purchase the remaining 49% of Ayrshire.
In consideration for the Ayrshire shares, we issued a convertible
non-interest-bearing promissory note in the amount of $20,000, which amount is
convertible from time to time but no later than December 30, 2006 into a maximum
of 2,000,000 shares of our common stock. The value of shares issuable upon
conversion (based upon a $0.50 per share value) in excess of the note amount has
been classified as contingently redeemable equity. Of these shares, up to
400,000 may be withheld in satisfaction for any breach of warranties by the
former shareholders of Ayrshire. The determination of purchase price was based
on, among other things, annual revenue for the two preceding years relative to
comparable market based values for publicly traded companies. The Ayrshire
shares are subject to escrow and pledge agreements and will be reconveyed to the
former shareholders in the event of a default by us of certain terms and
conditions of the acquisition agreements, including, among other things, a
voluntary or involuntary bankruptcy proceeding involving us or the failure by us
to list our shares of common stock on a major stock exchange by December 30,
2006. The results of operations for Ayrshire, using the equity method, have been
included in the Company's financial statements since the date of acquisition. As
of September 30, 2004, no shares had been issued in exchange for the convertible
promissory note.
In connection with this acquisition, we agreed to make a non-interest-bearing
loan of $1,000,000 to Ayrshire. was We advanced $300,000 at closing of the
acquisition and $700,000 on November 3, 2003. The loan to Ayrshire has been
accounted for as a note receivable. We may exercise an option to acquire the
remaining 49% of Ayrshire in consideration for the issuance of 1,500,000 shares
of our common stock, subject to certain adjustments. The Company has allocated
$325,000 of the consideration paid to this intangible asset.
On December 1, 2003, we completed the acquisition of all the issued and
outstanding shares of Danlas, a British Virgin Islands Company that owns 51% of
IRCA (Proprietary) Limited ("IRCA"), a South African company specializing in
corporate learning, certification and risk mitigation in the area of safety,
health environment and quality assurance ("SHEQ"). IRCA operates in South
Africa, England and the United States through various operating subsidiaries.
Danlas also holds options to acquire the remaining 49% of IRCA. In consideration
for the Danlas shares, the Company (i) issued a convertible promissory note in
the aggregate principal amount of $20,000 convertible under certain conditions
into a maximum of 2,500,000 shares of the Company's common stock, (ii) agreed to
advance $500,000 in cash to Danlas to establish an international sales force,
(iii) provided $500,000 as collateral for an operating line of credit and, (iv)
provided certain future profit thresholds are met, agreed to issue up to an
additional 1,000,000 shares of the Company's common stock. The value of shares
issuable upon conversion (based upon a $0.50 per share value) in excess of the
note amount has been classified as contingently redeemable equity. The
determination of purchase price was based on, among other things, annual revenue
for the two preceding years relative to comparable market based values for
publicly traded companies. The results of operations for IRCA, using the equity
method, have been included in the Company's financial statements since the date
of acquisition. The $500,000 deposited as collateral in support of a bank line
of credit is classified as restricted cash in the Company's balance sheet. In
consideration of the operating results for the year ended June 30, 2004 and
management's estimate of future cash flows, the Company wrote down its remaining
investment in IRCA of approximately $884,962 to $0 in the fiscal year ended June
30, 2004.
As part of the Danlas transaction, we issued two convertible notes of $10,000
each with which to purchase the remaining 49% of IRCA. However, the notes are
only effective should Danlas be able to exercise two options for the remaining
49% of IRCA. The options are exercisable for the period December 1, 2003 to
December 31, 2005 commencing the day upon which the average closing price per
share of the Company's common stock for a period of ten days equals or exceeds
$2.00. The purchase consideration for the remaining 49% is 2,000,000 shares of
our common stock. The Company has allocated $75,000 of the consideration paid to
this option.
-15-
Purchased Intangible Assets
Changes in the net carrying amount of goodwill for the three months ended
September 30, 2004 is as follows:
Balance as of June 30, 2004 $ 1,849,526
Goodwill acquired during the period 5,879
-----------
Balance as of September 30, 2004 $ 1,855,405
===========
SFAS 142 requires goodwill and other intangible assets to be tested for
impairment at least annually. We regularly evaluate whether events and
circumstances have occurred which indicate a possible impairment of goodwill and
other intangible assets. In evaluating whether there is an impairment of
goodwill and other intangible assets, we evaluate the performance of each
subsidiary relative to its performance in prior periods, its budget and its
upcoming three year forecast. We also evaluate the revenue achieved per share of
our common stock issued as part of the purchase consideration in relation to
market capitalization of publicly traded training companies for current and
prior periods. Based on our review of the goodwill and other intangible assets,
we concluded that we did not have any impairment of goodwill at September 30,
2004.
The values assigned to other intangible assets are considered appropriate based
on independent valuations. The following table sets forth the Company's acquired
other intangible assets at September 30 and June 30, 2004, respectively, which
will continue to be amortized:
September 30, 2004 June 30, 2004
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Gross Average Net Gross Average Net
Carrying Life in Accumulated Carrying Carrying Life in Accumulated Carrying
Amount Months Amortization Amount Amount Months Amortization Amount
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Trade names and $ 156,841 58 $ 33,942 $ 122,899 $ 156,841 58 $ 27,521 $ 129,320
trademarks
Backlog 40,600 36 15,944 24,656 40,600 36 4,511 36,089
Current and core
technology 152,317 9 51,992 100,325 152,317 9 41,027 111,290
Customer
relationships 175,100 55 32,647 142,453 175,100 55 28,515 146,585
Other intangibles 53,600 13 53,600 - 53,600 13 41,926 11,674
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 578,458 38 $ 188,125 $ 390,333 $ 578,458 38 $ 143,500 $ 434,958
============ ============ ============ ============ ============ ============ ============ ============
Five Year Amortization schedule:
Fiscal Year Amount
-------------- -------------
2005 $ 91,446
2006 126,475
2007 83,547
2008 60,302
2009 28,563
Thereafter -
------------
Total $ 390,333
============
Divestitures
In December 2003, we sold our interest in CBL Global Corporation and its
Australian subsidiaries (collectively "CBL") to Messrs. Scammell and Kennedy,
the former owners of CBL. In conjunction with the management buyout, we entered
into a Settlement Agreement with respect to our litigation with CBL. Pursuant to
the terms of the agreement, we conveyed all of our interest in CBL back to the
former owners in exchange for surrender and cancellation of 3,000,000 shares of
Company stock issued to them in connection with acquisition of CBL and the
cancellation of $1,000,000 in convertible notes payable to them. Also as a
result of the divestiture, $222,151 owed by CBL to Messrs. Kennedy and Scammell
is no longer an obligation of the Company. Through CBL's strategic alliance with
IRCA, Trinity will continue to market CBL-related workplace learning content and
products in Africa.
As a result of the divestiture, the accumulated deficit of $1,314,277 resulting
from the accumulated operating loss for CBL between October 2002 and December
2003 as well as other comprehensive income of $30,128 for the same period are
included in our consolidated accumulated deficit and accumulated other
comprehensive income at
-16-
September 30, 2004. The net fair value of the assets and liabilities divested,
net of $1,000,000 convertible note payable, which was cancelled, the
intercompany receivable from CBL and the cancellation of 3,000,000 shares of our
common stock which were cancelled were recorded as a $461,063 net credit to our
common stock.
Pro Forma Results
The operating results of CBL, TouchVision, RMT and VILPAS have been included in
the accompanying consolidated financial statements from the date of acquisition
forward and, for CBL, up to the date of divestiture. In December 2003, we
completed the sale of our interest in CBL to the former owners of CBL.
Accordingly, CBL business' results of operations were included from July 1, 2003
to September 30, 2003. The business results of operations of RMT and TouchVision
are included for the period September 1, 2003 through September 30, 2004. The
business results for VILPAS are included for the period July 1, 2004 through
September 30, 2004.
The following unaudited pro forma financial information for the three months
ended September 30, 2003 presents the combined results of operations of the
Company and TouchVision, RMT, and VILPAS assuming the acquisitions occurred July
1, 2003. In December 2003, we completed the sale of our interest in CBL to the
former owners of CBL. Accordingly, CBL's business operating results are not
included in the Company's combined unaudited pro forma financial information for
the three months ended September 30, 2003. The unaudited pro forma financial
information is not intended to represent or be indicative of the consolidated
results of the operations of the Company that would have been reported had these
acquisitions been completed as of the dates presented, nor should it be taken as
a representation of the future consolidated results of operations of the
Company.
(Pro forma)
---------------
Three Months
Ended
September 30,
2003
---------------
Revenue $ 1,193,198
===============
Gross Profit $ 919,957
===============
Operating Loss $ (706,227)
===============
Net Loss $ (726,300)
===============
Net Loss per Common Share - Basic / Diluted $ (0.03)
===============
NOTE 3 - PROPERTY AND EQUIPMENT
Scheduled below are the assets, cost, and accumulated depreciation at September
30, 2004 and June 30, 2004, respectively and depreciation expense for the three
months ended September 30, 2004 and 2003, respectively.
Asset Cost Depreciation Expense Accumulated Depreciation
------------------------- ------------------------- -------------------------
9/30/2004 6/30/2004 9/30/2004 9/30/2003 9/30/2004 6/30/2004
----------- ----------- ----------- ----------- ----------- -----------
Furniture & Equipment $ 41,949 $ 53,733 $ 3,337 $ 4,862 $ 8,447 $ 16,573
=========== =========== =========== =========== =========== ===========
NOTE 4 - EQUITY INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
At September 30, 2004, the principal components of Equity Investments in and
Advances to Associated Companies were the following:
-17-
Ayrshire IRCA
----------- -----------
Equity investment as of July 1, 2004 $ 842,935 $ -
Advances 1,000,000 80,000
Provision for advances - (80,000)
Equity in losses of unconsolidated subsidiary (225,255) (343,246)
----------- -----------
Balance September 30, 2004 $ 1,617,680 $ (343,246)
=========== ===========
The financial positions of Ayrshire / Riverbend and IRCA at September 30, 2004
were:
Ayrshire IRCA
----------- -----------
Income statement information:
Revenue $ 411,772 $ 1,382,499
=========== ===========
Operating loss $ (76,452) $ (296,339)
=========== ===========
Net Loss $ (225,255) $ (343,246)
=========== ===========
Financial position information:
Current assets $ 899,473 $ 566,957
=========== ===========
Noncurrent assets $ 83,595 $ 1,147,321
=========== ===========
Current Liabilities $ 349,656 $ 896,042
=========== ===========
Long-term liabilities $ 1,543,736 $ 1,908,876
=========== ===========
The consideration paid for our investment in Ayrshire was $1,379,871. This
amount comprises legal and financial advisory fees of $379,871 plus 2,000,000
shares of our common stock valued at $0.50 per share. The net asset value of
Ayrshire at acquisition date was $1,806,886 and our pro rata share of their net
assets was $875,463. Equity Investments in Associated Companies are periodically
reviewed for impairment. The difference between our investment and our pro rata
share of Ayrshire's net assets as been allocated to goodwill and to intangible
assets. Equity Investments in Associated Companies are periodically reviewed for
impairment. When such impairment is identified, it is recorded as a loss in that
period. As of September 30, 2004, no such impairment was incurred.
The consideration paid for our investment in IRCA was $2,178,049. This amount
comprises legal, financial advisory and consultancy fees of $928,049 including
the payment to Mr. Steynberg of $607,165 plus 2,500,000 shares of our common
stock valued at $0.50 per share. The net asset value of IRCA at acquisition date
was $2,704,870 and our pro rata share of their net assets was $1,379,484. The
difference between our investment and our pro rata share of IRCA's net assets
has been allocated to goodwill and to intangible assets. Equity Investments in
Associated Companies are periodically reviewed for impairment. When such
impairment is identified, it is recorded as a loss in that period. As of June
30, 2004, we recognized an impairment loss for IRCA of $884,963.
In connection with our September 1, 2003 purchase of 51% of Ayrshire, we agreed
to make a non-interest-bearing loan of $1,000,000 to Ayrshire, $300,000 of which
was advanced at closing of the acquisition and $700,000 was advanced on November
3, 2003. The note is due December 30, 2006 provided that if by December 2005, an
option to purchase the additional 49% of Ayrshire has not been exercised, the
loan shall be repayable in five equal annual installments, the first installment
being payable on December 31, 2007 and the remaining installments payable in
yearly intervals thereafter. As partial consideration for our December 1, 2003
purchase of 51% of IRCA, we agreed to make a non-interest-bearing loan of
$80,000 to IRCA Australia, which was advanced during fiscal 2004. Based on
management's evaluation of the collectibility of this loan receivable, we
provided an allowance for doubtful loan receivable for $80,000 during the three
months ended September 30, 2004.
The other amortizable intangible assets are being amortized over varying
periods, as indicated by independent valuations, using the straight-line method.
The values assigned to the intangible assets are considered appropriate based on
independent valuations. The identifiable intangible assets are being amortized
over varying periods ranging from three to five years, as indicated by
independent valuations, and using the straight-line method.
The following table sets forth the Company's acquired intangible assets in
equity investments at September 30, 2004 which will continue to be amortized:
-18-
2004
---------------------------------------------------------
Gross Weighted Net
Carrying Average Life Accumulated Carrying
Amount in Months Amortization Amount
------------ ------------ ------------ ------------
Backlog $ 123,142 55 $ 28,012 $ 95,130
Current and core technology 28,101 36 10,094 18,007
Distributor relationships 122,579 60 26,478 96,101
Maintenance Contracts 67,345 60 16,283 51,062
In-Process R&D 20,833 0 20,833 -
Option value 325,000 indefinite - 325,000
------------ ------------ ------------
Total $ 687,000 $ 101,700 $ 585,300
============ ============ ============
Five Year Amortization schedule:
Fiscal Year Amount
--------------- ----------
2005 $ 56,395
2006 75,095
2007 63,828
2008 55,346
2009 9,636
Thereafter -
----------
Total $ 260,300
==========
NOTE 5 - COMMITMENTS
Total rental expense included in operations for operating leases for the three
months ended September 30, 2004 and 2003, respectively, amounted to $42,919 and
$27,332. The operating leases pertain to office space used by the Company for
its operations. Certain lease rentals contain renewal options and provide for
payment of property taxes and operating expenses. These operating lease
agreements expire at varying dates through 2008.
Total minimum lease commitments as of September 30, 2004:
Calendar Year Amount
-------------- ----------
2004 $ 111,260
2005 371,943
2006 333,591
2007 322,169
2008 134,237
Thereafter -
----------
Total $ 1,273,200
==========
As part of the Company's contractual arrangement with IRCA, we agreed to place
$500,000 on deposit with Standard Bank and restrict the funds for use as
collateral for an operating line of credit at IRCA. This deposit is classified
as restricted cash. Should IRCA default on its line of credit with Standard
Bank, these funds may be seized by Standard Bank.
NOTE 6 - OTHER ASSETS
Supplemental Balance Sheet Information as of September 30, 2004 (unaudited) and
June 30, 2004 (audited):
-19-
September 30 June 30,
2004 2004
------------ ------------
(Unaudited) (Audited)
------------ ------------
Other assets:
Deferred debt issuance costs, net of accumulated
amortization of $7,194 and $0, respectively $ 251,806 $ -
Other assets 145,925 142,856
------------ ------------
Other assets, net $ 397,731 $ 142,856
============ ============
NOTE 7 - RELATED PARTY TRANSACTIONS
Our corporate reorganization during the fiscal year ended September 30, 2002 was
effected primarily by two of our officers and directors, Messrs. Douglas Cole
and Edward Mooney. During that fiscal year and the transition period subsequent
thereto, we entered into several transactions with these individuals and with
entities controlled by them, as well as entities controlled by Mr. Theodore
Swindells, a significant stockholder of our company.
As of July 15, 2002, we entered in a two-year Advisory Agreement with Granite
Creek Partners, LLC ("GCP"), formerly King's Peak Advisors, LLC, automatically
renewable for an additional 12-month period. Under the terms of the Advisory
Agreement, GCP agreed to provide us with general corporate, financial, business
development and investment advisory services on a non-exclusive basis. These
services include assisting with the identification of placement agents,
underwriters, lenders and other sources of financing, as well as additional
qualified independent directors and members of management. GCP is a private
company whose principals are Messrs. Cole, Mooney and Swindells. At our August
19, 2003 meeting, our board of directors voted to suspend the Advisory Agreement
from August 15, 2003 until January 2004, and this agreement remains suspended.
Through December 31, 2003, GCP had earned a total of $315,000 under the Advisory
Agreement, $110,000 of which was converted into 4,400,000 shares of our common
stock in March 2003. The remaining balance of $205,000 was paid in full to GCP
as of June 30, 2004.
As of July 31, 2002, we entered into an Advisory Agreement with European
American Securities, Inc. ("EAS"), a private entity of which Mr. Swindells is a
principal, pursuant to which EAS agreed to provide financial advisory and
investment banking services to us in connection with various equity and/or debt
transactions. In exchange for such services, we agreed to pay EAS a retainer fee
of $5,000 per month and a commission ranging from 5% to 7% based on the type of
transaction consummated, such fees being payable, at EAS' option, in cash or our
common stock. On October 2, 2003, we renewed the agreement with EAS on terms
similar to those contained in the first agreement. On January 1, 2004, we
amended the October 2003 agreement for services rendered in connection with our
senior convertible bridge note offering, which closed on May 28, 2004, for which
we paid EAS a fee of 10%. Through June 30, 2004, EAS had earned a total of
$1,065,104 pursuant to our arrangement with them, of which $345,450 was earned
in connection with private equity and/or debt transactions and $719,654 was
earned for advisory services in connection with certain acquisitions. In January
2004, 250,000 shares with a fair market value of $375,000 were paid to EAS in
the Company's common stock. As of September 30, 2004, the balance owed to EAS
was $81,653. On May 27, 2004, European American Perinvest Group, a subsidiary of
EAS, invested $100,000 in our 2004 senior convertible bridge note offering. On
May 28, 2004, this investment was converted to 166,699 restricted shares of our
common stock.
During the period August 2001 to June 30, 2002, Mr. Swindells advanced a total
of $925,000 to us by way of short-term non-interest bearing convertible working
capital loans, as follows: $145,000 during the fiscal year ended September 30,
2001 and $780,000 during the transition period from October 1, 2002 to June 30,
2003. We repaid $500,000 of the total amount owing in September 2003 and issued
an aggregate of 850,000 shares of our common stock to Mr. Swindells in November
2003 in payment of the balance of $425,000. During the period June 2004 to
October 2004, Mr. Swindells advanced us $155,000 for use as working capital. On
August 10, 2004 we repaid $50,000 of this amount and on November 2, 2004 we paid
the remaining balance of $105,000. On October 14, 2004, Mr. Swindells exercised
warrants to purchase 300,000 shares of our common stock at $0.05 per share.
In October 2002, we (i) issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and (ii) in connection with the issuance of the Bridge
Financing Notes, issued warrants to the holders of the notes to purchase
additional shares of common stock. Of the total principal amount of the Bridge
Financing Notes, $55,000 was advanced by GCP and $120,000 by Mr. Swindells. On
-20-
May 19, 2003, the aggregate principal amount of the Bridge Financing Notes and
accrued interest thereon of $34,745 was converted into 1,336,867 shares of
common stock at a price of $0.40 per share. The warrants issued in connection
with the Bridge Financing Notes are exercisable for a period of one year at a
price of $0.05 per share, and contain a net issuance provision whereby the
holders may elect a cashless exercise of such warrants based on the fair market
value of the common stock at the time of conversion. On March 26, 2004, GSP
exercised its warrants in a cashless exercise for which it received a total of
126,042 shares of common stock.
In connection with our acquisition of our interest in IRCA, we entered into an
agreement with Titan Aviation Ltd. ("Titan"), a private company held in a trust
of which Mr. Martin Steynberg and other business partners are the beneficiaries.
Pursuant to this agreement, we paid Titan on May 14, 2004 the sterling
equivalent of 4,000,000 South African Rand ($607,165) in consideration for
various services rendered to IRCA. Mr. Steynberg, who is a stockholder in IRCA
Investments (Proprietary) Limited, which owns 25.1% of IRCA became a director of
our company on January 1, 2004 pursuant to the terms of the IRCA acquisition.
William Jobe, one of our directors, was paid a total of $59,500 during the
period December 2003 to May 2004 and in September 2004 he was paid $4,815 as
compensation for merger and acquisition services associated with our acquisition
of TouchVision.
From time to time, Jan-Olaf Willums, an officer of VILPAS, as well as companies
of which he is a director, have advanced funds to VILPAS. The current balance of
$181,408 owing to Mr. Willums, of which $109,341 bears interest at 8% per annum
and $72,067 is non-interest bearing, has no fixed terms of repayment.
NOTE 8 - NOTES PAYABLE
On July 29, 2004, we issued a secured promissory note in the principal amount of
$500,000 to Oceanus Value Fund, L.P. ("Oceanus"). The note would have matured on
October 27, 2004, and bore interest at the rate of twelve percent (12%). In
connection with the issuance of the note, we also issued to Oceanus a five-year
warrant to purchase up to 125,000 shares of our common stock at a price of $1.00
per share. As such, a value attributable to the warrants using the Black Scholes
option valuation model of $188,842 was determined and recorded as a discount on
notes payable.
On August 31, 2004, we entered into a series of agreements with Laurus Master
Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured convertible term
note in the principal amount of $5.5 million and (ii) a five-year warrant to
purchase up to 1,600,000 shares of our common stock at a price of $0.81 per
share. Of the note proceeds, $4,491,000 was deposited in a restricted account as
security for the total loan amount and for use by us to make acquisitions as
approved by Laurus; the outstanding principal balance of $500,000 was repaid to
Oceanus and the remainder of the loan proceeds was used for operating needs. The
principal amount of the note carries an interest rate of prime plus two percent,
subject to adjustment, and we must make monthly principal payments of at least
$22,059, commencing November 1, 2004, toward the outstanding non-restricted
principal amount. Any remaining outstanding principal and interest are due in
full on August 31, 2007. The principal amount of the note and accrued interest
thereon are convertible into shares of our common stock at a price of $0.72 per
share, subject to anti-dilution adjustments. A value attributable to the
warrants using the Black Scholes option valuation model of $2,863,363 was
determined and recorded as a liability and a discount on notes payable. A value
attributable to the beneficial conversion feature of the note using the Black
Scholes option valuation model of $2,070,784 was determined and recorded as
credit to common stock and a discount on notes payable.
During the period from June 2004 through September 2004, Mr. Swindells advanced
us $120,000 for use as working capital. On August 10, 2004 we repaid $50,000 of
this amount.
As of September 30, 2004 and June 30, 2004, notes payable consisted of the
following:
September 30, June 30,
2004 2004
------------ ------------
Notes payable to third parties:
Convertible note payable, net of unamortized discount of $2,783,825
attributed to warrant and unamortized discount of $2,013,262 attributable
to beneficial conversion; interest at prime plus 2% payable monthly,
principal payments of $22,059 on the outstanding non-restricted
principal amount due the first of each month beginning November 1,
2004 until August 31, 2007 when any remaining principal and interest
are due. $ 702,913 $ -
-21-
Note payable to two credit unions; interest payable monthly, principal
due in full February 5, 2005, unsecured, interest at 12% per annum. 250,000 250,000
Third party creditors; unsecured, non-interest bearing and no fixed
terms of repayment. 10,810 10,810
Third party individuals; due September 1, 2006, unsecured, interest at
10% per annum, interest payable monthly, principal due in full at
maturity. 92,699 73,560
Bank note payable; due October 29, 2004, secured by Company vehicle,
interest at 9.5% per annum, monthly payments of interest and
principal. 10,736 12,103
Revolving bank lines of credit; unsecured, interest ranging from prime
plus 2.625% to prime plus 6.75%, monthly payment of principal and
interest. 131,590 133,128
Revolving third party line of credit; unsecured, interest at prime
plus 1.99%, monthly payments of interest and principal. 9,958 11,182
Notes payable to related parties:
Note payable to related party; principal and accumulated interest due
December 31, 2004, unsecured, interest at 6% per annum. 14,286 13,297
Convertible note payable to a related party, unsecured, interest,
non-interest bearing, no fixed terms of repayment. 70,000 50,000
Note payable to a related party; unsecured, interest at 8% per annum
on $109,341; non-interest bearing on $72,067. No fixed terms of
repayment. 181,408 177,179
Notes payable for acquisitions and equity investments:
Convertible note payable to a related party for VILPAS purchase; due
August 5, 2005, unsecured, non-interest bearing. 500,000 500,000
Convertible note payable to a related party for IRCA purchase; due
December 31, 2005, unsecured, non-interest bearing. 20,000 20,000
Convertible note payable to a related party for Riverbend purchase;
due December 31, 2006, unsecured, non-interest bearing. 20,000 20,000
------------ ------------
Total notes payable 2,014,400 1,271,259
Less: current maturities (1,262,086) (1,159,430)
------------ ------------
Long-term notes payable $ 752,314 $ 111,829
============ ============
Maturity schedule for notes payable:
Fiscal Year Amount
----------- -------------
2005 $ 605,259
2006 1,054,706
2007 357,405
2008 4,794,117
2009 -
-------------
Sub-total 6,811,487
Less: unamortized note discount (4,797,087)
-------------
Total $ 2,014,400
=============
-22-
NOTE 9 - STOCK OPTION PLAN
On December 2, 2002, at a special meeting of our shareholders, the 2002 Stock
Plan was approved. The Plan allowed for a maximum aggregate number of shares
that may be optioned and sold under the plan of (a) 3,000,000 shares, plus (b)
an annual 500,000 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 2002 Stock Plan to allow for a maximum aggregate number of
shares that may be optioned and sold under the plan of (a) 6,000,000 shares,
plus (b) an annual 1,000,000 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 25% on the day of the grant and
the remaining 75% vests monthly over the next 36 months.
The following schedule summarizes the activity during the three months ended
September 30, 2004 and 2003, respectively:
September 30, 2004 September 30, 2003
--------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
Outstanding at beginning of year 5,570,000 $ 0.42 2,447,000 $ 0.23
Granted 100,000 0.60 735,000 0.50
Exercised - - - -
Canceled - - - -
------------ ------------ ------------ ------------
Outstanding at September 30 5,670,000 $ 0.43 3,182,000 $ 0.29
============ ============ ============ ============
Exercisable at September 30 2,965,729 $ 0.40 1,303,125 $ 0.26
============ ============ ============ ============
Stock options outstanding and exercisable under 2002 Stock Plan as of September
30, 2004 are as follows:
Weighted Average Remaining Number of Options Weighted
Range of Number of Options Average Contractual Life Vested Average
Exercise Price Outstanding Exercise Price (Years) (Exercisable) Exercise Price
-------------- ---------------- ---------------- ------------------- ----------------- ---------------
$0.05 500,000 $ 0.05 3.02 372,260 $ 0.05
$0.25 800,000 0.25 3.20 560,685 0.25
$0.50 4,270,000 0.50 4.13 1,989,565 0.50
$0.60 100,000 0.60 4.27 43,219 0.60
---------------- ---------------- ----------------- ---------------
5,670,000 $ 0.43 2,965,729 $ 0.40
================ ================ ================= ===============
There are 1,784,590 options available for grant at September 30, 2004. The
weighted average grant date fair value of options granted as of September 30,
2004 is $0.43.
NOTE 10 - WARRANTS
Through September 30, 2004, the Company had issued warrants for purchase of its
common stock to investors and service providers in connection with its financing
transactions. The principal terms of the warrants are summarized below:
-23-
Number of Exercise Price
Description Shares per Share Exercisable Through
----------- ------------- -------------- ----------------------
October 2002 Equity Private Placement 500,000 $ 1.00 May 2006
October 2002 Equity Private Placement Bonus Warrants (1) 250,000 $ 2.00 n/a
May 2003 Equity Private Placement 2,438,000 $ 1.00 August 2006
May 2003 Equity Private Placement 7,708,600 $ 1.00 October 2006
May 2003 Bonus Warrants (1) 5,073,300 $ 2.00 n/a
Warrants Issued to Financial Advisors 200,050 $ 0.60 October 2006
Warrants Issued to Investment Bank 20,000 $ 0.50 July 2008
Warrants Issued to Mr. Swindells on note conversion 850,000 $ 1.00 November 2006
Bonus Warrants to Mr. Swindells (1) 425,000 $ 2.00 n/a
2004 Bridge Loan Warrant 2,695,000 $ 1.00 February and May 2009
Warrant Issued to Oceanus Value Fund 125,000 $ 1.00 July 29, 2009
Warrant Issued to Laurus Funds 1,600,000 $ 0.81 August 30, 2009
------------- -------------
Total 21,884,950 $ 1.24
============= =============
(1) Bonus warrants are issuable upon exercise of the original warrant.
NOTE 11 - SEGMENT AND RELATED INFORMATION
We operate as a single business segment; however, our consolidated subsidiaries
are organized geographically into reporting segments consisting of the United
States Division, the European Division, the Australia Division and the South
Africa Division. Our United States division comprises our corporate operations
and subsidiaries domiciled in the United States of America. The European
division comprises subsidiaries domiciled in Europe; the Australia Division
comprises subsidiaries domiciled in Australia. The South Africa division
comprises non-consolidated subsidiaries domiciled in South Africa accounted for
using the equity method of accounting including a two person office owned by
them in Australia.
As of and for the first quarter ended September 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 384,579 $ (937,139) $ 34,334 $ - $ 125,814 $ 914,815 $ 2,183 $ 8,458,218 $ 257,261
Europe 362,464 (59,883) 11,625 - 205,287 564,073 - 1,761,516 514,298
Australia 155,811 (4,042) 2,003 - 60,168 376,517 31,319 536,924 77,574
South Africa - - - (648,501) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 902,854 $(1,001,064) $ 47,962 $ (648,501) $ 391,269 $ 1,855,405 $ 33,502 $10,756,658 $ 849,133
========== =========== =========== =========== =========== =========== =========== =========== ===========
As of and for the first quarter ended September 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 109,993 $ (696,107) $ 5,852 $ - $ 132,484 $ - $ 8,654 $ 4,080,652 $ 1,485,167
Europe - - - - - - - - -
Australia 144,000 (225,113) 82,986 - 166,491 - 78,991 1,607,373 (234,598)
South Africa - - - (995) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 253,993 $ (921,220) $ 88,838 $ (995) $ 298,975 $ - $ 87,645 $ 5,688,025 $ 1,250,569
========== =========== =========== =========== =========== =========== =========== =========== ===========
NOTE 12 - STOCKHOLDERS' EQUITY
On July 29, 2004, we issued a secured promissory note in the principal amount of
$500,000 to Oceanus Value Fund, L.P. ("Oceanus"). In connection with the
issuance of the note, we also issued to Oceanus a five-year warrant to purchase
up to 125,000 shares of our common stock at a price of $1.00 per share. A value
attributable to the warrants using the Black Scholes option valuation model of
$188,842 was determined and recorded as a discount on notes payable.
-24-
On August 31, 2004, we entered into a series of agreements with Laurus Master
Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured convertible term
note in the principal amount of $5.5 million and (ii) a five-year warrant to
purchase up to 1,600,000 shares of our common stock at a price of $0.81 per
share. Of the note proceeds, $4,491,000 was deposited in a restricted account as
security for the total loan amount and for use by us to make acquisitions as
approved by Laurus; the outstanding principal balance of $500,000 was repaid to
Oceanus and the remainder of the loan proceeds was used for operating needs. The
principal amount of the note carries an interest rate of prime plus two percent,
subject to adjustment, and we must make monthly principal payments of at least
$22,059, commencing November 1, 2004, toward the outstanding non-restricted
principal amount. The principal amount of the note and accrued interest thereon
are convertible into shares of our common stock at a price of $0.72 per share,
subject to anti-dilution adjustments. A value attributable to the warrants using
the Black Scholes option valuation model of $2,863,363 was determined and
recorded as a discount on notes payable. A value attributable to the beneficial
conversion feature of the note using the Black Scholes option valuation model of
$2,070,784 was determined and recorded as credit to common stock and a discount
on notes payable.
NOTE 13 - GOING CONCERN
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
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. These conditions raise substantial
doubt about our ability to continue as a going concern
To meet our present and future liquidity requirements, we will continue to seek
additional funding through private placements and ongoing operations. To this
end we anticipate the closing of a $1.5 million private offering of convertible
debt in late December 2004 or early January 2005, the proceeds of which will be
added to our working capital. 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.
Trinity's future capital requirements will depend on our ability to successfully
implement these initiatives and other factors, including our ability to maintain
our existing customer base and to expand our customer base into new geographic
markets, and overall financial market conditions in the United States and other
countries where we will seek prospective investors.
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
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. Based upon our cash balance at
December 1, 2004 we will not be able to sustain operations for more than two
months without additional sources of financing.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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/A 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, 2004, filed on December 3, 2004, under the heading Information
Regarding Forward-Looking Statements and elsewhere. Investors should review this
quarterly report on Form 10-QSB/A 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
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. Based upon our cash balance at
December 1, 2004, we will not be able to sustain operations for more than two
months without additional sources of financing.
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, development of the business of our
newly-acquired subsidiaries, 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. That would raise substantial
doubt about our ability to continue as a going concern.
Accounting for Riverbend and IRCA
In September and December 2003, we completed the acquisition, respectively,
of our interest in Riverbend and IRCA. Our interim financial statements as
originally filed for the periods ending September 30, 2003 and December 31, 2003
and March 31, 2004 reflected the consolidation of those entities with our
company. Our investments in Riverbend and IRCA have been re-classified in our
year-end audited financial statements as equity investments and, accordingly,
the financial results of these companies have not been consolidated with our
financial statements. We have filed amended quarterly reports for the periods
ended September 30 and December 31, 2003 and March 31, 2004 that reflect this
change in accounting treatment.
Results of Operations
Three Months Ended September 30, 2004 as Compared to the Three Months Ended
September 30, 2003
Our sales revenues for first quarter 2005 were $902,854, as compared to
$253,993 for the first quarter 2004. This increase in revenues is due to the
acquisitions in September 2003 of TouchVision and RMT and our acquisition of
VILPAS in March 2004. The three month period in 2003 comprises three months
revenue of CBL and one month each of RMT and TouchVision.
Costs of sales, which consist of labor and hardware costs, and other
incidental expenses, was $180,905 for the first quarter 2005 as compared to
$32,497 for the first quarter 2004, resulting in gross profit of $721,949 for
the first quarter 2005, as compared to $221,496 for the first quarter 2004.
These increases in both costs and gross profit
-26-
were due to and associated with increased revenues resulting from the
acquisitions completed by us in September 2003 and March 2004.
Operating expenses for first quarter 2005 were $1,723,013 as compared to
$1,142,716 for the first quarter 2004. This increase was due primarily to a
significant increase in selling, general and administrative expenses which
increased $219,568 from $269,594 for the first quarter 2004. This increase is
largely due to the addition of the three new subsidiaries. Salaries and benefits
expense also increased $321,583 due to the addition of the new subsidiaries and
additional finance and management staff hired in Trinity corporate operations.
Other Expense of $885,398 was $860,708 greater than that for the first
quarter 2004. This increase is primarily due to losses in associated companies
accounted for on an equity basis of $648,501 and an increase in interest expense
of $206,415. Losses in associated companies comprise Riverbend ($225,255) and
IRCA ($423,246). Included in interest expense of $229,703 is $199,888
attributable to amortization of discounts on the Laurus and Oceanus notes of
$137,060 and $62,828, respectfully.
We reported net loss available for common stockholders of $1,861,586, or
$0.06 per share for the first quarter 2005, compared with a net loss of $945,910
or $0.06 per share for first quarter 2004.
The operating results of CBL, TouchVision, and RMT have been included in
the accompanying consolidated financial statements from the date of acquisition
forward and, for CBL, up to the date of divestiture. Accordingly, CBL business'
results of operations were included from October 1, 2002 to December 22, 2003.
The business results of operations of RMT and TouchVision are included for the
period September 1, 2003 through September 30, 2004. The business results for
VILPAS are included for the period March 1, 2004 through September 30, 2004.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and TouchVision, RMT, and VILPAS
assuming the acquisitions occurred July 1, 2003. The unaudited pro forma
financial information is not intended to represent or be indicative of the
consolidated results of the operations of the Company that would have been
reported had these acquisitions been completed as of the dates presented, nor
should it be taken as a representation of the future consolidated results of
operations of the Company.
(Pro forma)
---------------
Three Months
Ended
September 30,
2004
---------------
Revenue $ 1,193,198
===============
Gross Profit $ 919,957
===============
Operating Loss $ (706,227)
===============
Net Loss $ (726,300)
===============
On a pro forma basis, sales revenue of $902,854 for the three months ended
September 30, 2004 was $290,344 less than that for the three months ended
September 30, 2003. On a pro forma basis the decline in revenue is primarily
attributable to TouchVision where revenue declined $220,572 when compared to the
prior year. On a pro forma basis, gross profit had similar trends.
On a pro forma basis, operating loss of $1,001,064 for the first three
months ended September 30, 2004 was $294,837 greater than that for the three
months ended September 30, 2003. The increase is primarily a result of losses
sustained in TouchVision and increased operating costs in Trinity corporate
operations because of staff additions and increased legal fees.
On a pro forma basis, Other Expense of $885,398 for the three months ended
September 30, 2004 is $866,325 greater than that in the prior year primarily
because of the $647,506 increase in Equity Losses in Associated Companies and
amortization of the note discounts of $199,888 described above.
-27-
We operate as a single business segment; however, our consolidated
subsidiaries are organized geographically into reporting segments consisting of
the United States Division, the European Division, the Australia Division and
the South Africa Division. Our United States division comprises our corporate
operations and subsidiaries domiciled in the United States of America. The
European division comprises subsidiaries domiciled in Europe; the Australia
Division comprises subsidiaries domiciled in Australia. The South Africa
division comprises non-consolidated subsidiaries domiciled in South Africa
accounted for using the equity method of accounting including a two person
office owned by them in Australia.
As of and for the first quarter ended September 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 384,579 $ (937,139) $ 34,334 $ - $ 125,814 $ 914,815 $ 2,183 $ 8,458,218 $ 257,261
Europe 362,464 (59,883) 11,625 - 205,287 564,073 - 1,761,516 514,298
Australia 155,811 (4,042) 2,003 - 60,168 376,517 31,319 536,924 77,574
South Africa - - - (648,501) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 902,854 $(1,001,064) $ 47,962 $ (648,501) $ 391,269 $ 1,855,405 $ 33,502 $10,756,658 $ 849,133
========== =========== =========== =========== =========== =========== =========== =========== ===========
As of and for the first quarter ended September 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 109,993 $ (696,107) $ 5,852 $ - $ 132,484 $ - $ 8,654 $ 4,080,652 $ 1,485,167
Europe - - - - - - - - -
Australia 144,000 (225,113) 82,986 - 166,491 - 78,991 1,607,373 (234,598)
South Africa - - - (995) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 253,993 $ (921,220) $ 88,838 $ (995) $ 298,975 $ - $ 87,645 $ 5,688,025 $ 1,250,569
========== =========== =========== =========== =========== =========== =========== =========== ===========
The following describes underlying trends in the businesses of each of our three
operating subsidiaries.
VILPAS. The Norwegian government is currently refining its mandates with regard
to functionally disabled workers, with funding now targeted at not only training
of the handicapped but also at subsidizing direct employment of handicapped and
challenged individuals. FunkWeb, a majority owned subsidiary of VILPAS, is in
the process of revising some of its programs and market strategies to be able to
participate in government programs aimed directly at increasing employment among
functionally disabled workers. There is little or no seasonality to the business
of VILPAS. The majority of operating costs are fixed costs, with some variable
costs incurred related to cost of instructors, which costs may vary depending
upon enrollment.
RMT. Over the past year there has been a general reduction in Australian
government subsidies for corporate training. As a result, RMT and other
Registered Training Organizations must rely on competitive advantages to retain
clients and to attract new customers. Accordingly, RMT is in the process of
developing new products and services to expand its reach beyond the Australian
viticulture industry. There is little or no seasonality to RMT's business. New
investment for courseware may increase in the coming fiscal year as RMT develops
new courses to market in Australia and in markets outside Australia. Variable
costs for RMT primarily include one-time and ongoing expenses for outsourced
course development and, at times, instructors. Presently, RMT sells its products
and services in Australia in local currency (Australian Dollars) and there is
little or no effect from currency exchange. In the future, if RMT is successful
in selling in markets outside of Australia, foreign exchange factors may impact
the ability of RMT to market and compete in a profitable manner.
TouchVision. TouchVision has begun to expand its business into developing new
software and consulting services for the hospital and healthcare market, while
continuing to supply industry sectors it has focused on in the past. We believe
investments in technology infrastructure by hospitals and healthcare providers
will be stable in the coming fiscal years. There is little or no seasonality to
the business of TouchVision. In addition to sales through its
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existing sales force, TouchVision is in the process of establishing distribution
arrangements with outside companies selling to the healthcare industry.
Depending on sales channel mix, some sales through outside agents may result in
lower retained revenues but, due to corresponding lower fixed costs, these sales
may nonetheless have a positive impact on the bottom line.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have a history of
losses, and our accumulated deficit as of September 30, 2004 was $24,512,562 as
compared to $22,650,976 as of June 30, 2004.
At September 30, 2004, we had a cash balance of $846,860 compared to
$892,739 at June 30, 2004. Net cash used by operating activities during the
first quarter 2005 was $833,475 attributable primarily to our loss from
operations of $1,776,832. Net cash generated by financing activities was
$5,311,000 for the first quarter 2005 representing the net of borrowings and
repayments under short and long-term notes of $5,570,000 less fees associated
with debt issuance of $259,000. Of these funds, an aggregate of $70,000 was
advanced to our consolidated subsidiaries and $4,491,000 was deposited in a bank
in support of future acquisitions.
Accounts receivable increased from $243,164 at June 30, 2004 to $391,269 at
September 30, 2004. This increase is due to the timing of billings to and
collections from our customers.
Accounts payable increased from $814,651 at June 30, 2004 to $880,359 at
September 30, 2004. Accrued expenses decreased from $721,192 at June 30, 2004 to
$614,937 at September 30, 2004. These changes are attributable to expenses
incurred by the three subsidiaries we acquired during fiscal year 2004 and our
continuing corporate expansion during the year.
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. Capital expenditures, excluding
purchases financed through capital lease, during the first quarter 2005 and
2004, were $0 and $10,635, respectively.
We continued to seek equity and debt financing in first quarter 2005 to
support our growth and to finance recent and proposed acquisitions. In this
regard, on July 29, 2004, we issued a secured convertible promissory note in the
principal amount of $500,000 to Oceanus Value Fund, L.P. ("Oceanus"). On
September 1, 2004, we repaid the principal owing on the promissory note plus
accrued proceeds from the Laurus transaction described below.
On August 31, 2004, we entered into a series of agreements with Laurus
Master Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured
convertible term note in the principal amount of $5.5 million and (ii) a
five-year warrant to purchase up to 1,600,000 shares of our common stock at a
price of $0.81 per share. Of the note proceeds, $233,000 was used for
operations, $4,491,000 was deposited in a restricted account as security for the
total loan amount and for use by us to make acquisitions as approved by Laurus;
however, funds may be released for operations at a rate of 25% of the dollar
volume of our stock for a twenty day period, and the outstanding principal
balance of $500,000 was repaid to Oceanus. The principal amount of the note
carries an interest rate of prime plus two percent, subject to adjustment, and
we must make monthly principal payments of at least $22,059, commencing November
1, 2004, toward the outstanding non-restricted principal amount. The principal
amount of the note and accrued interest thereon is convertible into shares of
our common stock at a price of $0.72 per share, subject to anti-dilution
adjustments.
To meet our present and future liquidity requirements, we are continuing to
seek additional funding through private placements and ongoing operations. To
this end we anticipate the closing of a $1.5 million private offering of
convertible debt in late December 2004 or early January 2005, the proceeds of
which will be added to our working capital. 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.
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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
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. Based upon our cash balance at
December 1, 2004 we will not be able to sustain operations for more than two
months without additional sources of financing.
ITEM 3. CONTROLS AND PROCEDURES
Trinity Learning 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, 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.
In connection with the completion of its audit of, and the issuance of its
report on, Trinity Learning's consolidated financial statements for the year
ended June 30, 2004, BDO Spencer Steward ("BDO") advised the Audit Committee of
Trinity Learning's Board of Directors of certain material weaknesses in our
financial reporting. In light of this, Trinity Learning is undertaking a review
of its disclosure, financial information, internal controls and procedures and
organization and staffing of its corporate accounting department. It is
anticipated that this review will result in, among other things, the hiring of
additional finance and accounting resources, including independent consultants
who will document, test and develop current and expanded internal controls and
procedures and provide support to our existing finance and accounting staff.
Trinity Learning's management, audit committee, and directors will continue to
work with our auditors and other outside advisors to ensure that our controls
and procedures are adequate and effective.
Except as stated above, our Chief Executive Officer and Chief Financial
Officer 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 Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized, and reported within the time
periods specified in the rules and forms of the SEC, and there have been no
other changes in our internal controls over financial reporting during our most
recent fiscal period that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith
31.1 Certification of the Company's Chief Executive Officer.
31.2 Certification of the Company's Chief Financial Officer.
32.1 Certification of the Company's Chief Executive Officer.
32.2 Certification of the Company's Chief Financial Officer.
(b) Reports on Form 8-K
1. On July 16, 2004, we filed a Current Report on Form 8-K reporting under
Item 4 the appointment of new auditors.
2. On July 26, 2004, we filed an amended Current Report on Form 8-K with
respect to our 8-K filed on July 16, 2004, providing the required exhibit to
such 8-K.
3. On July 27, 2004, we filed a Current Report on Form 8-K, reporting under
Item 5 that we had reached an agreement with ProsoftTraining to terminate our
previously announced Agreement and Plan of Merger with ProsoftTraining.
4. On September 7, 2004, we filed a Current Report on Form 8-K, reporting
under Items 1.01, 3.02, 7.01, and 9.01 our private equity agreements with Laurus
Master Fund, Ltd.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRINITY LEARNING CORPORATION
December 22, 2004 By: /S/ DOUGLAS D. COLE
-------------------
Douglas D. Cole
Chief Executive Officer
December 22, 2004 By: /S/ CHRISTINE R. LARSON
-----------------------
Christine R. Larson
Chief Financial Officer
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