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PART II. | OTHER INFORMATION |
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Item 1. | Legal Proceedings. |
| 20 |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
| 20 |
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Item 3. | Defaults Upon Senior Securities |
| 20 |
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Item 4. | Submission of Matters to a Vote of Security Holders. |
| 20 |
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Item 5. | Other Information. |
| 20 |
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Item 6. | Exhibits. |
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Signatures |
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FINANCIAL INFORMATION
The accompanying unaudited condensed financial statements have been prepared in accordance with the requirements of Form 10QSB and Item 310 of Regulation S-B of the Securities and Exchange Commission (the “Commission”), and include the results of BAXL Holdings, Inc. (the “registrant”, the “Company”, “BAXL”, “we”, “us”, or “our”). Accordingly, certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted from the following financial statements. Interim statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for the year ended 2007. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s financial position as of September 30, 2007, and the results of its operations for the nine and three month periods ended September 30, 2007 and 2006. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire fiscal year, or any other period. The following unaudited condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2006 and notes thereto.
3
BAXL Holdings, Inc.
Condensed Consolidated Balance Sheet
| September 30, 2007 | |
| (unaudited) | |
Assets |
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Current assets: |
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Cash and cash equivalents | $ | 2,275,297 |
Accounts receivable, net of allowance for doubtful accounts of $10,364 |
| 295,809 |
Inventory |
| 607,193 |
Prepaid expenses and other current assets |
| 87,723 |
Total current assets |
| 3,266,022 |
Property and equipment, net |
| 63,050 |
Deposits |
| 8,950 |
| $ | 3,338,022 |
Liabilities and Stockholders' Deficit |
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Current liabilities |
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Accounts payable | $ | 559,737 |
Accrued expenses and other current liabilities |
| 1,000,431 |
Deferred revenue |
| 79,218 |
Current portion of capital lease obligation |
| 11,854 |
Total current liabilities |
| 1,651,240 |
Capital lease obligation, net of current portion |
| 57,104 |
Notes payable long-term |
| 2,500,000 |
Stockholders' deficit: |
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Preferred stock, $.001 par value; 10,000,000 shares authorized; 0 shares issued |
| - |
Common stock, $.001 par value; 100,000,000 shares authorized; 14,721,150 shares issued and outstanding |
| 14,721 |
Additional paid-in capital |
| 54,678,746 |
Accumulated deficit |
| (55,563,789) |
Total Stockholders' deficit |
| (870,322) |
| $ | 3,338,022 |
The Notes to Financial Statements are an integral part of these statements.
4
BAXL Holdings, Inc.
Condensed Consolidated Statements of Operations
For the Nine and Three Month periods Ended
| Nine Months Ended |
| Three Months Ended | ||||||||
| September 30, 2007 |
| September 30, 2006 |
| September 30, 2007 |
| September 30, 2006 | ||||
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||
Sales | $ | 1,055,066 |
| $ | 1,202,139 |
| $ | 390,456 |
| $ | 320,191 |
Cost of goods sold |
| 706,869 |
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| 1,018,523 |
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| 263,678 |
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| 412,510 |
Gross profit |
| 348,197 |
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| 183,616 |
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| 126,778 |
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| (92,319) |
Operating expenses |
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Engineering and development expenses | 805,519 |
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| 763,837 |
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| 322,414 |
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| 146,464 | |
Selling, general and administrative expenses | 2,838,542 |
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| 2,387,964 |
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| 969,629 |
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| 1,183,935 | |
Depreciation and Amortization |
| 340,537 |
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| 1,685 |
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| 107,290 |
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| - |
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| 3,984,598 |
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| 3,153,486 |
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| 1,399,333 |
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| 1,330,399 |
Loss from operations |
| (3,636,401) |
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| (2,969,870) |
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| (1,272,555) |
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| (1,422,718) |
Other (income) expense |
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Other income |
| (13,695) |
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| (2,557) |
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| (7,720) |
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| (209) |
Interest expense, net |
| 513,216 |
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| 163,649 |
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| 160,952 |
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| 81,498 |
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| 499,521 |
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| 161,092 |
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| 153,232 |
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| 81,289 |
Net loss | $ | (4,135,922) |
| $ | (3,130,962) |
| $ | (1,425,787) |
| $ | (1,504,007) |
Net loss per share, basic and diluted | $ | (.75) |
| $ | (.74) |
| $ | (.18) |
| $ | (.35) |
Weighted average number of shares outstanding |
| 5,505,131 |
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| 4,237,628 |
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| 7,998,214 |
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| 4,237,628 |
The Notes to Financial Statements are an integral part of these statements.
5
BAXL Holdings, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
For the period from January 1, 2007 to September 30, 2007
| Common Stock |
| Preferred Stock |
| Additional |
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| Total | |||||||||
| Shares |
| Par Value |
| Shares |
| Par Value |
| Paid-in Capital |
| Accumulated Deficit |
| Stockholders Deficit ' | |||||
Balance January 1, 2007 | 4,237,628 |
| $ | 4,237 |
| 242,625,052 |
| $ | 18,083,494 |
| $ | 28,063,837 |
| $ | (51,427,867) |
| $ | (5,276,299) |
Cancellation of common stock of former holders of BAXL common stock | (4,237,628) |
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| (4,237) |
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| 4,237 |
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| - |
Issuance of common stock to former holders of common stock of BAXL | 39,043 |
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| 39 |
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| (39) |
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| - |
Issuance of common stock to former holders of preferred stock of BAXL | 2,235,401 |
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| 2,235 |
| (242,625,052) |
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| (18,083,494) |
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| 18,081,259 |
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| - |
Issuance of common stock to convertible note holders of BAXL | 5,307,037 |
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| 5,307 |
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| 3,494,693 |
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| 3,500,000 |
Issuance of common stock to former Allmarine holders of common stock | 2,000,000 |
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| 2,000 |
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| (2,000) |
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| - |
Purchase and retirement of Allmarine Treasury Stock | (510,000) |
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| (510) |
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| (665,040) |
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| (665,550) |
Issuance of common stock in private placement for cash at $1.50 per share | 5,649,669 |
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| 5,650 |
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| 8,468,854 |
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| 8,474,504 |
Costs of restructuring and private placement |
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| (2,540,528) |
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| (2,540,528) |
Write off of Deferred debt issue costs |
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| (226,527) |
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| (226,527) |
Net loss |
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| (4,135,922) |
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| (4,135,922) |
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| - |
Balance September 30, 2007 | 14,721,150 |
| $ | 14,721 |
| - |
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| - |
| $ | 54,678,746 |
| $ | (55,563,789) |
| $ | (870,322) |
The Notes to Financial Statements are an integral part of these statements
6
BAXL Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Month Periods Ended
| Nine Months Ended | ||||
| September 30, 2007 |
| September 30, 2006 | ||
| (unaudited) |
| (unaudited) | ||
Net loss | $ | (4,135,922) |
| $ | (3,130,962) |
Adjustments to reconcile net loss to net cash used by |
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operating activities: |
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Depreciation and amortization |
| 12,084 |
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| 1,685 |
Amortization of debt issue costs |
| 328,453 |
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Provision for doubtful accounts |
| 13,303 |
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| 43,612 |
Non-cash interest expense |
| 509,217 |
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| 169,476 |
Changes in operating assets and liabilities: |
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Accounts receivable |
| (34,210) |
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| (36,046) |
Inventory |
| (87,942) |
|
| 355,946 |
Prepaids and other current assets |
| (73,036) |
|
| (7,676) |
Deposits |
| 3,757 |
|
| - |
Accounts payable |
| (385,349) |
|
| 336,953 |
Accrued expenses and other current liabilities |
| (366,553) |
|
| (68,578) |
Deferred revenue |
| (17,559) |
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| (260,170) |
Net cash used by operating activities |
| (4,233,757) |
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| (2,595,760) |
Cash flows from investing activities |
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Purchase of equipment |
| (3,757) |
|
| - |
Net cash used by investing activities |
| (3,757) |
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| - |
Cash flows from financing activities |
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Net proceeds from convertible notes and warrants |
| 2,405,000 |
|
| 2,670,000 |
Repayment of convertible notes |
| (1,905,000) |
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Proceeds from private placement |
| 8,474,504 |
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Costs of restructuring and private placement |
| (2,540,528) |
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Purchase and retirement of Allmarine treasury stock |
| (665,550) |
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Principal payments on capital lease obligations |
| (8,537) |
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Debt issue costs |
| (245,888) |
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| (25,000) |
Net cash provided by financing activities |
| 5,514,001 |
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| 2,645,000 |
Net increase in cash and cash equivalents |
| 1,276,487 |
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| 49,240 |
Cash and cash equivalents |
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Beginning of period |
| 998,810 |
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| 314,034 |
End of period | $ | 2,275,297 |
| $ | 363,274 |
The Notes to Financial Statements are an integral part of these statements.
7
BAXL Holdings, Inc. Notes to Condensed Consolidated Financial Statements
1.
Formation and Operations of the Company
Nature of Operations
Effective August 29, 2007, Allmarine Consultants Corporation, a Nevada Corporation (now known as BAXL Holdings, Inc) (the “Company”) completed a reverse merger transaction in which Allmarine Acquisition Corporation, the Company’s wholly-owned subsidiary merged with and into BAXL Technologies, Inc. (formerly Merlot Communications Inc.), with BAXL Technologies, Inc. as the surviving corporation. Allmarine Consultants Corporation then changed its name to BAXL Holdings, Inc. The Company is in the business of developing, manufacturing, marketing and distributing equipment that enables the use of existing building or campus wiring for high-speed broadband applications such as wired and wireless data and internet access, video on demand, telephone, security and medical image transfer. The Company’s customers are primarily large hotel chains throughout the world.
Restructuring and Private Placement (“PIPE”)
Effective August 29, 2007, BAXL Technologies, Inc. (“BAXL”) merged with and into Allmarine Acquisition Corporation, the wholly-owned subsidiary of Allmarine Consulting Corporation with BAXL as the surviving corporation. Accordingly, the reverse merger will be accounted for as a recapitalization in which the assets and liabilities of the Company have been recorded at their historical values, the outstanding common stock and additional paid in capital has been restated to give effect to the shares of common stock issued in connection with the transaction to the stockholders (including preferred stockholders) of BAXL, the stockholders of Allmarine, and the holders of certain BAXL notes payable. In addition, the merged entity raised $5,933,976 ($8,474,504 net of expenses of $2,540,528) in connection with the issuance of common stock in accordance with the terms of the Agreements among the parties. Part of the net proceeds was used to repay $1,905,000 in subordinated notes payable and $276,121 of accrued interest. In addition, $665,550 was used to purchase 510,000 shares of Allmarine stock for Treasury (these shares were retired). The remaining net proceeds of $3,087,305 will be used to pay the remaining accrued interest of approximately $110,000 and for general corporate purposes.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10QSB and Item 310 of Regulation S-B of the Securities and Exchange Commission (the “Commission”), and include the results of BAXL Holdings, Inc. (the “registrant”, the ‘Company”, “BAXL”, “we”, “us”, or “our”). Accordingly, certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted from the following consolidated financial statements. Interim statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for the year ended 2007. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of September 30, 2007, and the results of its operations for the nine and three month periods ended September 30, 2007 and 2006. The consolidated results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire fiscal year, or any other period. The following unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2006 and notes thereto.
The accompanying unaudited condensed consolidated financial statements represent the accounts of BAXL Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
8
Formation and Operations of the Company (Continued)
The Company has incurred net losses (including a loss of $4.1 million for the nine months ended September 30, 2007) and negative operating cash flows since inception, and has a stockholders’ deficit of approximately $870,000 at September 30, 2007, which raises substantial doubt about its ability to continue as a going concern. The Company has funded its operating losses and development efforts since inception through the issuance of debt and equity securities. In order to continue development, increase marketing efforts and achieve profitable operations, management anticipates a need to achieve positive operating cash flow or for additional financing. Management’s plans for funding future operations primarily include the sale of debt and equity securities (see restructuring and private placement above). The Company’s failure to reach positive operating cash flow or to raise additional funds under its plan would unfavorably impact its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty, including the Company’s inability to realize the carrying value of assets.
2.
Summary of Significant Accounting Policies
Receivables and Credit Policies
Receivables are unsecured obligations due from customers under terms requiring payments up to ninety days from the date the services are performed, depending on the customer. The Company does not accrue interest on unpaid receivables. Customer receivable balances with invoice dates over ninety days old are considered delinquent. Management reviews these accounts taking into consideration the size of the outstanding balance and the past history with the customer. The carrying amount of receivables is reduced by a valuation allowance that reflects management’s best estimate of the amount that will not be collected. The need for a general reserve is evaluated by management.
Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance or, if unspecified, are applied to the earliest unpaid invoices.
Debt Issue Costs
Debt issue costs represent amounts paid to attorneys and agents in connection with the issuance of long-term debt. These costs have been reported as deferred charges and were amortized over the term of the respective debt. Upon the completion of the Company’s restructuring and private placement, the balance of net debt issue costs were written off to Additional paid-in capital.
Income Taxes
Income taxes are accounted for under the asset and liability method as set forth in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the temporary differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
Stock-Based Compensation
Effective January 1, 2006, the Company implemented the provisions of Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004) (“SFAS 123 R”), “Share Based Payments,” which is a revision of SFAS No. 123, “Accounting for Stock Based Compensation,” for all share-based compensation that was not vested as of December 31, 2005 and any new awards. All options in existence as of that date were vested.
9
Summary of Significant Accounting Policies (Continued)
Concentration of Credit Risk
The Company may, at times, have a concentration of their customer receivables with a specific customer. At September 30, 2007 two customers accounted for 40 percent and 22 percent of outstanding receivables, respectively. No other single customer accounted for more than 10 percent of outstanding receivables.
During the nine months ended September 30, 2007 one customer accounted for 17% of revenues and during the three months ended September 30, 2007 two customers accounted for 27% and 11 %, respectively.
Also during the nine and three month periods ending September 30, 2007 and 2006 approximately 28%, 46%, 36% and 12% of the Company’s revenues represented revenues from foreign customers.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Emerging Issues Task Force Abstract 00-21 - Revenue Arrangements with Multiple Deliverables (“EITF 00-21”) for sales arrangements where the Company supplies the product and is also responsible for the installation of those products. The Company recognizes a portion of the revenue upon shipment of the products, and the second component of the revenue upon installation. When the Company is not responsible for the installation, revenue is recognized upon shipment of the parts. Revenue from maintenance contracts is recognized over the period of the maintenance contract. In general, the Company’s product is sold with a one-year warranty. The Company reserves for returns and warranty costs based on the Company’s historical experience and industry standards.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Earnings Per Share
The Company complies with the accounting and reporting requirements of Statement of Financial Accounting Standards No. (“FAS”) 128, “Earnings Per Share.” Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares during the period. Common equivalent shares result from the assumed exercises of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock (the “treasury stock method”). Common equivalent share are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Inherently, stock options and warrants are deemed to be anti-dilutive when the average market price of the common stock during the period exceeds the exercise prices of the stock options or warrants. At September 30, 2007, the Company’s common stock equivalents included warrants exercisable for 3,270,575 shares of our common stock. These common stock equivalents are not included in the diluted EPS calculations because the effect of their inclusion would be anti-dilutive or would decrease the loss per common share.
10
Recent Accounting Pronouncements
In January 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.109" (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. FIN 48 requires companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties.
The Company did not recognize any adjustments to their consolidated financial statements as a result of its implementation of FIN 48.
In September 2006 the FASB issued SFAS No. 157,”Fair Value Measurements” (SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company has not yet determined the impact of this statement on its results of operations or financial condition.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -- Including an amendment of FASB Statement No. 115," (SFAS 159). This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of a reporting entity's first fiscal year beginning after November 15, 2007. The Company is currently evaluating what effect the adoption of SFAS 159 will have on their consolidated financial statements.
3.
Debt Issue Costs
Amortization of debt issue costs included as a charge to operations for the nine and three month periods ended September 30, 2007 and 2006 amounted to $328,453, $0, $103,325 and $0, respectively. Upon the completion of the Company’s restructuring and private placement (see Note 13), the balance of net debt issue costs were written off to additional paid-in capital.
4.
Notes Payable
During the nine months ended September 30, 2007, the Company borrowed an additional $1,905,000 as Subordinated Promissory Notes, which were repaid in connection with the restructuring and private placement and $500,000 in Convertible Notes. $3,500,000 of Convertible Notes payable were exchanged for 5,307,037 shares of common stock in connection with the restructuring and private placement.
5.
Notes Payable Long-Term
Notes payable long-term consist of the following at September 30, 2007:
Amended and Restated Senior Bridge Notes, interest only at 10 percent per annum, secured by all assets of the Company (1)(2) | $ | 2,500,000 |
(1)
$1,030,000 of these notes were issued in 2005 as Demand Convertible Notes. During August 2006, they were amended and restated in substantially the same form with a new maturity date of January 1, 2009. Related warrants were canceled and the notes are no longer convertible into common stock of the Company.
(2)
One of these notes was issued to the Company’s President in the amount of $60,000.
11
6.
Stockholders’ Deficit
Convertible preferred stock with a carrying amount of $18,083,494 was exchanged for 2,235,401 shares of common stock in connection with the private placement
At September 30, 2007, the Company is authorized to issue up to 10,000,000 shares of Preferred Stock with a par value of $.001. In addition, the Company is authorized to issue up to 100,000,000 shares of Common Stock, par value $.001.
Upon the completion of the restructuring described in Note 1, the Company has 14,721,150 shares of common stock outstanding representing 39,043 shares issued to former holders of BAXL common stock, 2,235,401 shares issued to former holders of BAXL preferred stock, 5,307,037 shares issued to former holders of BAXL Convertible notes (having a face amount of $3,500,000), 1,490,000 shares issued to former holders of Allmarine Consulting Corporation, and 5,649,669 shares issued for cash to new investors.
Warrants
A summary of outstanding warrants is as follows at September 30, 2007:
Description |
| Shares |
| Exercise Price |
| Expiration Date | |
Common Stock |
| 2,824,177 |
| $ | 1.875 |
| August 29, 2014* |
Common Stock |
| 446,398 |
| $ | 7.95 |
| Various dates from April 16, 2009 through October 31, 2012 |
* or 5 years from the effective date of a registration statement whichever is later.