UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
(Amendment
No. 1)
(Mark
One)
x QUARTERLY
REPORT
UNDER SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE
ACT
OF
1934
For
the
quarterly period ended March 31, 2007.
o TRANSITION
REPORT
UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE
ACT
For
the
transition period from ___________ to ____________
Commission
file number 0-28606
TURNAROUND
PARTNERS, INC.
(formerly
EMERGE CAPITAL CORP.)
(Exact
name of small business issuer as specified in its charter)
DELAWARE
|
22-3387630
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or organization)
|
Identification
No.)
|
109
North
Post Oak Lane, Suite 422
Houston,
TX 77024
(Address
of principal executive offices, including area code)
713-621-2737
(Issuer's
telephone number)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
number of shares outstanding of our common stock at April 10, 2007 was
49,436,256.
Transitional
Small Business Disclosure Format (check one): o Yes x
No
EXPLANATORY
NOTE
On
August
28, 2007, the Chief Financial Officer of Turnaround Partners, Inc. (the
“Company”),
with
the approval of the Board of Directors of the Company, concluded that the
consolidated financial statements for the period ended March 31, 2006 included
in the March 31, 2007 Form 10-QSB filed on May 14, 2007 should no longer be
relied on.
The
Company adopted FSP EITF 00-19-2 on January 1, 2007 and incorrectly applied
the
new method of accounting for registration payment arrangements retrospectively.
The new method of accounting for registration payment arrangements should have
been accounted for prospectively. This resulted in an incorrect presentation
of
the consolidated financial statements for the three (3) months ended March
31,
2006.
The
Company discussed the matters disclosed in this filing with the Company’s
independent accountant. The Company has revised the consolidated financial
statements by filing an amendment to the March 31, 2007 Quarterly Report on
Form
10-QSB.
In
accordance with Rune 12b-15 of the Securities Exchange Act of 1934, the complete
text of those items in which amended language appears is set forth herein,
including those portions of the text that have not been amended from that set
forth in the original Form 10-QSB. Except for the restatement, this Form
10-QSB/A does not materially modify or update other disclosures in the original
Form 10-QSB, including the nature and character of such disclosure to reflect
events after May 21, 2007, the filing date of the original Form 10-QSB.
Accordingly this Form 10-QSB/A should be read in conjunction with the Company’s
other filings made with the Securities and Exchange Commission. Currently date
certifications from the Company’s Chief Executive Officer and Chief Financial
Officer have been included as exhibits to this amendment.
TURNAROUND
PARTNERS, INC.
(formerly
EMERGE CAPITAL CORP.)
FORM
10-QSB/A
INDEX
|
Page
Number
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
|
Condensed
Consolidated Balance Sheet as of March 31, 2007
(Unaudited)
|
4
-
5
|
Condensed
Consolidated Statements of Operations for the three months ended
March 31,
2007 and 2006 (Unaudited)
|
6
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31,
2007 and 2006 (Unaudited)
|
7
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
8 -
13
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
|
14 –
18
|
Item
3. Controls and Procedures
|
19
– 20
|
|
|
PART
II - OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
20
|
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
|
|
SIGNATURES
|
21
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
|
TURNAROUND
PARTNERS, INC. AND SUBSIDIARIES
(formerly
Emerge Capital Corp and Subsidiaries)
CONDENSED
CONSOLIDATED BALANCE SHEET
March
31, 2007
(Unaudited)
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,131,369
|
|
Restricted
cash
|
|
|
98,452
|
|
Notes
and accounts receivable
|
|
|
325,870
|
|
Investment
in marketable securities
|
|
|
256,991
|
|
Due
from affiliate
|
|
|
128,066
|
|
Prepaid
expense and deferred financing costs
|
|
|
245,010
|
|
Total
current assets
|
|
|
2,185,758
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
Investment
in real estate partnership and other investments
|
|
|
4,543,005
|
|
Fixed
assets, net
|
|
|
65,846
|
|
Total
noncurrent assets
|
|
|
4,608,851
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,794,609
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
678,297
|
|
Convertible
debentures—net of $236,568 discount
|
|
|
1,480,628
|
|
Notes
payable
|
|
|
165,565
|
|
Unearned
income
|
|
|
130,555
|
|
Series
C Preferred stock including associated paid in capital; liquidation
preference of $373,500, redeemable at $1,500 per share at Company
option,
cumulative dividends of $120 per share per year, non-voting, par
value
$.01, 1,000 shares authorized, 249 shares issued and
outstanding
|
|
|
|
|
|
|
|
220,547
|
|
Derivative
liability
|
|
|
777,058
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,452,650
|
|
|
|
|
|
|
Convertible
debentures—net of $1,457,090 discount
|
|
|
5,167,910
|
|
Notes
payable
|
|
|
146,628
|
|
Accrued
interest payable
|
|
|
612,764
|
|
Total
liabilities
|
|
|
9,379,952
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
TURNAROUND
PARTNERS, INC. AND SUBSIDIARIES
(formerly
Emerge Capital Corp and Subsidiaries)
CONDENSED
CONSOLIDATED BALANCE SHEET
March
31, 2007
(Unaudited)
(Continued)
SHAREHOLDERS'
DEFICIT
|
|
|
|
Preferred
Stock, par value $.01, 2,000,000 shares authorized:
|
|
|
|
Series
A Convertible Preferred Stock, noncumulative, $.01 par value; 400,000
shares authorized; none issued
|
|
|
-
|
|
Series
B Convertible Preferred Stock, $.01 par value; 100,000 shares authorized;
6,666 shares issued and outstanding; no liquidation or redemption
value
|
|
|
67
|
|
Series
D Convertible Preferred Stock, 100,000 shares authorized; 700 shares
issued and outstanding; no liquidation or redemption value
|
|
|
7
|
|
Common
stock, $.001 par value; 900,000,000 shares authorized; 39,784,753
shares
issued and outstanding
|
|
|
39,785
|
|
Additional
paid-in capital
|
|
|
855,317
|
|
Retained
deficit
|
|
|
(3,480,519
|
)
|
Total
shareholders' deficit
|
|
|
(2,585,343
|
)
|
TOTAL
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
$
|
6,794,609
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
TURNAROUND
PARTNERS, INC. AND SUBSIDIARIES
(formerly
Emerge Capital Corp and Subsidiaries)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
REVENUE
|
|
|
|
|
|
Discount
income
|
|
$
|
-
|
|
$
|
9,668
|
|
Consulting
revenue
|
|
|
213,867
|
|
|
171,250
|
|
Marketable
securities gain
|
|
|
21,500
|
|
|
664,615
|
|
Fee
income
|
|
|
17,500
|
|
|
20,000
|
|
Total
revenue
|
|
|
252,867
|
|
|
865,533
|
|
General
and administrative expenses (net of allocation to an affiliated
entity—$101,199 for 2007 and $41,796 for 2006)
|
|
|
415,487
|
|
|
379,493
|
|
OPERATING
INCOME (LOSS)
|
|
|
(162,620
|
)
|
|
486,040
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
Gain
on sale of subsidiary
|
|
|
-
|
|
|
(3,042,406
|
)
|
Net
change in derivative liability
|
|
|
265,968
|
|
|
182,653
|
|
Debt
extinguishment
|
|
|
(450,650
|
)
|
|
(94,365
|
)
|
Interest
expense
|
|
|
140,568
|
|
|
31,384
|
|
Interest
expense-derivatives
|
|
|
307,870
|
|
|
81,491
|
|
Interest
expense - Preferred Series C stock
|
|
|
6,616
|
|
|
7,794
|
|
Other
income - net
|
|
|
(35,821
|
)
|
|
(22,275
|
)
|
Total
other (income) expense
|
|
|
234,551
|
|
|
(2,855,724
|
)
|
Income
(loss) before income tax
|
|
|
(397,171
|
)
|
|
3,341,764
|
|
INCOME
TAX PROVISION
|
|
|
|
|
|
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
-
|
|
Total
income tax provision
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(397,171
|
)
|
|
3,341,764
|
|
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
4,687
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(397,171
|
)
|
|
3,337,077
|
|
Preferred
dividends paid
|
|
|
-
|
|
|
4,554
|
|
INCOME
(LOSS) AVAILABLE TO COMMON SHARES
|
|
$
|
(397,171
|
)
|
$
|
3,332,523
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(0.01
|
)
|
|
0.14
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
|
$
|
(0.01
|
)
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(0.01
|
)
|
|
0.01
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Basic
average shares outstanding
|
|
|
33,954,444
|
|
|
23,735,816
|
|
|
|
|
|
|
|
|
|
Diluted
average shares outstanding
|
|
|
33,954,444
|
|
|
490,271,170
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
TURNAROUND
PARTNERS, INC. AND SUBSIDIARIES
(formerly
Emerge Capital Corp and Subsidiaries)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(397,171
|
)
|
$
|
3,337,077
|
|
|
|
|
|
|
|
|
|
Adjustment
to reconcile net income (loss) to net cash provided by (used in)
operating
activities
|
|
|
49,564
|
|
|
(3,290,583
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(347,607
|
)
|
|
46,494
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(2,279
|
)
|
|
(5,418
|
)
|
Cash
received for sale of subsidiary
|
|
|
-
|
|
|
93,396
|
|
Preferential
return from partnership
|
|
|
446,250
|
|
|
-
|
|
Proceeds
from sale of investments
|
|
|
-
|
|
|
23,220
|
|
Net
cash provided by investing activities
|
|
|
443,971
|
|
|
111,198
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Principal
payments on note payable
|
|
|
(20,336
|
)
|
|
-
|
|
Dividends
paid on preferred stock
|
|
|
-
|
|
|
(4,554
|
)
|
Net
cash used in financing activities
|
|
|
(20,336
|
)
|
|
(4,554
|
)
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
76,028
|
|
|
153,138
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
1,153,793
|
|
|
378,399
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
1,229,821
|
|
$
|
531,537
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
6,257
|
|
$
|
-
|
|
Taxes
paid
|
|
$
|
-
|
|
$
|
9,882
|
|
Conversion
of debentures to common stock:
|
|
|
|
|
|
|
|
Increase
in par value
|
|
$
|
10,338
|
|
$
|
-
|
|
Increase
in paid in capital
|
|
$
|
112,486
|
|
$
|
-
|
|
Redemption
and purchase of preferred stock:
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
$
|
-
|
|
$
|
15,000
|
|
Increase
in notes payable
|
|
$
|
-
|
|
$
|
240,000
|
|
Decrease
in paid-in capital
|
|
$
|
-
|
|
$
|
243,498
|
|
|
|
|
|
|
|
|
|
Sale
of subsidiary:
|
|
|
|
|
|
|
|
Assets
sold
|
|
$
|
-
|
|
$
|
2,906,001
|
|
Liabilities
assumed by buyer
|
|
$
|
-
|
|
$
|
5,855,011
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(unaudited)
TURNAROUND
PARTNERS, INC. AND SUBSIDIARIES
(formerly
EMERGE CAPITAL CORP. AMD SUBSIDIARIES)
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 -
Basis of Presentation
Our
unaudited Condensed Consolidated Balance Sheet as of March 31, 2007, the
unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2007 and March 31, 2006, and the unaudited Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2007
and March 31, 2006 have not been audited. These statements have been prepared
on
a basis that is consistent with the accounting principles applied in our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2006. In our
opinion, these unaudited condensed consolidated financial statements include
all
normal and recurring adjustments necessary for a fair presentation of Turnaround
Partners, Inc. and subsidiaries (formerly Emerge Capital Corp and subsidiaries
(“Emerge”)). The results for the three months are not necessarily indicative of
the results expected for the year.
As
used
herein, the “Company”, “management”, “we”, “our” refers to Turnaround Partners,
Inc. or Turnaround Partners, Inc. together with its subsidiaries. The Company’s
fiscal year ends on December 31st.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted in accordance with the published
rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”)
for interim financial statements. The unaudited Condensed Consolidated Financial
Statements and the notes thereto in this report should be read in conjunction
with the audited Consolidated Financial Statements and notes thereto included
in
our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2006 (the “10-KSB”).
On
August
31, 2005, NuWave Technologies, Inc. ( "NuWave" or "the Company") entered into
a
merger agreement (the "Agreement") with Corporate Strategies, Inc. ("Corporate
Strategies") and the shareholders of Corporate Strategies ("Shareholders").
The
Company was subsequently renamed Turnaround Partners, Inc. The transaction
was
accounted for as a reverse acquisition since control of the merged group passed
to the shareholders of the acquired company (Corporate Strategies).
Pursuant
to the terms of the Agreement, the Company issued one (1) share of its common
stock ("Common Stock"), par value $0.001 per share, to each holder of Corporate
Strategies Class A common stock in exchange for two (2) shares of Corporate
Strategies Class A common stock, par value $0.001 per share. Second, the Company
issued one (1) share of the Company's Series C preferred stock ("Series C
Preferred"), par value $0.01 per share, to each holder of Corporate Strategies
Series A preferred stock for one (1) share of Corporate Strategies Series A
preferred stock, par value $0.001 per share.
The
Company issued and delivered shares of its Series B convertible Preferred stock
("Series B Preferred") to each holder of Corporate Strategies Class B common
stock so that effectively upon conversion of the Series B Preferred into common
shares, the common shares issued upon conversion shall be equal to ninety-five
percent (95%) of the issued and outstanding stock of the Company (calculated
on
a fully diluted basis as of the date of the Merger, following the issuance
of
all the Merger Consideration (as such term is defined in the Agreement) and
after giving effect to such conversion, but not including any shares of Common
Stock issuable upon conversion of any then outstanding Company convertible
debentures ). Therefore, the Merger Consideration for the Common Stock, Series
C
Preferred and Series B Preferred was the Corporate Strategies Class A common,
Series A preferred and Class B common, respectively. The number of shares issued
to the Shareholders in connection with the Merger was based upon a determination
by the Company's Board of Directors (the "Board").
The
terms
of the Series B Preferred were subsequently modified. In connection with the
Kipling purchase, 93,334 shares of Series B Preferred were exchanged for a
like
number of Series D Preferred, which were subsequently reduced to 700 shares
of
Series D Preferred. The remaining 6,666 shares of Series B Preferred are
convertible into 4,195,445 shares of common stock.
Each
share of the Series D may be convertible, at the option of the holder, at any
time and from time to time after December 31, 2006 through December 31, 2010,
into that number of shares of Common Stock equal to the greater of (a) one
tenth
of one percent (0.1%) of the total number of shares of Common Stock issued
and
outstanding as of the last day of the fiscal quarter immediately preceding
such
date of conversion, calculated on a fully diluted basis after giving effect
to
the conversion of such share(s) of Series D and (b) One Hundred Thousand
(100,000) shares of Common Stock. Each share of Series D Preferred Stock held
by
the Holders which has not been converted on or before December 31, 2010 into
shares of Common Stock shall be convertible, at the option of the Holder of
such
share, at any time and from time to time after December 31, 2010 into one tenth
of one percent (0.1%) of the total number of shares of Common Stock issued
and
outstanding on December 31, 2010, calculated on a fully diluted basis after
giving effect to the conversion of such share(s) of Series D Preferred Stock.
The shares of Common Stock received upon conversion shall be fully paid and
non-assessable shares of Common Stock.
The
Series B and D Convertible Preferred Stockholders and the holders of the common
stock vote together and the Preferred Stock shall be counted on an "as
converted" basis, thereby giving the Preferred Shareholders control of the
Company.
In
November 2006, we migrated from a Delaware corporation to a Nevada corporation
and changed the name of the Company to Turnaround Partners, Inc.
We
primarily provide business
restructuring, turnaround execution and business development advisory services
for emerging and re-emerging public and private companies.
The
Company also actively trades securities and options with available cash. Many
of
these transactions contain a considerable amount of risk. Under our consulting
agreements, we do not take positions in securities of our clients that at any
one time would cause us to have an ownership interest in them of over 4.99%.
We
also have a limited partnership interest in a hotel in West Palm Beach,
Florida.
Lehigh
Acquisition Corp. ("Lehigh") was a subsidiary of NuWave and is treated as if
it
was acquired August 31, 2005, the date of the merger. Lehigh was sold on
February 3, 2006. The interim financial statements include the operations of
Lehigh through February 3, 2006 as discontinued operations.
The
accompanying unaudited Condensed Consolidated Financial Statements include
the
accounts of the Company and its subsidiaries. All significant inter-company
balances and transactions have been eliminated.
On
May
31, 2006, we filed an S-8 with the Securities and Exchange Commission for the
Emerge Capital Corp. 2005 Stock Incentive Plan (the “Plan”). The document was
submitted to register 10,000,000 shares of common stock. The purpose of the
Plan
is to promote the long-term growth and profitability of the Company by (a)
providing key people with incentives to improve shareholder value and to
contribute to the growth and financial success of the Company, and (b)
enabling the Company to attract, retain and reward the best-available persons.
This document is herein incorporated by reference.
On
September 30, 2006, we completed a stock purchase agreement (the “Agreement”)
with Kipling Holdings, Inc. (“Kipling”) and Timothy J. Connolly, to acquire 100%
of the total issued and outstanding capital stock of Kipling Holdings, Inc.
(“Kipling”), a Delaware corporation.
The
accompanying unaudited condensed consolidated financial statements for prior
years contain certain reclassifications to conform with current year
presentation.
Change
in Accounting Principle for Registration Payment
Arrangements.
In
December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position on No. EITF 00-19-2, Accounting for Registration Payment
Arrangements (“FSP EITF 00-19-2”). FSP EITF 00-19-2 provides that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement should be separately recognized and measured
in
accordance with Statement of Financial Accounting Standards (“FAS”) No. 5,
Accounting for Contingencies, which provides that loss contingencies should
be
recognized as liabilities if they are probable and can be reasonably estimated.
Subsequent to the adoption of FSP EITF 00-19-2, any changes in the carrying
amount of the contingent liability will result in a gain or loss that will
be
recognized in the consolidated statement of operations in the period the changes
occur. The guidance in FSP EITF 00-19-2 is effective immediately for
registration payment arrangements and the financial instruments subject to
those
arrangements that are entered into or modified subsequent to the date of
issuance of FSP EITF 00-19-2. For registration payment arrangements and
financial instruments subject to those arrangement that were entered into prior
to the issuance of FSP EITF 00-19-2, this guidance is effective for our
consolidated financial statements issued for the year beginning January 1,
2007,
and interim periods within that year.
On
January 1, 2007, we adopted the provisions of FSP EITF 00-19-2 to account for
our registration payment arrangements. As of January 1, 2007 and March 31,
2007,
management determined that is was not probable that we would have any payment
obligation under our registration payment arrangements; therefore, no accrual
for contingent obligation is required under the provisions of FSP EITF 00-19-2.
Accordingly, these amended comparative condensed consolidated financial
statements have been adjusted to apply the new method prospectively. The
following financial statement line items for the three months ended March 31,
2007 were affected by the change in accounting principle:
Consolidated
Statements of Operations
|
|
As Computed
|
|
As Reported
|
|
|
|
|
|
under
|
|
under
FSP
|
|
Effect of
|
|
|
|
EITF 00-19
|
|
EITF
00-19-2
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Interest
expense-derivatives
|
|
$
|
337,323
|
|
$
|
307,870
|
|
$
|
(29,453
|
)
|
Net
change in fair value of derivative
|
|
|
260,180
|
|
|
265,968
|
|
|
5,788
|
|
Net
loss
|
|
|
(373,506
|
)
|
|
(397,171
|
)
|
|
23,665
|
|
Net
loss per share
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Debenture
payable - net of discount
|
|
|
7,004,391
|
|
|
6,648,538
|
|
|
355,853
|
|
Derivative
liability
|
|
|
1,132,911
|
|
|
777,058
|
|
|
(355,853
|
)
|
Total
liabilities and shareholders' deficit
|
|
|
6,794,609
|
|
|
6,794,609
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(373,506
|
)
|
|
(397,171
|
)
|
|
23,665
|
|
Net
change in fair value of derivatives and amortization of debt
discount.
|
|
|
597,503
|
|
|
573,838
|
|
|
(23,665
|
)
|
Note
2 - Income (Loss) Per Common Share
In
accordance with the Financial Accounting Standards Board (the “FASB”) Statement
of Financial Accounting Standards No. 128 (“SFAS 128”), "Earnings per Share",
basic earnings per share are computed based on the weighted average shares
of
common stock outstanding during the periods. Diluted earnings per share
are computed based on the weighted average shares of common stock plus the
assumed issuance of common stock for all potentially dilutive
securities.
The
computations for basic and diluted net income (loss) per share consist of the
following:
|
|
Three
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(397,171
|
)
|
$
|
3,332,523
|
|
Less
effect of derivatives, preferred stock and convertible
debenture
|
|
|
-
|
|
|
218,785
|
|
Adjusted
income (loss) from continuing operations
|
|
|
(397,171
|
)
|
|
3,551,308
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(4,687
|
)
|
Net
income (loss)
|
|
$
|
(397,171
|
)
|
$
|
3,546,621
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares
|
|
|
33,954,444
|
|
|
23,735,816
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Series
D preferred stock
|
|
|
-
|
|
|
12,319,034
|
|
Convertible
debentures
|
|
|
-
|
|
|
454,216,320
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares
|
|
|
33,954,444
|
|
|
490,271,170
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.01
|
)
|
$
|
0.14
|
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
(0.00
|
)
|
Net
income (loss)
|
|
$
|
(0.01
|
)
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
(0.00
|
)
|
Net
income (loss)
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
(1) |
A
weighted average year-to-date number of Convertible Debentures, Series
B
and Series D preferred stock to convert into 151,198,873 shares of
common
stock were outstanding during the three months ended March 31, 2007,
but
were not included in the computation of diluted per share net income
for
the three months ended March 31, 2007 because they were anti-dilutive.
There were no similar potentially dilutive shares outstanding for
the
three months ended March 31, 2006.
|
Note
3 - Convertible Debentures - Derivative Financial
Instruments
The
Convertible Debentures issued from 2003 through 2005 have been accounted for
in
accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities”, and the Emerging Issues Task Force (“EITF”) Abstract No. 00-19
(“EITF 00-19”), "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
The
Company identified the following instruments with embedded derivatives requiring
evaluation and accounting under the relevant guidance applicable to financial
derivatives:
· |
Cornell Debenture issued 5/6/04 in the face amount of
$400,000
|
· |
Cornell Debenture issued 6/24/04 in the face amount of
$500,000
|
· |
Cornell Debenture issued 9/28/04 in the face amount of
$400,000
|
· |
Cornell Debenture issued 4/6/05 in the face amount of
$400,000
|
· |
Holland et. al. Debentures issued 12/8/03 in the face amount of
$135,000
|
· |
Holland et. al. Debentures issued 12/22/03 in the face amount of
$250,000
|
· |
Saporito Debenture issued 1/29/04 in the face amount of
$100,000
|
· |
Viola Debenture issued 10/12/04 in the face amount of
$100,000
|
· |
Highgate House Funds Debenture issued 12/02/05 in the face amount
of
$6,225,000
|
These
embedded derivatives have been bifurcated from their respective host debt
contracts and accounted for as derivative liabilities in accordance with EITF
00-19 and SFAS No. 133.
The
embedded derivatives are marked-to-market each reporting period with changes
in
fair value recorded to the Company's income statement as "Net change in
derivative liability". The Company has utilized a third party to fair value
the
embedded derivatives using a layered discounted probability-weighted cash flow
approach. This valuation was prepared by the third party valuation firm that
developed the original model that the Company used to value its
derivatives.
The
fair
value of the derivative liabilities are subject to the changes in the trading
value of the Company's common stock, as well as other factors. As a result,
our
financial statements may fluctuate from quarter-to-quarter based on factors,
such as the price of our stock at the balance sheet date and the amount of
shares converted by debenture holders. Consequently, our financial position
and
results of operations may vary from quarter-to-quarter based on conditions
other
than our operating revenues and expenses.
On
February 3, 2006, as part of the sale of Lehigh, the Cornell Debentures for
$250,000 issued 5/5/05 and $150,000 issued 7/20/05 were cancelled. The resulting
gain on extinguishment of $94,365 has been included in other income for the
three months ended March 31, 2006.
During
the first quarter of 2007, certain individuals converted debentures into our
common stock. As a result, we recorded a gain on extinguishment of debt in
the
amount of $450,000 for the quarter ended March 31, 2007.
Note
4 - Segment Reporting
Our
company has two business segments: business services (which consists of
turnaround execution services, management restructuring services, and business
development services) and a hotel investment through our wholly owned
subsidiary, Kipling Holdings, Inc.
We
primarily provide business restructuring, turnaround execution and business
development advisory services for emerging and re-emerging public
companies.
The
Company's operations are conducted in the United States.
|
|
Business
Services
|
|
Hotel
Investment
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
252,867
|
|
$
|
-
|
|
Loss
before income tax
|
|
|
(173,579
|
)
|
|
(223,592
|
)
|
Segment
assets
|
|
|
1,787,757
|
|
|
5,006,852
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
865,533
|
|
$
|
-
|
|
Loss
before income tax
|
|
|
3,341,764
|
|
|
-
|
|
Segment
assets
|
|
|
2,875,096
|
|
|
-
|
|
Note
5 - Investment in Unconsolidated Entities
Through
our wholly-owned subsidiary, Kipling Holdings, Inc, we own a 35% limited
partnership interest in a partnership that owns a Hilton hotel in West Palm
Beach, Florida. Because we do not control the partnership entity, we carry
our
investment in unconsolidated entities at cost, plus our equity in net earnings
or losses, less distributions received since the date of acquisition and any
adjustment for impairment. Our equity in net earnings or losses is adjusted
for
the straight-line depreciation, over the lower of 25 years or the remaining
life
of the venture, of the difference between our cost and our proportionate share
of the underlying net assets at the date of acquisition. We periodically review
our investment in unconsolidated entities for other than temporary declines
in
fair value. Any decline that is not expected to be recovered in the next 12
months is considered other than temporary and an impairment is recorded as
a
reduction in the carrying value of the investment. Estimated fair values are
based on our projections of cash flows. Since we are a limited partner, we
do
not make management decisions in this partnership and are subject to the
decisions made by the general partner of this unconsolidated entity. This could
include a sale of the property at a time and price that may not be in our best
interest. While we expect the General Partner will act in good faith at all
times, we could incur a loss on this investment if a sale or foreclosure of
the
real estate occurs at a price that does not fully recover our equity
investment.
Note
6 - Sale of Lehigh Acquisition Corp.
In
February 2006, the Company sold its wholly-owned subsidiary, Lehigh, to Cornell
Capital Partners, LP ("Cornell") for total proceeds of $5,948,407 including
the
assumption of $4,881,274 promissory notes, $400,000 of convertible debentures,
$573,737 of accrued expense and interest and cash of $93,396. The transaction
resulted in a gain of $3,042,406.
Note
7. - Income Taxes
The
gain
from sale of the subsidiary discussed in Note 6 is a non-taxable transaction
under the Internal Revenue Code.
Note
8 - Repurchase of Preferred Stock
On
February 21, 2006, the Company agreed to repurchase 272.278 shares of the
Company's Series C preferred stock for a promissory note of $240,000. The note
bears interest at 8% and is payable in monthly installments of approximately
$4,800 until paid in full.
On
March
31, 2006, the Company redeemed ten shares of Series C preferred stock for
$15,000.
Note
9 – Series C Preferred Stock
We
have
249 shares of Series C preferred stock outstanding. The stock has a liquidation
preference of $373,500 and is redeemable at $1,500 per share at the Company’s
option. Dividends are cumulative and accrue at the rate of $120 per share per
year. Although the Series C stock is redeemable at the option of the Company,
the holder of these shares is our Chairman of the Board of Directors. Since
these shares are held by our Chairman, who effectively has control of the
redemption, we have classified our Series C preferred stock, and associated
paid
in capital, as a current liability in accordance with
EITF
Topic No. D-98 “Classification and Measurement of Redeemable
Securities”.
Note
10 – RESTATEMENT OF MARCH 31, 2006 FINANCIAL STATEMENTS
Turnaround
Partners, Inc., fka Emerge Capital Corp, (the “Company”) is filing this
Amendment No. 1 to its Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2007 to restate the financial results and Note 1 –
Basis of Presentation. The restatement removes the effect of the provisions
of
FSP EITF 00-19-2 to account for our registration payment arrangements for the
three months ended March 31, 2006. The Company adopted FSP EITF 00-19-2 on
January 1, 2007 and incorrectly applied the new method of accounting for
registration payment arrangements retrospectively. The new method of accounting
for registration payment arrangements should have been accounted for
prospectively. This resulted in an incorrect presentation of the consolidated
financial statements for the three (3) months ended March 31, 2006.
Adjustments
were recorded to remove the effect of the retroactive entries to apply FSP
EITF
00-19-2 to Interest expense – Derivatives ($10,750) and Net
change in fair value of derivative $3,333 for the three months ended March
31,
2006. These items affected the income statement and statement of cash flows
only
for the three months ended March 31, 2006. The effect of the restatement was
to
change the income statement and cash flows for March 31, 2006 to the originally
filed statements in the March 31, 2006 Form 10-QSB.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS
This
Quarterly Report on Form 10-QSB, and the accompanying M,D&A, contains
forward-looking statements. Statements contained in this report about
Turnaround Partners, Inc.’s (formerly Emerge Capital Corp.) future outlook,
prospects, strategies and plans, and about industry conditions and demand for
our financial services are forward-looking. All statements that express
belief, expectation, estimates or intentions, as well as those that are not
statements of historical fact, are forward looking. The words "proposed,"
"anticipates," "anticipated," "will," "would," "should," "estimates" and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements represent our reasonable belief and are based on
our
current expectations and assumptions with respect to future events. While we
believe our expectations and assumptions are reasonable, they involve risks
and
uncertainties beyond our control that could cause the actual results or outcome
to differ materially from the expected results or outcome reflected in our
forward-looking statements. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this quarterly report
may
not occur. Such risks and uncertainties include, without limitation, our
continuing success in securing consulting agreements, conditions in the capital
and equity markets that provide opportunities for our restructuring and
turnaround services, our success in trading marketable securities, our ability
to maintain contracts that are critical to our operations, actual customer
demand for our financing and related services, collection of accounts and notes
receivable, the success of our investment in our partnership that owns a hotel
in West Palm Beach, Florida and our ability to obtain and maintain normal terms
with our vendors and service providers during the periods covered by the
forward-looking statements.
The
forward-looking statements contained in this report speak only as of the date
hereof. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. All forward-looking statements attributable to
Turnaround Partners, Inc. or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in our annual report filed on Form 10-KSB and in our future periodic reports
filed with the SEC. The following M,D&A should be read in conjunction with
the unaudited Condensed Consolidated Financial Statements of the Company, and
the related notes thereto included elsewhere herein, and in conjunction with
our
audited financial statements, together with footnotes and the M,D&A, in our
2006 annual report filed on Form 10-KSB with the SEC.
OVERVIEW
On
August
31, 2005, NuWave Technologies, Inc. ( "NuWave" or "the Company") entered into
a
merger agreement (the "Agreement") with Corporate Strategies, Inc. ("Corporate
Strategies") and the shareholders of Corporate Strategies ("Shareholders").
The
Company was subsequently renamed Turnaround Partners, Inc. The transaction
was
accounted for as a reverse acquisition since control of the merged group passed
to the shareholders of the acquired company (Corporate Strategies).
Pursuant
to the terms of the Agreement, the Company issued one (1) share of its common
stock ("Common Stock"), par value $0.001 per share, to each holder of Corporate
Strategies Class A common stock in exchange for two (2) shares of Corporate
Strategies Class A common stock, par value $0.001 per share. Second, the Company
issued one (1) share of the Company's Series C preferred stock ("Series C
Preferred"), par value $0.01 per share, to each holder of Corporate Strategies
Series A preferred stock for one (1) share of Corporate Strategies Series A
preferred stock, par value $0.001 per share.
The
Company issued and delivered shares of its Series B convertible Preferred stock
("Series B Preferred") to each holder of Corporate Strategies Class B common
stock so that effectively upon conversion of the Series B Preferred into common
shares, the common shares issued upon conversion shall be equal to ninety-five
percent (95%) of the issued and outstanding stock of the Company (calculated
on
a fully diluted basis as of the date of the Merger, following the issuance
of
all the Merger Consideration (as such term is defined in the Agreement) and
after giving effect to such conversion, but not including any shares of Common
Stock issuable upon conversion of any then outstanding Company convertible
debentures ). Therefore, the Merger Consideration for the Common Stock, Series
C
Preferred and Series B Preferred was the Corporate Strategies Class A common,
Series A preferred and Class B common, respectively. The number of shares issued
to the Shareholders in connection with the Merger was based upon a determination
by the Company's Board of Directors (the "Board").
The
terms
of the Series B Preferred were subsequently modified. In connection with the
Kipling purchase, 93,334 shares of Series B Preferred were exchanged for a
like
number of Series D Preferred, which were subsequently reduced to 700 shares
of
Series D Preferred. The remaining 6,666 shares of Series B Preferred are
convertible into 4,195,445 shares of common stock.
Each
share of the Series D may be convertible, at the option of the holder, at any
time and from time to time after December 31, 2006 through December 31, 2010,
into that number of shares of Common Stock equal to the greater of (a) one
tenth
of one percent (0.1%) of the total number of shares of Common Stock issued
and
outstanding as of the last day of the fiscal quarter immediately preceding
such
date of conversion, calculated on a fully diluted basis after giving effect
to
the conversion of such share(s) of Series D and (b) One Hundred Thousand
(100,000) shares of Common Stock. Each share of Series D Preferred Stock held
by
the Holders which has not been converted on or before December 31, 2010 into
shares of Common Stock shall be convertible, at the option of the Holder of
such
share, at any time and from time to time after December 31, 2010 into one tenth
of one percent (0.1%) of the total number of shares of Common Stock issued
and
outstanding on December 31, 2010, calculated on a fully diluted basis after
giving effect to the conversion of such share(s) of Series D Preferred Stock.
The shares of Common Stock received upon conversion shall be fully paid and
non-assessable shares of Common Stock.
The
Series B and D Convertible Preferred Stockholders and the holders of the common
stock vote together and the Preferred Stock shall be counted on an "as
converted" basis, thereby giving the Preferred Shareholders control of the
Company.
In
November 2006, we migrated from a Delaware corporation to a Nevada corporation
and changed the name of the Company to Turnaround Partners, Inc.
Lehigh
Acquisition Corp. ("Lehigh") was a subsidiary of NuWave and is treated as if
it
was acquired August 31, 2005, the date of the merger. Lehigh was sold on
February 3, 2006. The interim financial statements include the operations of
Lehigh from January 1, 2006 through February 3, 2006 as discontinued
operations.
The
accompanying unaudited Condensed Consolidated Financial Statements include
the
accounts of the Company and its subsidiaries. All significant inter-company
balances and transactions have been eliminated.
We
primarily provide business restructuring, turnaround execution and business
development advisory services for emerging and re-emerging public and private
companies. The Company also actively trades securities and options with
available cash. Many of these transactions contain a considerable amount of
risk. Under our consulting agreements, we do not take positions in securities
of
our clients that at any one time would cause us to have an ownership interest
in
them of over 4.99%.
Through
our wholly-owned subsidiary, Kipling Holdings, Inc, we own a 35% limited
partnership interest in a partnership that owns a Hilton hotel in West Palm
Beach, Florida. Because we do not control the partnership entity, we carry
our
investment in unconsolidated entities at cost, plus our equity in net earnings
or losses, less distributions received since the date of acquisition and any
adjustment for impairment. Our equity in net earnings or losses is adjusted
for
the straight-line depreciation, over the lower of 25 years or the remaining
life
of the venture, of the difference between our cost and our proportionate share
of the underlying net assets at the date of acquisition. We periodically review
our investment in unconsolidated entities for other than temporary declines
in
fair value. Any decline that is not expected to be recovered in the next 12
months is considered other than temporary and an impairment is recorded as
a
reduction in the carrying value of the investment. Estimated fair values are
based on our projections of cash flows. Since we are a limited partner, we
do
not make management decisions in this partnership and are subject to the
decisions made by the general partner of this unconsolidated entity. This could
include a sale of the property at a time and price that may not be in our best
interest. While we expect the General Partner will act in good faith at all
times, we could incur a loss on this investment if a sale or foreclosure of
the
real estate occurs at a price that does not fully recover our equity
investment.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued FASB Statement No. 159,
Establishing the Fair Value Option for Financial Assets and
Liabilities
(“SFAS
159”)
,
to
permit all entities to choose to elect to measure eligible financial instruments
at fair value. SFAS 159 applies to fiscal years beginning after November 15,
2007, with early adoption permitted for an entity that has also elected to
apply
the provisions of SFAS 157,
Fair
Value Measurements
. An
entity is prohibited from retrospectively applying SFAS 159, unless it chooses
early adoption. Management is currently evaluating the impact of SFAS 159 on
the
consolidated financial statements.
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2007 and March 31, 2006
Revenue
Our
total
revenue for the three months ended March 31, 2007 was $252,867 as opposed to
total revenue of $865,533 for the same period ending March 31, 2006.
For
the
three months ended March 31, 2006, we recorded discount income of $9,668. We
did
not realize any discount income for the same period ending March 31, 2007.
We do
not anticipate generating any significant new business in this
area.
We
earned
$213,867 in consulting revenue for the three months ended March 31, 2007 versus
$171,250 for the three months ended March 31, 2006. Consulting revenues are
generally one-time fees related to specific events, or contracts for services
rendered over a period of time. During the quarter ended March 31, 2007, we
had
ongoing consulting agreements with three customers compared to five during
the
same period 2006.
Trading
in marketable securities generated income of $21,500 for the quarter ended
March
31, 2007 compared to income of $664,615 for the same period in 2006. Marketable
securities losses included unrealized gains (losses) of $33,863 and $571,098,
respectively for the quarters ended March 31, 2007 and 2006 and realized gains
(losses) of $(12,363) and $93,517, respectively for the quarters ended March
31,
2007 and 2006.
Our
fee
income was comparable for the two quarter ended March 31, 2007 ($17,500) and
March 31, 2006 ($20,000). Fee income is generated through the realization of
placement fees from clients for financing transaction that occurred during
the
comparable quarters.
General
and Administrative Expenses
General
and administrative (“G&A”) expenses for the quarter ended March 31, 2007
were $415,487 compared to $379,493 for the period ended March 31, 2006, an
increase of approximately $36,000. For the three months ended March 31, 2007,
general and administrative expenses were primarily comprised of salaries and
benefits ($237,083) and professional fees ($142,816). The remaining general
and
administrative expenses were comprised of travel, advertising, rent and other
ordinary expenses necessary for our operations. For the three months ended
March
31, 2006 general and administrative expenses were primarily comprised of
salaries and benefits ($146,540), professional fees ($134,468), travel,
entertainment and business development ($19,030), Broadcasting expenses for
our
radio talk show ($26,565) and other ordinary expenses necessary for our
operations. Our company shares office space and certain administrative functions
and staff with an affiliated company to whom we allocate costs for these shared
functions based on an estimate of time usage.
Salaries
and benefits increased by approximately $100,000 to $237,083 in 2007 as compared
to the same period in 2006, primarily representing new employees added during
the third quarter of 2005, the hiring of a part-time chief financial officer
in
July 2006 and a due diligence principal in January 2007.
Interest
expense increased by approximately $334,000 for the three months ended March
31,
2007 as compared to the same period ended March 31, 2006. The increase is a
primarily a result of the amortization of discounts related to derivatives
on
our convertible debentures.
Other
income and expense
We
recorded derivative income of $265,968 for the three months ended March 31,
2007
versus $182,653 for the same period ended March 31, 2006. These amounts
represent the change in the fair value of the net derivative liability for
the
quarters.
Gain
on
sale of subsidiary of $3,042,406 represents the gain on the sale of Lehigh
in
February 2006.
During
the first quarter of 2007 and 2006, certain individuals converted their
debentures into our common stock. As a result, we recorded a gain on debt
extinguishment in the amount of $450,650 in the first quarter of 2007 versus
a
gain of $94,365 in the first quarter of 2006.
Discontinued
Operations
During
February 2006, the Company sold the shares of its wholly-owned subsidiary
Lehigh. The loss from discontinued operations was $4,688, for the three months
ended March 31, 2006, net of applicable income tax.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
activities
We
recorded a net loss for the three months ended March 31, 2007 of $397,171 versus
net income of $3,332,523 for the three months ended March 31, 2006. Net cash
used in operating activities was $347,607 for the three months ended March
31,
2007. Non-cash derivative interest expense and net change in derivative
liability amounted to a charge of $573,838. We recorded a gain on debt
extinguishment in the amount of $450,650. An increase in the value of our
marketable securities amounted to $103,140.
At
March
31, 2007, the Company had a working capital deficit of $1,266,892 including
$98,452 of restricted cash. Our working capital deficit includes a computed
liability for the fair value of derivatives of $777,058, which will only be
realized on the conversion of the derivatives, or settlement of the debentures.
The Company at its option can force conversion of certain of convertible
debentures into the Company's common stock at maturity date.
We
have a
Standby Equity Distribution Agreement (the "SEDA") with Cornell under which
the
Company may, at its discretion, periodically sell to Cornell registered shares
of the Company's common stock for a total purchase price of up to $30 million.
For each share of common stock purchased under the SEDA, Cornell will pay NuWave
99% of the lowest closing bid price on the Over-the-Counter Bulletin Board
or
other principal market on which its common stock is traded for the 5 days
immediately following the notice date. Furthermore, Cornell will retain a fee
of
10% of each advance made under the SEDA. Additionally, we have been advised
that
an updated registration statement of the SEDA may be necessary in order to
draw
down capital under the terms of the SEDA.
The
amount of each advance is limited to a maximum draw down of $1,000,000 every
seven (7) trading days up to a maximum of $4,000,000 in any 30-day period.
The
Company's ability to request advances is conditioned upon the Company having
enough shares of common stock registered pursuant to the SEC rules and
regulations. In addition, the Company may not request advances if the shares
to
be issued in connection with such advances would result in Cornell owning more
than 9.9% of the Company's outstanding common stock.
Investing
activities
We
received proceeds from a preferential return from our investment in the
partnership that owns a hotel in West Palm Beach, Florida in the amount of
$446,250.
Under
our
consulting agreements, we do not take positions in securities of our clients
that at any one time would cause us to have an ownership interest in them of
over 4.99%. Because of this restriction, we could be hindered in our ability
to
generate necessary cash for our operations.
Financing
activities
For
the
three months ended March 31, 2007, we repaid approximately $20,000 on note
payables.
We
have
249 shares of Series C preferred stock outstanding. The stock has a liquidation
preference of $373,500 and is redeemable at $1,500 per share at the Company’s
option. Dividends are cumulative and accrue at the rate of $120 per share per
year. Although the Series C stock is redeemable at the option of the Company,
the holder of these shares is our Chairman of the Board of Directors. Since
these shares are held by our Chairman, who effectively has control of the
redemption, we have classified our Series C preferred stock, and associated
paid
in capital, as a current liability in accordance with with EITF Topic No. D-98
“Classification and Measurement of Redeemable Securities”.
Our
cash
flows for the periods are summarized below:
|
|
Three months ended
|
|
Three months ended
|
|
|
|
March
31, 2007
|
|
March 31, 2006
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(347,607
|
)
|
$
|
46,494
|
|
Net
cash provided by investing activities
|
|
|
443,971
|
|
|
111,198
|
|
Net
cash used in financing activities
|
|
|
(20,336
|
)
|
|
(4,554
|
)
|
Our
cash
increased by $76,028 since December 31, 2006.
Management
believes the Company has adequate working capital and cash to be provided from
operating activities to fund current levels of operations. We anticipate that
our company will grow. As our business grows we believe that we will have to
raise additional capital in the private debt and/or public equity markets to
fund our investments. We could also potentially realize proceeds from our shelf
registration statement.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company leases its office space under an operating lease. Rental expense under
operating leases for continuing operations aggregated $20,448 for the three
months ended March 31, 2007.
Future
minimum payments under non-cancellable operating leases for continuing
operations with initial or remaining terms of one year or more consist of the
following at March 31, 2007:
2007
|
|
|
53,143
|
|
2008
|
|
|
74,032
|
|
2009
|
|
|
74,032
|
|
2010
|
|
|
8,058
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
209,265
|
|
ITEM
3. CONTROLS AND PROCEDURES
(A)
Evaluation of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized,
accumulated and communicated to the Company’s management, including its Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate,
to allow timely decisions regarding required disclosure.
As
of the
end of the period covered by this report, the Company's management carried
out
an evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based on the material
weaknesses described herein the Company's CEO and CFO have concluded that the
Company's disclosure controls and procedures were not effective, as of the
date
of that evaluation, for the purposes of recording, processing, summarizing
and
timely reporting of material information required to be disclosed in reports
filed by the Company under the Exchange Act. Because of our size, the Company
shares its accounting staff with an affiliated company and is comprised of
its
part-time Chief Financial Officer, controller and data entry clerk. The
controller and data entry clerk are considered contract employees whom also
work
for an affiliated company as contract employees. Our CFO is also an employee
of
an affiliate. Because of the structure of our staff, we have a failure to
maintain effective controls over the selection, application and monitoring
of
our accounting policies to assure that certain complex equity transactions
are
accounted for in accordance with generally accepted accounting
principles.
(B)
Changes in
Internal Controls over Financial Reporting
In
connection with the evaluation of the Company's internal controls during the
Company's last fiscal quarter covered by this report, the Company's CEO and
CFO
have determined that there were no changes to the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially effect, the Company's internal controls over financial
reporting.
Material
Weaknesses Identified
In
connection with the audit of our consolidated financial statements for the
fiscal year ended December 31, 2006, our independent registered public
accounting firm informed us that we have significant deficiencies constituting
material weaknesses. As defined by the Public Company Accounting Oversight
Board
Auditing Standard No. 2, a material weakness is a significant control
deficiency or a combination of significant control deficiencies that result
in
there being more than a remote likelihood that a material misstatement in the
annual or interim financial statements will not be prevented or detected. The
material weaknesses identified by the auditor during the December 31, 2005
and
2006 audit were the lack of segregation of duties necessary to maintain proper
checks and balances between functions and the lack of procedures to properly
account for non-routine transactions and preparation of certain financial
statement disclosures in accordance with U.S. GAAP. The absence of qualified
full time accounting personnel was a contributing factor to the problems
identified by the auditor. The specific circumstances giving rise to the
weaknesses include utilizing the services of contract accountants on a part
time
basis in the absence of internal accounting personnel.
Further,
based on the material weaknesses described herein, we concluded that our
disclosure controls and procedures were not effective at March 31, 2007, the
end
of this reporting period.
Remediation
Plan regarding the Material Weaknesses
The
Company has taken the following steps to address the specific problems
identified by the auditors:
|
1 |
We
have hired a part-time Chief Financial Officer and a contract part-time
bookkeeper to allow us to properly implement segregation of duties
necessary to maintain checks and balances between accounting and
executive
functions.
|
|
2
|
All
non-routine transactions will be reviewed by our part-time Chief
Financial
Officer and contract controller before they are
completed.
|
|
3
|
We
will emphasize enhancement of the segregation of duties based on
the
limited resources that we have, and, where practical, we will continue
to
assess the cost versus benefit of adding additional resources that
would
mitigate the situation. Our part-time Chief Financial Officer will
monitor
our accounting policies to ensure proper accounting for financial
derivatives and other unusual transactions on an ongoing
basis.
|
The
Company continues its efforts to remediate control weaknesses and further
improve and strengthen its internal control over financial reporting under
the
direction of the CEO and the CFO.
PART
II -
OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
The
Company from time to time may be involved in various lawsuits and actions by
third parties arising in the ordinary course of business. Unless noted elsewhere
in this filing, management is not aware of any additional pending litigation,
claims or assessments that could have a material adverse effect on the Company’s
business, financial condition and results of operations.
ITEM
2.
UNREGISTERED SALES (REPURCHASES) OF EQUITY SECURITIES
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)
Documents filed as a part of this report:
Exhibit
31.1: Officer's Certification Pursuant to Section 302
Exhibit
32.1: Certificate pursuant to 18 U.S.C. Section 1350 as adopted to Section
906
of the Sarbanes - Oxley Act of 2002
(B)
Current Reports filed on Form 8-K:
On
January 5, 2007, the Company filed a Current Report on Form 8-K disclosing
that
we had completed our reincorporation from Delaware to the state of
Nevada.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Company has caused
this Quarterly Report on Form 10-QSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date:
September 6, 2007
|
Turnaround
Partners, Inc.
|
|
(Registrant)
|
|
|
|
/s/
Timothy J Connolly
|
|
Timothy
J. Connolly
Chief
Executive Officer
|
|
|
Date:
September 6, 2007
|
Turnaround
Partners, Inc.
|
|
(Registrant)
|
|
|
|
/s/
Wm Chris Mathers
|
|
Wm
Chris Mathers
Chief
Financial Officer
|
|
|