SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2006
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23000
Trestle Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware | 95-4217605 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1328 W. Balboa Blvd. Suite C, Newport Beach, CA 92661 | ||
(Address of principal executive offices) | ||
Registrant’s phone number, including area code (949) 903-0468 | ||
Former name, former address and former fiscal year, if changed since last report: | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý NO o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at November 13, 2006 | |
Common Stock, $.001 par value | 8,257,214 |
Transitional Small Business Disclosure Format (Check one): YES o NO ý
TRESTLE HOLDINGS, INC.
INDEX
ITEM 1. FINANCIAL STATEMENTS: | |
Consolidated Balance Sheets — September 30, 2006 (Unaudited) and December 31, 2005 | |
Consolidated Statements of Operations (Unaudited) — Quarter and nine months ended September 30, 2006 and 2005 | |
Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2006 and 2005 | |
Notes to Consolidated Financial Statements | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3. CONTROLS AND PROCEDURES | |
PART II — OTHER INFORMATION | |
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TRESTLE HOLDINGS, INC.
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
ASSETS | (Unaudited) | ||||||
CURRENT ASSETS | |||||||
Cash | $ | 1,070,000 | $ | 305,000 | |||
Accounts receivable, net of allowance for doubtful accounts of $3,000 and $82,000 at September 30, 2006 and December 31, 2005, respectively | 28,000 | 960,000 | |||||
Inventory | — | 502,000 | |||||
Prepaid expenses and other current assets | 20,000 | 59,000 | |||||
TOTAL CURRENT ASSETS | 1,118,000 | 1,826,000 | |||||
Fixed assets, net of accumulated depreciation of zero and $182,000 at September 30, 2006 and December 31, 2005, respectively | — | 118,000 | |||||
Goodwill | — | 1,514,000 | |||||
Intangible assets, net of accumulated amortization of zero and $933,000 at September 30, 2006 and December 31, 2005, respectively | — | 975,000 | |||||
Other assets | — | 15,000 | |||||
TOTAL ASSETS | $ | 1,118,000 | $ | 4,448,000 |
See accompanying notes to consolidated financial statements.
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September 30, | December 31, | ||||||
2006 | 2005 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | (Unaudited) | ||||||
CURRENT LIABILITIES: | |||||||
Accounts payable | $ | 100,000 | $ | 996,000 | |||
Accrued expenses | 31,000 | 554,000 | |||||
Deferred revenue | — | 303,000 | |||||
TOTAL CURRENT LIABILITIES | 131,000 | 1,853,000 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
STOCKHOLDERS’ EQUITY: | |||||||
Common stock, $.001 par value, 40,000,000 shares authorized, 8,257,000 and 8,257,000 issued and outstanding at September 30, 2006 and December 31, 2005, respectively | 8,000 | 8,000 | |||||
Additional paid in capital | 53,172,000 | 52,915,000 | |||||
Deferred stock compensation | — | (3,000 | ) | ||||
Accumulated deficit | (52,193,000 | ) | (50,325,000 | ) | |||
Total stockholders’ equity | 987,000 | 2,595,000 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,118,000 | $ | 4,448,000 |
See accompanying notes to consolidated financial statements.
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TRESTLE HOLDINGS, INC.
Quarter ended September 30, | Nine months ended September 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
REVENUES | |||||||||||||
Product | $ | 309,000 | $ | 754,000 | $ | 1,318,000 | $ | 2,540,000 | |||||
Software support | 75,000 | 125,000 | 269,000 | 297,000 | |||||||||
Total revenues | 384,000 | 879,000 | 1,587,000 | 2,837,000 | |||||||||
COST OF SALES | 172,000 | 544,000 | 772,000 | 1,980,000 | |||||||||
GROSS PROFIT | 212,000 | 335,000 | 815,000 | 857,000 | |||||||||
OPERATING EXPENSES | |||||||||||||
Research and development | 263,000 | 555,000 | 1,078,000 | 1,473,000 | |||||||||
Selling, general and administrative expenses | 561,000 | 1,262,000 | 2,158,000 | 4,039,000 | |||||||||
Total operating expenses | 824,000 | 1,817,000 | 3,236,000 | 5,512,000 | |||||||||
LOSS FROM OPERATIONS | (612,000 | ) | (1,482,000 | ) | (2,421,000 | ) | (4,655,000 | ) | |||||
Interest income and other, net | 573,000 | (2,000 | ) | 553,000 | 132,000 | ||||||||
NET LOSS | $ | (39,000 | ) | $ | (1,484,000 | ) | $ | (1,868,000 | ) | $ | (4,523,000 | ) | |
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted | $ | (0.00 | ) | $ | (0.18 | ) | $ | (0.22 | ) | $ | (0.56 | ) | |
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted | 8,257,000 | 8,257,000 | 8,257,000 | 8,025,000 |
See accompanying notes to consolidated financial statements.
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TRESTLE HOLDINGS, INC.
Nine months ended September 30, | |||||||
2006 | 2005 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net loss | $ | (1,868,000 | ) | $ | (4,523,000 | ) | |
Adjustments to reconcile loss from operations to net cash provided by/(used in) operating activities: | |||||||
Depreciation and amortization | 451,000 | 495,000 | |||||
Provision for doubtful accounts | (38,000 | ) | 80,000 | ||||
Stock based compensation | 260,000 | 59,000 | |||||
Gain on sale of assets | (581,000 | ) | — | ||||
Changes in operating assets and liabilities, net of effects from acquisition/disposition of business: | |||||||
Accounts receivable | 952,000 | (221,000 | ) | ||||
Inventory | 258,000 | (95,000 | ) | ||||
Prepaid expenses and other assets | 54,000 | 201,000 | |||||
Accounts payable and accrued expenses | (1,409,000 | ) | (20,000 | ) | |||
Deferred revenue | (159,000 | ) | (154,000 | ) | |||
Net cash used in operating activities | (2,080,000 | ) | (4,178,000 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Proceeds from the sale of assets | 2,845,000 | — | |||||
Additions to fixed assets | — | (171,000 | ) | ||||
Cash paid for acquisition of net assets of InterScope | — | (178,000 | ) | ||||
Net cash used in investing activities | 2,845,000 | (349,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Offering costs on issuance of common stock | — | (259,000 | ) | ||||
Payment of note | (625,000 | ) | — | ||||
Net proceeds from common stock | — | 2,550,000 | |||||
Net proceeds from issuance of note | 625,000 | — | |||||
Net cash provided by financing activities | 0 | 2,291,000 | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | 765,000 | 2,236,000 | |||||
CASH AND CASH EQUIVALENTS, Beginning of period | 305,000 | 2,371,000 | |||||
CASH AND CASH EQUIVALENTS, End of period | $ | 1,070,000 | $ | 135,000 |
Nine months ended September 30, | |||||||
2006 | 2005 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Cash received/(paid) during the period for: | |||||||
Interest | $ | (14,000 | ) | $ | 24,000 | ||
Income taxes | $ | — | $ | — | |||
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS | |||||||
During the first quarter ended March 31, 2005, there was a cashless exercise of 37,000 warrants into 18,000 shares of common stock. Additionally, the Company acquired substantially all of the assets of InterScope Technologies, Inc. in exchange for 337,838 shares of Trestle common stock and $178,000 in cash. |
See accompanying notes to consolidated financial statements.
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TRESTLE HOLDINGS, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current Operations and Background — On September 22, 2006, Trestle Holdings, Inc. ("Trestle Holdings" or "Company") consummated the sale of substantially all of its assets to Clarient, Inc. in exchange for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities.
As a result of such sale, we are a non-operating public company and our operating results through September 22, 2006 are not meaningful to our future results. The Company is seeking out suitable candidates for a business combination with a private company. The Company previously developed and sold digital tissue imaging and telemedicine applications linking dispersed users and data primarily in the healthcare and pharmaceutical markets.
Basis of Presentation and Principles of Consolidation — The consolidated financial statements reflect the financial position, results of operations and cash flows of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation. Certain reclassifications have been made in order to conform to the September 30, 2006 financial statement presentation. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-KSB for the year ended December 31, 2005. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented.
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 those estimates.
Cash and Cash Equivalents — The Company considers investments with original maturities of 90 days or less to be cash equivalents.
Accounts Receivable - The Company extends credit to its customers. Collateral is generally not required. Credit losses are provided for in the financial statements based on management’s evaluation of historical and current industry trends. Although the Company expects to fully collect amounts due, actual collections may differ from estimated amounts.
Inventory - Inventory is valued at the lower of cost or market. Cost is determined using standard costs, which approximates first-in, first-out method.
Fixed Assets — Fixed assets are stated at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from one to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated life of the improvement.
Intangible Assets— In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less then the assets’ carrying amounts. Factors considered important which could trigger an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the Company’s overall business and significant negative industry or economic trends. If such assets are identified to be impaired, the impairment to be recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset.
Goodwill and Other Indefinite Lived Intangibles — In accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and other indefinite lived intangibles are not amortized, but are tested annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. No impairment losses were recorded the nine months ended September 30, 2006 or for the year ending December 31, 2005.
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Revenue Recognition — The Company recognizes revenue associated with its business on product sales after shipment of the product to the customer and formal acceptance by the customer has been received. Depending upon the specific agreement with the customer, such acceptance normally occurs subsequent to one or more of the following events: receipt of the product by the customer, installation of the product by the Company and/or training of customer personnel by the Company. For sales to qualified distributors revenues are recognized upon transfer of title which is generally upon shipment. Revenue collected in advance of product shipment or formal acceptance by the customer is reflected as deferred revenue. Revenue attributable to software maintenance and support is deferred and recognized ratably over the term of the maintenance agreement, generally one year.
The Company recognizes revenue on multiple element arrangements using the residual method. Under the residual method, revenue is recognized when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of the undelivered elements such as consulting services and product maintenance, and recognizes the revenue for the remainder of the arrangement fee attributable to the elements initially delivered when the basic criteria in SOP 97-2 have been met. Revenue from consulting services is recognized as the related services are performed.
Shipping and Handling Costs — The Company records the revenue related to shipping and handling costs charged to customers in net sales. The related expense is recorded in cost of sales in the accompanying statements of income.
Research and Development — The Company charges research and development expenses to operations as incurred.
Income Taxes —The Company records income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” The standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Stock-Based Compensation— On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which was issued in December 2004. SFAS 123(R) revises SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS 123(R) requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award. SFAS 123(R) also requires measurement of the cost of employee services received in exchange for an award. SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require the excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows. The Company has chosen to adopt SFAS 123(R) using the modified prospective method. Accordingly, prior period amounts have not been restated. Under this application, the Company recorded the cumulative effect of compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption and recorded compensation expense for all awards granted after the date of adoption.
SFAS 123(R) provides that income tax effects of share-based payments are recognized in the financial statements for those awards that will normally result in tax deduction under existing law. Under current U.S. federal tax law, the Company would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement. The Company does not recognize a tax benefit for compensation expense related to incentive stock options unless the underlying shares are disposed in a disqualifying disposition.
Net Income (Loss) Per Share — The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Common equivalent shares related to stock options and warrants have been excluded from the computation of basic and diluted earnings per share, for the quarters and the nine months ended September 30, 2006 and 2005 because their effect is anti-dilutive.
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Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and accounts receivable. The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed FDIC insured limits. Concentration of credit risk associated with accounts receivable is significant due to the limited number of customers, as well as their dispersion across geographic areas. The Company performs ongoing credit evaluations of its customers and generally requires partial deposits. Although the Company has a diversified customer base, a substantial portion of its debtors’ ability to honor their contracts is dependent upon financial conditions in the healthcare industry.
Financial Instruments —The Company’s financial instruments consist of cash, accounts receivable, accounts payable, and accrued expenses. The carrying values of cash, accounts receivable, accounts payable, and accrued expenses are representative of their fair values due to their short-term maturities.
Recently Issued Accounting Pronouncements— In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid Financial Instruments.” SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principal cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative financial instrument. Generally, FASB Statement of Financial Accounting Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires that a derivative embedded in a host contract that does not meet the definition of a derivative be accounted for separately (referred to as bifurcation) under certain conditions. That general rule notwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad exception for interest-only and principal-only strips initially resulting from the separation of rights to receive contractual cash flows of a financial instrument that itself does not contain an embedded derivative that would have been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope exception to strips that represent rights to receive only a portion of the contractual interest cash flows or of the contractual principal cash flows of a specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 , “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” permitted a qualifying special-purpose entity (SPE) to hold only passive derivative financial instruments pertaining to beneficial interests (other than another derivative financial instrument) issued or sold to parties other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE to hold a derivative instrument pertaining to beneficial interests that itself is a derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. This statement is not applicable to the Company.
In March 2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement:
1. | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. |
2. | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. |
3. | Permits an entity to choose “Amortization method” or “Fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities: |
4. | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. |
5. | Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
This statement is effective as of the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statements.
The SEC recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR60"), suggesting companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements in the section entitled "Financial Statements."
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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard establishes a standard definition for fair value, establishes a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. This statement will not a significant impact on the Company’s results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This standard requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur as a component of comprehensive income. The standard also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.
The requirement to recognize the funded status of a defined benefit postretirement plan is effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for the fiscal years ending after December 15, 2008. This statement will not a significant impact on the Company’s results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. It is effective for the fiscal year ending May 31, 2007, and is not expected to materially impact our financial position or results of operations.
NOTE 2 - SALE OF ASSETS
On September 22, 2006, the Company consummated the sale of substantially all of its assets to Clarient, Inc in exchange for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities. The Company recorded a gain of $581,000 from this sale.
NOTE 3 - ACQUISITION OF INTERSCOPE
On March 11, 2005, we purchased substantially all of the assets of InterScope Technologies, Inc. (“InterScope”). InterScope’s business was historically in image acquisition. Interscope Technologies developed key software applications for improving the workflow of clinical and biopharma pathology, especially in data management applications for use in anatomic pathology, toxicology and genomic environments. These applications attempt to deliver integrated solutions and services to pathologists working in clinical and drug development applications.
Under the terms of the acquisition, we, through our wholly-owned subsidiary, paid the Sellers $178,000 in cash and 338,000 shares of the Company’s common stock valued at $1,000,000. The Company’s common stock was valued using the Company’s average closing price over the 60 days prior to the signing date of the asset purchase agreement. Additionally, we hired four former InterScope employees and its former chairman.
The total purchase price as allocated to assets and liabilities was based upon estimated fair market values. This allocation included the recording of approximately $1,178,000 to identifiable intangible assets to be amortized over 3 years.
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The following summarized unaudited pro forma consolidated results of operations reflect the effect of the InterScope as if it had occurred at the beginning of the period presented. The unaudited pro forma consolidated results of operations presented below are not necessarily indicative of operating results which would have been achieved had the acquisition been consummated as of the beginning of the periods presented and should not be construed as representative of future operations:
Nine months ended September 30, 2005 | ||||
Revenues | $ | 2,837,000 | ||
Cost of Revenues | 1,980,000 | |||
Gross Profit | 857,000 | |||
Operating Expenses | 5,713,000 | |||
Operating Loss | $ | (4,856,000 | ) | |
Loss per share | ||||
Basic and diluted EPS as reported | $ | (0.56 | ) | |
Pro forma basic and diluted EPS | $ | (0.61 | ) |
NOTE 4 - INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following at September 30, 2006 and December 31, 2005:
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Work-in-process | $ | — | $ | 492,000 | |||
Finished goods | — | 118,000 | |||||
Reserve for obsolescence | — | (108,000 | ) | ||||
Total | $ | — | $ | 502,000 |
NOTE 5 - FIXED ASSETS
Fixed assets are comprised of the following at September 30, 2006 and December 31, 2005.
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Furniture, fixtures and equipment | $ | — | $ | 299,000 | |||
Less accumulated depreciation | — | (181,000 | ) | ||||
Total | $ | — | $ | 118,000 |
NOTE 6 - INTANGIBLE ASSETS
Intangible assets are comprised of the following at September 30, 2006 and December 31, 2005.
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Intangible assets | $ | — | $ | 1,908,000 | |||
Less accumulated amortization | — | (933,000 | ) | ||||
Net intangible assets | $ | — | $ | 975,000 |
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NOTE 7 - ACCRUED LIABILITIES
Accounts payable and accrued expenses are comprised of the following at September 30, 2006 and December 31, 2005.
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Accrued bonus | $ | — | $ | 269,000 | |||
Accrued paid time off | — | 143,000 | |||||
Accrued legal | — | 43,000 | |||||
Other | 31,000 | 99,000 | |||||
Total | $ | 31,000 | $ | 554,000 |
NOTE 8 - NOTES PAYABLE
On February 27, 2006, we entered into a Loan and Security Agreement between us and Clarient (the “Loan Agreement”) pursuant to which we borrowed $250,000 from Clarient. The Loan Agreement was amended on June 19th, 2006 with the Third Amendment which replaces the maturity date of the loan made by Clarient to us pursuant to the Loan Agreement to the earliest of (i) September 30, 2006 as may be extended under the Purchase Agreement, (ii) an “extraordinary corporate transaction” (which consists of certain significant transactions involving the assets or securities of Trestle Holdings), (iii) the date of acceleration of the loan following an event of default, or (iv) upon termination of the Purchase Agreement under certain circumstances.
On June 19, 2006, in connection with the execution of the Purchase Agreement and to provide us with additional working capital pending completion of the proposed Acquisition, Clarient entered into a Second Loan and Security Agreement (the “Second Loan Agreement”) with Trestle pursuant to which Clarient loaned $250,000 to Trestle Holdings and agreed to, from time to time prior to the closing of the proposed Acquisition and upon conditions contained in the Second Loan Agreement, loan up to an additional $250,000 in two tranches of $125,000 to us pursuant to which Clarient loaned $125,000. These loans bear interest at the annual rate of 8% and are secured by a lien on Trestle’s accounts receivable, inventory, software and intellectual property.
At the completion of the Acquisition, these loans were canceled and all unpaid principal and accrued interest were offset against the purchase price payable by Clarient to Trestle for the Acquisition.
NOTE 9 - PRIVATE PLACEMENT
We sold 1,457,000 units in a private placement resulting in net proceeds of $2,550,000 during the quarter ended March 31, 2005. On January 21, 2005, the Company completed this private placement. The placement was a unit offering to institutional and accredited investors, with each unit consisting of one share of the Company's common stock and a warrant to purchase 0.75 shares of common stock. The units were priced at $1.75 and each warrant is exercisable for shares at $1.75 per share.
NOTE 10 - STOCK OPTIONS AND WARRANTS
The Company's employee stock option plans (the "Plans") provide for the grant of non-statutory or incentive stock options to the Company's employees, officers, directors or consultants. The Compensation Committee of our board of directors administers the Plans, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the Plans generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant (110% for awards issued to a 10% or more stockholder). The term of the options granted under the Plans cannot be greater than 10 years; 5 years for a 10% or more stockholder. Options vest at varying rates generally over five years. An aggregate of 1,855,000 shares were reserved under the Plans, of which 765,000 shares were available for future grant at September 30, 2006.
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Prior to January 1, 2006 the Company accounted for its stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method the Company did not record compensation expense for the quarter ended September 30, 2005 related to the issuance of employee and director stock option grants because the exercise price equaled the fair market value of the underlying common stock at the date of grant . The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended September 30, 2005 and nine months ended September 30, 2005. Periods ending in 2006 are included for comparative purposes.
Quarter Ended September 30, | Nine months ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Net loss | ||||||||||||
As reported | $ | (39,000 | ) | $ | (1,484,000 | ) | $ | (1,868,000 | ) | $ | (4,523,000) | |
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | — | (126,000 | ) | — | (377,000) | |||||||
Pro forma | $ | (39,000 | ) | $ | (1,610,000 | ) | $ | (1,829,000 | ) | $ | (4,900,000) | |
Loss per share | ||||||||||||
Basic and diluted EPS as reported | $ | (0.00 | ) | $ | (0.18 | ) | $ | (0.22 | ) | $ | (0.56) | |
Pro forma basic and diluted EPS | $ | (0.00 | ) | $ | (0.20 | ) | $ | (0.22 | ) | $ | (0.61) |
The Company has elected to adopt the detailed method provided in SFAS No. 123(R) for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the income tax effects of employee stock-based compensation awards that are outstanding upon the adoption of SFAS No. 123(R).
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. The expected life of an option grant is based on management’s estimate. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
The following assumptions were used to determine the fair value of stock options granted using the Black-Scholes option-pricing model:
2006 | 2005 | ||||
Dividend yield | 0.0 | % | 0.0 | % | |
Volatility | 112 | % | 53 | % | |
Average expected option life | 6.67 years | 6.67 years | |||
Risk-free interest rate | 4.30 | % | 3.93 | % |
During the quarter ended September 30, 2006, the Company granted no options. To account for previous grants, we recorded compensation expense of $57,000 which includes the issuance of past employee stock options vesting in this quarter. As of September 30, 2006, $80,000 remains to be recognized as a compensation expense for issued options. Though these expenses result in a deferred tax benefit, we have a full valuation allowance against the deferred tax benefit.
During the nine months ended September 30, 2006, the Company granted 105,000 options to non-management board members. The weighted average exercise price of the grants during the quarter was $0.25. The options vest quarterly over the 2006 fiscal year with an expiration date of 10 years. The Company has assumed that all stock options issued during the quarter will vest. To account for such grants, we recorded deferred stock compensation of $23,000, and recognized compensation expense of $17,000 related to this issuance and a total compensation expense of $257,000 which includes the issuance of past employee stock options vesting in this quarter.
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The following table summarizes activity in the Company's stock option plans during the nine months ended September 30, 2006 and the year ended December 31, 2005:
Number of Shares | Weighted Average Price Per Share | ||||||
Balance at December 31, 2004 | 745,000 | $ | 3.80 | ||||
Granted | 501,000 | 0.86 | |||||
Balance at December 31, 2005 | 1,246,000 | $ | 2.62 | ||||
Granted | 105,000 | $ | 0.25 | ||||
Canceled | 291,000 | 1.78 | |||||
Balance at September 30, 2006 | 1,060,000 | $ | 1.92 |
The following summarizes pricing and term information for options issued to employees and directors which are outstanding as of September 30, 2006:
Options Outstanding | Options Exercisable | |||||||||||||||
Range of Exercise Prices | Number Outstanding at September 30, 2006 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable at September 30, 2006 | Weighted Average Exercise Price | |||||||||||
0.25 - 1.00 | 555,000 | 8.17 | $ | 0.67 | 455,000 | $ | 0.60 | |||||||||
1.01 - 10.00 | 492,000 | 7.75 | 2.91 | 445,000 | 3.97 | |||||||||||
45.00 - 50.00 | 1,000 | 3.67 | 45.00 | 1,000 | 45.00 | |||||||||||
65.00 - 72.50 | 11,000 | 3.05 | 67.45 | 11,000 | 67.45 | |||||||||||
105.00 | 1,000 | �� | 1.67 | 105.00 | 1,000 | 105.00 | ||||||||||
0.50 - 105.00 | 1,060,000 | 7.91 | $ | 2.54 | 913,000 | $ | 3.21 |
NOTE 11 - EARNINGS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for each of the quarters and the nine months ended September 30, 2006 and 2005 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
Quarter Ended September 30, | Nine months ended September 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Weighted average common stock equivalents: | |||||||||||||
Stock options | 1,060,000 | 1,645,000 | 1,279,000 | 1,401,000 | |||||||||
Warrants | 4,179,000 | 4,253,000 | 4,216,000 | 4,280,000 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission. The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this report.
Overview
On September 22, 2006, Trestle Holdings, Inc. ("Trestle Holdings" or "Company") consummated the sale of substantially all of its assets to Clarient, Inc. in exchange for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities.
As a result of such sale, we are a non-operating public company and our operating results through September 22, 2006 are not meaningful to our future results. The Company is seeking out suitable candidates for a business combination with a private company. The Company previously developed and sold digital tissue imaging and telemedicine applications linking dispersed users and data primarily in the healthcare and pharmaceutical markets.
Critical accounting policies and estimates
The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates:
The Company recognizes revenue on product sales after shipment of the product to the customer and formal acceptance by the customer has been received. Depending upon the specific agreement with the customer, such acceptance normally occurs subsequent to one or more of the following events: receipt of the product by the customer, installation of the product by the Company and training of customer personnel by the Company. For sales to qualified distributors revenues are recognized upon transfer of title which is generally upon shipment. Revenue collected in advance of product shipment or formal acceptance by the customer is reflected as deferred revenue. Revenue attributable to software maintenance and support is deferred and recognized ratably over the term of the maintenance agreement, generally one year.
The Company recognizes revenue on multiple element arrangements using the residual method. Under the residual method, revenue is recognized when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of the undelivered elements such as consulting services and product maintenance, and recognizes the revenue for the remainder of the arrangement fee attributable to the elements initially delivered when the basic criteria in SOP 97-2 have been met. Revenue from consulting services is recognized as the related services are performed.
The Company accounts for its business acquisitions under the purchase method of accounting in accordance with SFAS 141, "Business Combinations." The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair value of the tangible net assets acquired is recorded as intangibles. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items.
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The Company assesses the potential impairment of long-lived assets and identifiable intangibles under the guidance of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." which states that a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset exceeds its fair value. An impairment loss is recognized only if the carrying amount of the long-lived asset exceeds its fair value and is not recoverable.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates.
For the Quarter Ended September 30, 2006 and 2005
Results of Operations
Revenues
Revenues were $384,000 and $879,000 for the quarters ended September 30, 2006 and 2005, respectively. Revenues for the quarters ended September 30, 2006 and 2005 consisted of $309,000 and $754,000 for product and software sales and $75,000 and $125,000 for software support, respectively. The decrease in revenue is primarily due to lower number of product unit sales partially offset by a greater percentage of direct sales for which the Company receives a higher per unit revenues and the sale of our assets to Clarient which closed September 22, 2006. Revenues will decrease to zero due to the sale of substantially all the Company’s assets.
Cost of Sales
Cost of sales was $172,000 and $544,000 for the quarters ended September 30, 2006 and 2005, respectively. The decrease in cost of sales is due lower product unit sales partially offset by an increase in margin on direct sales.
Research and Development
Research and development expenses were $263,000 and $555,000 for the quarters ended September 30, 2006 and 2005, respectively. The decrease of $292,000 in research and development expenses results mainly through cost cutting measures enacting at the Company. Research and development expenses will decrease to zero for the future due to the sale of substantially all the Company’s assets.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $561,000 and $1,262,000 for the quarters ended September 30, 2006 and 2005, respectively. The decrease of $701,000 resulted from a decrease in corporate expenses and a reduction in head count and various other fluctuations partially offset by significant increases in non-cash expense related to stock options and amortization of intangibles. We expect selling, general and administrative expenses will decrease significantly in the future as we have terminated all of our employees due to the sale of assets to Clarient and outsourced our administrative function.
Interest Income, Interest Expense and Other
Interest income and other, net was $573,000 and ($2,000) for the quarters ended September 30, 2006 and 2005, respectively, an increase in income of $575,000. The increase is principally due to the gain on the sale of assets of $581,000 from the sale of substantially all the Company’s assets.
For the Nine months ended September 30, 2006 and 2005
Results From Operations
Revenues
Revenues were $1,587,000 and $2,837,000 for the nine months ended September 30, 2006 and 2005, respectively. Revenues for the nine months ended September 30, 2006 and 2005 consisted of $1,318,000 and $2,540,000 for product sales and $269,000 and $297,000 for software support, respectively. The decrease in revenue is primarily due to lower number of product unit sales partially offset by a greater percentage of direct sales for which the Company receives a higher per unit revenues and the sale of our assets to Clarient which closed September 22, 2006. Revenues will decrease to zero for the future due to the sale of substantially all the Company’s assets.
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Cost of Sales
Cost of sales was $772,000 and $1,980,000 for the nine months ended September 30, 2006 and 2005, respectively. The decrease in cost of sales is due lower product unit sales partially offset by an increase in margin on direct sales.
Research and Development
Research and development expenses were $1,078,000 and $1,473,000 for the nine months ended September 30, 2006 and 2005, respectively. The decrease of $395,000 in research and development expenses results from typical quarter to quarter fluctuation. Research and development expenses will decrease to zero due to the sale of substantially all the Company’s assets.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,158,000 and $4,039,000 for the nine months ended September 30, 2006 and 2005, respectively, a decrease of $1,881,000. The decrease resulted from a decrease in corporate expenses and a reduction in head count and various other fluctuations partially offset by significant increases in non-cash expense related to stock options and amortization of intangibles. We expect selling, general and administrative expenses will decrease significantly in the future as we have terminated all of our employees due to the sale of assets to Clarient and outsourced our administrative function.
Interest Income, Interest Expense and Other
Interest income, interest expense and other, net was $553,000 and $132,000 for the nine months ended September 30, 2006 and 2005, respectively, a decrease of $421,000. The increase is principally due to the gain on the sale of assets of $581,000 from the sale of substantially all the Company’s assets.
Liquidity and Capital Resources
Net cash used in operating activities was $2,080,000 and $4,178,000 in the nine months ended September 30, 2006 and 2005, respectively. The decrease of $2,098,000 in cash used by operating activities was primarily due to improved margins on sales and cost savings related to a reduction of employees, outside consultants and other corporate expenses.
Net cash provide by / (used in) investing activities was $2,845,000 and ($349,000) for the nine months ended September 30, 2006 and 2005, respectively. Investing activities for the nine months ended September 30, 2005 resulted from the purchase of fixed assets and cash used in the purchase of substantially all of the assets of InterScope. Investing activities for the nine months ended September 30, 2006 resulted from the sale of substantially all the Company’s assets.
Cash provided by financing activities was zero and $2,291,000 from the net proceeds of a private placement for the nine months ended September 30, 2006 and 2005, respectively.
During the nine months ended September 30, 2005, we raised proceeds of $2,550,000. The placement was a unit offering to institutional and accredited investors, with each unit consisting of one share of the Company's common stock and a warrant to purchase 0.75 shares of common stock. The units were priced at $1.75 and each warrant is exercisable for shares at $1.75 per share. The Company sold an aggregate of 2,600,000 units resulting in gross proceeds of $4,550,000 to the Company of which the $2,000,000 had been received by December 31, 2004. The Company paid commissions of $20,000 to Scottsdale Capital and $138,000 to T.R. Winston & Company as non-exclusive agents on the funding. These payments were offset against funds received in the placement. Additionally, the Company acquired substantially all of the assets of InterScope Technologies, Inc. in exchange for 337,838 shares of Trestle common stock and $178,000 in cash.
On February 27, 2006, we entered into a Loan Agreement pursuant to which we borrowed $250,000 from Clarient which matured on September 22, 2006. On June 19, 2006, in connection with the execution of the Purchase Agreement and to provide us with additional working capital pending completion of the proposed Acquisition, Clarient entered into a Second Loan Agreement with Trestle pursuant to which Clarient loaned $250,000 to Trestle Holdings and agreed to, from time to time prior to the closing of the proposed Acquisition and upon conditions contained in the Second Loan Agreement, loan up to an additional $250,000 in two tranches of $125,000 to us pursuant to which Clarient loaned $125,000. This loan matured on September 22, 2006. These loans bore interest at the annual rate of 8% and were secured by a lien on Trestle’s accounts receivable, inventory, software and intellectual property.
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At the completion of the sale of our assets, these loans were canceled and all unpaid principal and accrued interest were offset against the purchase price paid by Clarient to Trestle.
On September 22, 2006, the Company consummated the sale of substantially all of its assets to Clarient, Inc in exchange for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities.
The Company has suffered recurring losses from operations and has an accumulated deficit of $52,193,000 at September 30, 2006. Currently, we are a non-operating public company. The Company is seeking out suitable candidates for a business combination with a private company.
Inflation and Seasonality
Inflation has not been material to the Company during the past five years. Seasonality has not been material to the Company.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid Financial Instruments.” SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principal cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative financial instrument. Generally, FASB Statement of Financial Accounting Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires that a derivative embedded in a host contract that does not meet the definition of a derivative be accounted for separately (referred to as bifurcation) under certain conditions. That general rule notwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad exception for interest-only and principal-only strips initially resulting from the separation of rights to receive contractual cash flows of a financial instrument that itself does not contain an embedded derivative that would have been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope exception to strips that represent rights to receive only a portion of the contractual interest cash flows or of the contractual principal cash flows of a specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 , “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” permitted a qualifying special-purpose entity (SPE) to hold only passive derivative financial instruments pertaining to beneficial interests (other than another derivative financial instrument) issued or sold to parties other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE to hold a derivative instrument pertaining to beneficial interests that itself is a derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. This statement is not applicable to the Company.
In March 2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement:
· | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. |
· | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. |
· | Permits an entity to choose “Amortization method” or “Fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities: |
· | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. |
· | Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
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This statement is effective as of the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statements. This statement is not applicable to the Company.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard establishes a standard definition for fair value, establishes a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. This statement will not a significant impact on the Company’s results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This standard requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur as a component of comprehensive income. The standard also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.
The requirement to recognize the funded status of a defined benefit postretirement plan is effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for the fiscal years ending after December 15, 2008. This statement will not a significant impact on the Company’s results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. It is effective for the fiscal year ending May 31, 2007, and is not expected to materially impact our financial position or results of operations.
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Risk Factors
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
We have a history of net losses and may never achieve or maintain profitability.
We have a history of incurring losses from operations. As of September 30, 2006, we had an accumulated deficit of approximately $52,193,000, of which approximately $37,635,000 was incurred prior to our acquisition of our current business line. We anticipate that our existing cash, cash equivalents and loans will be sufficient to fund our operations. Our ability to continue may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses in connection with our business activities.
We are a non-operating company seeking a suitable transaction and may not find a suitable candidate or transaction.
Since the sale of substantially all of our assets to Clarient, we are a non-operating company and are seeking suitable transaction with a private company, however we may not find a suitable candidate or transaction. If we are unable to consummate a suitable transaction we will be forced to liquidate and dissolve, which will take three years to complete and may result in our distributing less cash to our shareholders. Additionally, we will be spending cash during the winding down of the Company and may not have enough cash to distribute to our shareholders.
We cannot assure you of the exact amount or timing of any future distribution to our stockholders.
The precise nature, amount and timing of any future distribution to our stockholders will depend on and could be delayed by, among other things, the opportunities for a private company transaction, administrative and tax filings during or associated with our seeking a private company transaction or any subsequent dissolution, potential claim settlements with creditors, and unexpected or greater than expected operating costs associated with any potential private company transaction or any subsequent liquidation. Furthermore, we cannot provide any assurances that we will actually make any distributions. Any amounts we actually distribute to our stockholders may be less than the price or prices at which our common stock has recently traded or may trade in the future.
We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution to stockholders.
Claims, liabilities and expenses incurred while seeking a private company transaction or any subsequent dissolution, such as legal, accounting and consulting fees and miscellaneous office expenses, will reduce the amount of assets available for future distribution to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.
We will continue to incur the expenses of complying with public company reporting requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome.
In the event of liquidation, our Board of Directors may at any time turn management of the liquidation over to a third party, and our directors may resign from our board at that time.
If we are unable to find or consummate a suitable private company transaction, our directors may at any time turn our management over to a third party to commence or complete the liquidation of our remaining assets and distribute the available proceeds to our stockholders, and our directors may resign from our board at that time. If management is turned over to a third party and our directors resign from our board, the third party would have sole control over the liquidation process, including the sale or distribution of any remaining assets.
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If we are deemed to be an investment company, we may be subject to substantial regulation that would cause us to incur additional expenses and reduce the amount of assets available for distribution.
If we invest our cash and/or cash equivalents in investment securities, we may be subject to regulation under the Investment Company Act of 1940. If we are deemed to be an investment company under the Investment Company Act because of our investment securities holdings, we must register as an investment company under the Investment Company Act. As a registered investment company, we would be subject to the further regulatory oversight of the Division of Investment Management of the Securities and Exchange Commission, and our activities would be subject to substantial regulation under the Investment Company Act. Compliance with these regulations would cause us to incur additional expenses, which would reduce the amount of assets available for distribution to our stockholders. To avoid these compliance costs, we intend to invest our cash proceeds in money market funds and government securities, which are exempt from the Investment Company Act but which currently provide a very modest return.
If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, in the event of dissolution, our stockholders could be held liable for payment to our creditors of each such stockholder’s pro rata share of amounts owed to the creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.
In the event of dissolution or a distribution of substantially all our assets, pursuant to the Delaware General Corporation Law, we will continue to exist for three years after the dissolution became effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under the Delaware General Corporation Law, in the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities during this three-year period, each stockholder could be held liable for payment to our creditors of such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.
However, the liability of any stockholder would be limited to the amounts previously received by such stockholder from us (and from any liquidating trust or trusts) in the dissolution. Accordingly, in such event a stockholder could be required to return all distributions previously made to such stockholder. In such event, a stockholder could receive nothing from us under the plan of dissolution. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. There can be no assurance that any contingency reserve established by us will be adequate to cover any expenses and liabilities.
Our auditors have expressed a going concern opinion.
Primarily as a result of our recurring losses and our lack of liquidity, the Company received a report from our independent auditors that includes an explanatory paragraph describing the substantial uncertainty as to our ability to continue as a going concern for the year ended December 31, 2005.
Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock lower our value and make it more difficult for us to pursue or consummate a private company transaction.
Any sale of a substantial number of shares of our common stock (or the prospect of sales) may have the effect of depressing the trading price of our common stock. In addition, these sales could lower our value and make it more difficult for us to engage in a private company transaction. Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to engage in a private company transaction on terms more favorable to us.
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Our stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market's adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
· | announcements concerning our strategy, |
· | litigation, and |
· | general market conditions. |
Because our common stock is considered a "penny stock" any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is currently traded on the Over-The-Counter Bulletin Board ("OTC Bulletin Board") and is considered a "penny stock." The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ SmallCap Market.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.
We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize the issuance of 150,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common stock and the preferred stock can be issued by, and the terms of the preferred stock, including dividend rights, voting rights, liquidation preference and conversion rights can generally be determined by, our board of directors without stockholder approval. Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common stock and preferred stock, in the event that buyers can be found therefore. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders.
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ITEM 3 - CONTROLS AND PROCEDURES
Disclosure controls and procedures. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Interim President, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
At the end of the period covered by this report and at the end of each fiscal quarter therein, our management, with the participation of our Interim President, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Interim President concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.
Changes in internal controls over financial reporting. The Interim President has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, the Interim President has concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company is a non-accelerated filer and is required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending on or after July 15, 2007. Although the Company is working to comply with these requirements, the Company has only one consultant. The Company's lack of employees is expected to make compliance with Section 404 - especially with segregation of duty control requirements - very difficult and cost ineffective, if not impossible. While the SEC has indicated it expects to issue supplementary regulations easing the burden of Section 404 requirements for small entities like the Company, such regulations have not yet been issued.
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ITEM 1. | Legal Proceedings | ||
The Company is not currently involved in any material legal proceedings. | |||
ITEM 6. | Exhibits | ||
3.1 | Third Amended and Restated Articles of Incorporation of the Company dated November 2, 2006. | ||
31 | Certificate of Eric Stoppenhagen, Interim President, of Trestle Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | Certificate of Eric Stoppenhagen, Interim President, respectively, of Trestle Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRESTLE HOLDINGS, INC. | |||
Date: November 13, 2006 | /s/ ERIC STOPPENHAGEN | ||
Name: Eric Stoppenhagen | |||
Title: Interim President | |||
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EXHIBIT INDEX
Exhibit | Description | |
3.1 | Third Amended and Restated Articles of Incorporation of the Company dated November 2, 2006. | |
31 | Certificate of Eric Stoppenhagen, Interim President, of Trestle Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certificate of Eric Stoppenhagen, Interim President of Trestle Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |