REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders of Manaris Corporation
We
have
audited the accompanying consolidated balance sheet of Manaris Corporation
and
its subsidiaries as of June 30, 2007 and the related consolidated statements
of
operations and comprehensive loss, cash flows and stockholders’ equity for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Manaris
Corporation and its subsidiaries, as of June 30, 2006 and for the year then
ended, were audited by other auditors whose report dated September 29, 2006
expressed an unqualified opinion on those statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Manaris Corporation and
its
subsidiaries as of June 30, 2007 and the results of its operations and its
cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
We
also
audited the adjustments described in Note 21 that were applied to restate
the
2006 financial statements. In our opinion, such adjustments are appropriate
and
have been properly applied.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant losses since inception and
has
relied on non-operational sources of financing to fund operations, which
raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Raymond Chabot Grant Thornton LLP
Chartered
Accountants
Montreal,
Canada
December
11, 2007
Manaris
Corporation
|
Consolidated
Balance Sheets
|
(Expressed
in U.S. Dollars)
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
559,257
|
|
|
438,708
|
|
Accounts
receivable, net of allowance for doubtful accounts of $54,128
and
|
|
|
|
|
|
|
|
$115,721,
respectively
|
|
|
3,834,474
|
|
|
3,104,907
|
|
Deposits
in trust
|
|
|
-
|
|
|
79,781
|
|
Other
receivables (Note 10)
|
|
|
1,167,241
|
|
|
375,742
|
|
Inventories
(Note 10)
|
|
|
1,478,835
|
|
|
1,563,805
|
|
Prepaid
expenses and deposits
|
|
|
212,359
|
|
|
259,552
|
|
Deferred
contract costs (Note 4)
|
|
|
-
|
|
|
151,272
|
|
Restricted
held-to-maturity security
|
|
|
93,861
|
|
|
89,686
|
|
Current
assets of discontinued operations
|
|
|
695
|
|
|
9,011
|
|
Total
Current Assets
|
|
|
7,346,722
|
|
|
6,072,464
|
|
Property
and equipment, net (Note 7)
|
|
|
2,279,973
|
|
|
3,082,402
|
|
Intangible
assets (Note 8)
|
|
|
3,967,213
|
|
|
3,757,272
|
|
Goodwill
(Note 9)
|
|
|
4,116,872
|
|
|
3,762,000
|
|
Deferred
financing costs
|
|
|
376,794
|
|
|
101,681
|
|
Deposits
|
|
|
105,915
|
|
|
86,225
|
|
Deferred
contract costs (Note 4)
|
|
|
-
|
|
|
281,390
|
|
Total
Assets
|
|
|
18,193,489
|
|
|
17,143,434
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 10)
|
|
|
3,992,847
|
|
|
4,666,858
|
|
Bank
and other loans payable (Note 13)
|
|
|
1,054,238
|
|
|
2,331,696
|
|
Current
portion of long-term debt (Note 15)
|
|
|
94,317
|
|
|
103,717
|
|
Current
portion of convertible debentures (Note 16)
|
|
|
1,568,519
|
|
|
587,891
|
|
Due
to related parties (Note 12)
|
|
|
40,000
|
|
|
40,000
|
|
Total
Current Liabilities
|
|
|
6,749,921
|
|
|
7,730,162
|
|
Long-term
debt, less current portion (Note 15)
|
|
|
174,412
|
|
|
222,900
|
|
Deferred
revenue (Note 4)
|
|
|
-
|
|
|
281,390
|
|
Convertible
debentures (Note 16)
|
|
|
1,275,458
|
|
|
343,109
|
|
Balance
of purchase price payable (Note 14)
|
|
|
1,194,096
|
|
|
877,675
|
|
Derivative
financial instruments (Notes 14 and 16)
|
|
|
64,510
|
|
|
458,271
|
|
Total
Liabilities
|
|
|
9,458,397
|
|
|
9,913,507
|
|
Non-controlling
Interest
|
|
|
23,193
|
|
|
23,940
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, 500,000,000 shares authorized with a par value of
|
|
|
|
|
|
|
|
$0.00001;
93,437,654 and 77,671,281 issued and outstanding,
respectively
|
|
|
934
|
|
|
777
|
|
Additional
Paid-in Capital
|
|
|
36,727,893
|
|
|
34,169,867
|
|
Accumulated
other comprehensive income (loss)
|
|
|
1,268,622
|
|
|
(316,566
|
)
|
Deficit
|
|
|
(29,285,550
|
)
|
|
(26,648,091
|
)
|
Total
Stockholders’ Equity
|
|
|
8,711,899
|
|
|
7,205,987
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
18,193,489
|
|
|
17,143,434
|
|
Going
Concern (Note 1)
Contingencies
(Note 19)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Manaris
Corporation
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
|
|
(Expressed
in U.S. Dollars)
|
|
|
|
For
the Years Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Revenue
(Note 4)
|
|
|
18,740,561
|
|
|
10,498,505
|
|
Costs
of Revenue
|
|
|
12,226,804
|
|
|
7,464,710
|
|
Gross
Margin
|
|
|
6,513,757
|
|
|
3,033,795
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
875,827
|
|
|
979,635
|
|
Selling,
general and administration (Note 18)
|
|
|
6,468,080
|
|
|
6,937,860
|
|
Loss
on impairment of goodwill (Note 9)
|
|
|
-
|
|
|
1,529,767
|
|
Loss
on impairment of intangible assets (Note 8)
|
|
|
-
|
|
|
107,715
|
|
Research
and development
|
|
|
1,571,572
|
|
|
1,106,259
|
|
Total
Operating Expenses
|
|
|
8,915,479
|
|
|
10,661,236
|
|
Loss
from Operations
|
|
|
(2,401,722
|
)
|
|
(7,627,441
|
)
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
Other
income (expenses), net
|
|
|
372,269
|
|
|
(18,187
|
)
|
Interest
expense, net
|
|
|
(902,509
|
)
|
|
(762,488
|
)
|
Debentures
and preferred shares accretion (Notes 14 and 16)
|
|
|
(2,420,791
|
)
|
|
(4,036,772
|
)
|
Change
in fair value of derivative financial instruments (Notes 14 and
16)
|
|
|
1,762,161
|
|
|
45,543
|
|
Total
Other Income (Expenses)
|
|
|
(1,188,870
|
)
|
|
(4,771,904
|
)
|
Net
Loss from Continuing Operations before Income Tax Benefit
|
|
|
(3,590,592
|
)
|
|
(12,399,345
|
)
|
Income
Tax Benefit - Refundable tax credits (Note 20)
|
|
|
1,217,948
|
|
|
351,242
|
|
Net
Income (Loss) from Continuing Operations before Non-Controlling
Interest
|
|
|
(2,372,644
|
)
|
|
(12,048,103
|
)
|
Non-Controlling
Interest
|
|
|
1,890
|
|
|
(3,977
|
)
|
Net
Loss from Continuing Operations
|
|
|
(2,370,754
|
)
|
|
(12,052,080
|
)
|
Results
of Discontinued Operations (Note 5)
|
|
|
-
|
|
|
149,637
|
|
Net
Loss
|
|
|
(2,370,754
|
)
|
|
(11,902,443
|
)
|
Effect
of reduction in exercise price of outstanding warrants
|
|
|
-
|
|
|
(2,197,296
|
)
|
Net
Loss applicable to common stockholders
|
|
|
(2,370,754
|
)
|
|
(14,099,739
|
)
|
Net
Loss from continuing operations per share - Basic
|
|
|
|
|
|
|
|
and
Diluted (Note 18)
|
|
|
(0.03
|
)
|
|
(0.21
|
)
|
Net
Loss per share - Basic and Diluted (Note 18)
|
|
|
(0.03
|
)
|
|
(0.20
|
)
|
Weighted
Average Common Shares Outstanding
|
|
|
82,513,000
|
|
|
69,363,000
|
|
|
|
|
|
|
|
|
|
Statement
of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(2,370,754
|
)
|
|
(11,902,443
|
)
|
Foreign
currency translation adjustments
|
|
|
592,730
|
|
|
47,849
|
|
Comprehensive
Loss
|
|
|
(1,778,024
|
)
|
|
(11,854,594
|
)
|
Contingencies
(Note 19)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Manaris
Corporation
Consolidated
Statements of Cash Flows
(Expressed
in U.S. Dollars)
|
|
For
the Years Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Net
Loss
|
|
|
(2,370,754
|
)
|
|
(11,902,443
|
)
|
Adjustments
to reconcile net loss to cash generated by (used in) operating
activities
|
|
|
|
|
|
|
|
Results
of discontinued operations
|
|
|
-
|
|
|
(149,637
|
)
|
Stock-based
compensation
|
|
|
453,206
|
|
|
490,795
|
|
Expenses
settled with issuance of common shares
|
|
|
77,102
|
|
|
5,400
|
|
Depreciation
and amortization
|
|
|
1,101,965
|
|
|
1,046,355
|
|
Reduction
of loan payable (Note 4)
|
|
|
(200,000
|
)
|
|
-
|
|
Non-cash
financial expenses
|
|
|
9,766
|
|
|
(59,293
|
)
|
Gain
on disposal of property and equipment
|
|
|
(308,676
|
)
|
|
-
|
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
Loss
on impairment of goodwill
|
|
|
-
|
|
|
1,529,767
|
|
Loss
on impairment of intangible assets
|
|
|
-
|
|
|
107,715
|
|
Non-controlling
interest
|
|
|
(1,890
|
)
|
|
3,977
|
|
Loss
on conversion of convertible debentures
|
|
|
129,922
|
|
|
-
|
|
Debentures
and preferred shares accretion
|
|
|
2,420,791
|
|
|
4,036,772
|
|
Change
in fair value of derivative financial instruments
|
|
|
(1,762,161
|
)
|
|
(45,543
|
)
|
Amortization
of deferred financing costs
|
|
|
289,327
|
|
|
335,004
|
|
Non-cash
revenue
|
|
|
(355,928
|
)
|
|
-
|
|
Other
non-cash items
|
|
|
111,205
|
|
|
31,359
|
|
Changes
in operating assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
(Increase)
in accounts receivables
|
|
|
(697,684
|
)
|
|
(1,297,820
|
)
|
(Increase)
decrease in inventories
|
|
|
85,797
|
|
|
(87,689
|
)
|
(Increase)
decrease in other receivables
|
|
|
(727,954
|
)
|
|
483,366
|
|
(Increase)
decrease in deferred contract costs
|
|
|
423,471
|
|
|
(432,662
|
)
|
Decrease
(increase) in deferred revenue
|
|
|
(275,412
|
)
|
|
432,662
|
|
(Decrease)
increase in prepaid expenses and other assets
|
|
|
33,241
|
|
|
(259,085
|
)
|
(Decrease)
in due to related parties
|
|
|
-
|
|
|
(126,243
|
)
|
Increase
(decrease) in accounts payable and accrued liabilities
|
|
|
(850,534
|
)
|
|
1,594,692
|
|
Net
Cash Generated by (Used In) Operating Activities from Continuing
Operations
|
|
|
(2,415,200
|
)
|
|
(4,262,551
|
)
|
Net
Cash Generated by (Used in) Operating Activities from Discontinued
Operations
|
|
|
8,357
|
|
|
803,522
|
|
Net
Cash Generated by (Used In) Operating Activities
|
|
|
(2,406,843
|
)
|
|
(3,459,029
|
)
|
Investing
Activities
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
-
|
|
|
(654,279
|
)
|
Purchase
of property and equipment
|
|
|
(154,500
|
)
|
|
(182,851
|
)
|
Disposal
of property and equipment and inventory
|
|
|
835,041
|
|
|
-
|
|
Deposits
in trust
|
|
|
79,304
|
|
|
(79,781
|
)
|
Net
Cash Generated by (Used in) Investing Activities from Continuing
Operations
|
|
|
759,845
|
|
|
(916,911
|
)
|
Net
Cash Generated by (Used in) Investing Activities from Discontinued
Operations
|
|
|
-
|
|
|
3,007,568
|
|
Net
Cash Generated by (Used in) Investing Activities
|
|
|
759,845
|
|
|
2,090,657
|
|
Financing
Activities
|
|
|
|
|
|
|
|
Repayment
of bank credit line
|
|
|
(715,708
|
)
|
|
169,620
|
|
Repayment
of senior convertible debt
|
|
|
(774,073
|
)
|
|
(625,353
|
)
|
Repayment
of secured convertible debt
|
|
|
-
|
|
|
(1,225,257
|
)
|
Proceeds
from issue of secured convertible debentures
|
|
|
3,179,849
|
|
|
-
|
|
Long
term debt repayments
|
|
|
(74,156
|
)
|
|
(64,355
|
)
|
Proceeds
from investment tax credit financing
|
|
|
397,099
|
|
|
-
|
|
Repayments
of investment tax credit financing
|
|
|
(311,983
|
)
|
|
-
|
|
Proceeds
from capital leases
|
|
|
38,770
|
|
|
25,186
|
|
Repayments
of capital leases
|
|
|
(29,990
|
)
|
|
(50,539
|
)
|
Repayment
of related party advances
|
|
|
-
|
|
|
(49
|
)
|
Common
stock issued pursuant to stock options exercised
|
|
|
-
|
|
|
100,013
|
|
Common
stock issued pursuant to warrants exercised
|
|
|
-
|
|
|
2,206,022
|
|
Proceeds
(repayment) of other loans payable
|
|
|
(142,659
|
)
|
|
837,077
|
|
Net
Cash Generated by (Used in) Financing Activities from Continuing
Operations
|
|
|
1,567,149
|
|
|
1,372,365
|
|
Net
Cash Generated by (Used in) Financing Activities from Discontinued
Operations
|
|
|
-
|
|
|
(257,162
|
)
|
Net
Cash Generated by (Used in) Financing Activities
|
|
|
1,567,149
|
|
|
1,115,203
|
|
Effect
of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
200,398
|
|
|
404,730
|
|
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
120,549
|
|
|
151,561
|
|
Cash
and Cash Equivalents - Beginning of period
|
|
|
438,708
|
|
|
287,147
|
|
Cash
and Cash Equivalents - End of period
|
|
|
559,257
|
|
|
438,708
|
|
Going
Concern (Note 1)
|
|
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
|
Manaris
Corporation
|
|
Consolidated
Statements of Cash Flows (continued)
|
|
(Expressed
in U.S. Dollars)
|
|
|
|
For
the Years Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Non-Cash
Financing and Investing Activities
|
|
|
|
|
|
Issuance
of common shares for services
|
|
|
3,640
|
|
|
5,400
|
|
Issuance
of common shares for late filing of registration statement
|
|
|
73,462
|
|
|
-
|
|
Issuance
of common shares for interest payments
|
|
|
58,410
|
|
|
265,436
|
|
Issuance
of common shares for repayment of senior convertible notes, Series
A
|
|
|
341,458
|
|
|
2,099,792
|
|
Issuance
of common shares for conversion of senior convertible notes, Series
A
|
|
|
-
|
|
|
1,249,360
|
|
Issuance
of common shares for repayment of secured convertible notes, Series
B
|
|
|
1,034,545
|
|
|
-
|
|
Issuance
of stock options to settle outstanding legal claims
|
|
|
-
|
|
|
77,000
|
|
Issuance
of common shares for repayment of senior convertible
debentures
|
|
|
-
|
|
|
224,397
|
|
Issuance
of common shares for repayment of unsecured convertible
debentures
|
|
|
527,752
|
|
|
-
|
|
Issuance
of stock options for debt settlement
|
|
|
-
|
|
|
-
|
|
Issuance
of common shares to settle outstanding payables
|
|
|
25,709
|
|
|
136,860
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
Interest
(paid) earned from continuing operations
|
|
|
(164,870
|
)
|
|
(18,935
|
)
|
Interest
paid from discontinued operations
|
|
|
-
|
|
|
17,420
|
|
Income
taxes paid from discontinued operations
|
|
|
-
|
|
|
120,647
|
|
Going
Concern (Note 1)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Manaris
Corporation
|
|
|
Consolidated
Statement of Stockholders’ Equity
|
|
|
(Expressed
in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
Shares
|
|
Additional
|
|
Other
|
|
|
|
Total
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2005
|
|
|
54,782,802
|
|
|
548
|
|
|
24,142,078
|
|
|
(364,415
|
)
|
|
(12,548,352
|
)
|
|
11,229,859
|
|
Common
stock issued for services
|
|
|
15,000
|
|
|
-
|
|
|
5,400
|
|
|
-
|
|
|
-
|
|
|
5,400
|
|
Issuance
of common shares from exercise of stock options
|
|
|
1,758,000
|
|
|
18
|
|
|
99,995
|
|
|
-
|
|
|
-
|
|
|
100,013
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
490,795
|
|
|
-
|
|
|
-
|
|
|
490,795
|
|
Settlement
of outstanding legal claims by the issuance of options
|
|
|
-
|
|
|
-
|
|
|
77,000
|
|
|
-
|
|
|
-
|
|
|
77,000
|
|
Common
stock issued to settle outstanding payables
|
|
|
257,000
|
|
|
3
|
|
|
136,857
|
|
|
-
|
|
|
-
|
|
|
136,860
|
|
Common
stock issued pursuant to interest payments on Senior Secured
Convertible
Notes "A"
|
|
|
748,819
|
|
|
7
|
|
|
265,429
|
|
|
-
|
|
|
-
|
|
|
265,436
|
|
Common
stock issued pursuant to repayments of Senior Secured Convertible
Notes
"A"
|
|
|
5,897,695
|
|
|
59
|
|
|
2,099,734
|
|
|
-
|
|
|
-
|
|
|
2,099,793
|
|
Common
stock issued pursuant to repayment of Secured convertible
debenture
|
|
|
631,038
|
|
|
6
|
|
|
224,391
|
|
|
-
|
|
|
-
|
|
|
224,397
|
|
Common
stock issued upon conversion of
Senior
Secured Convertible Notes "A"
|
|
|
3,575,008
|
|
|
36
|
|
|
1,249,324
|
|
|
-
|
|
|
-
|
|
|
1,249,360
|
|
Reduction
in exercise price of outstanding warrants
|
|
|
-
|
|
|
-
|
|
|
2,197,296
|
|
|
-
|
|
|
(2,197,296
|
)
|
|
-
|
|
Common
stock issued pursuant to warrants exercised
|
|
|
7,525,124
|
|
|
75
|
|
|
2,309,221
|
|
|
-
|
|
|
-
|
|
|
2,309,296
|
|
Common
stock issued for purchase of business
|
|
|
2,550,795
|
|
|
26
|
|
|
872,346
|
|
|
-
|
|
|
-
|
|
|
872,372
|
|
Common
Stock cancellation
|
|
|
(70,000
|
)
|
|
(1
|
)
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
47,849
|
|
|
|
|
|
47,849
|
|
Net
loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,902,443
|
)
|
|
(11,902,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2006
|
|
|
77,671,281
|
|
|
777
|
|
|
34,169,867
|
|
|
(316,566
|
)
|
|
(26,648,091
|
)
|
|
7,205,987
|
|
Balance,
June 30, 2006
|
|
|
77,671,281
|
|
|
777
|
|
|
34,169,867
|
|
|
(316,566
|
)
|
|
(26,648,091
|
)
|
|
7,205,987
|
|
Correction
of error (Note 3)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
992,458
|
|
|
(266,705
|
)
|
|
725,753
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
453,206
|
|
|
-
|
|
|
-
|
|
|
453,206
|
|
Common
stock issued to settle outstanding payables
|
|
|
122,934
|
|
|
2
|
|
|
29,347
|
|
|
-
|
|
|
-
|
|
|
29,349
|
|
Common
stock issued pursuant to interest payments on Senior Secured
Convertible
Notes Series A
|
|
|
182,609
|
|
|
2
|
|
|
58,408
|
|
|
-
|
|
|
-
|
|
|
58,410
|
|
Common
stock issued pursuant to repayments of Senior Secured Convertible
Notes
Series A
|
|
|
1,101,004
|
|
|
11
|
|
|
381,447
|
|
|
-
|
|
|
-
|
|
|
381,458
|
|
Common
stock issued pursuant to repayments of Secured Convertible
Notes Series
B
|
|
|
12,450,353
|
|
|
124
|
|
|
1,034,421
|
|
|
-
|
|
|
-
|
|
|
1,034,545
|
|
Common
stock issued upon conversion of Unsecured Convertible
Debentures
|
|
|
1,654,394
|
|
|
16
|
|
|
527,736
|
|
|
-
|
|
|
-
|
|
|
527,752
|
|
Common
stock issued for late filing of registration statement
|
|
|
255,079
|
|
|
2
|
|
|
73,461
|
|
|
-
|
|
|
-
|
|
|
73,463
|
|
Translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
592,730
|
|
|
|
|
|
592,730
|
|
Net
loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,370,754
|
)
|
|
(2,370,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
93,437,654
|
|
|
934
|
|
|
36,727,893
|
|
|
1,268,622
|
|
|
(29,285,550
|
)
|
|
8,711,899
|
|
Going
Concern (Note 1)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
The
accompanying financial statements have been prepared using generally accepted
accounting principles applicable to a going concern, which assumes Manaris
Corporation (the “Company” or "Manaris") will be able to realize the carrying
value of its assets and discharge its liabilities in the normal course of
operations. The Company has incurred significant losses since inception and
has
relied on non-operational sources of financing to fund operations. Accordingly,
there exists substantial doubt that the Company would be able to continue
as a
going concern at June 30, 2007. The Company’s continuation as a going concern is
dependent upon its ability to obtain additional cash to allow for the
satisfaction of its obligations on a timely basis.
In
order
to address this situation, management will continue its focus on the core
business of the Company, which primarily includes the operations of Avensys
Inc.
(‘Avensys”), its wholly-owned subsidiary. Also, during the first quarter of
fiscal 2008, as described in Note 23 (e), the Company redeemed its Series
B
Subordinated Secured Convertible Promissory Notes and its Original Issue
Discount Series B Subordinated Secured Convertible Promissory Notes. In
connection with the redemption of the Notes, the Company received a $3.4
million
secured loan facility from Imperium Master Fund, LTD (the “Investor”)). On
September 24, 2007, also as described in Note 23 (e), the Company entered
into a
Securities Purchase and Loan Agreement (“SPL Agreement”) with the Investor for
the sale of a 6% Original Issue Discount Senior Secured Convertible Note
(“Convertible Note”) in the amount of $4,708,900. The principal value and the
gross proceeds of the Convertible Note is $4,000,000. The gross proceeds
will be
used to repay the secured loan facility with the balance of funds to be used
for
working capital purposes. In addition, the SPL Agreement provides the Company
with a $2,500,000 Working Capital Facility.
Avensys
is also seeking additional conventional bank credit-line financing to that
which
it already has, to support its growing operations. In addition to the above,
the
ability of the Company to continue as a going concern depends on the ability
of
the Company’s main subsidiary, Avensys, to continue to realize its business plan
and continue to generate positive cash flows.
While
management believes the use of the going concern assumption is appropriate,
there is no assurance that the above actions will be successful. These financial
statements do not include any adjustments or disclosures that may be necessary
should the Company not be able to continue as a going concern. If the use
of the
going concern assumption is not appropriate for these financial statements,
then
adjustments may be necessary to the carrying value and classification of
assets
and liabilities and reported results of operations and such adjustments could
be
material.
Manaris
operates the following wholly-owned subsidiaries:
|
·
|
Avensys
Inc. ("Avensys"), which develops optical components & sensors and
provides environmental monitoring solutions. Avensys sells its
optical
products and services primarily in North America, Asia and Europe
to the
telecommunications, aerospace, and oil and gas industries. Environmental
monitoring services and solutions are primarily targeted at public
sector
organizations across Canada.
|
|
·
|
C-Chip
Technologies Corporation (North America) ("C-Chip"), which, through
a
recently signed Technology License Agreement (Note 4), has granted
a
former supplier an exclusive license to manufacture and sell devices
based
on C-Chip’s technology in the sub-prime used vehicle market. C-Chip earns
royalties with respect to the devices sold by the licensee to the
credit
management marketplace.
|
The
Company was incorporated in the State of Nevada on June 26, 2000 as Keystone
Mines Limited. The Company subsequently changed its name to C-Chip Technologies
Corporation. In July 2005, the Company changed its name to Manaris Corporation.
The Company has achieved significant revenue from acquired companies and
also
has disposed of companies. The Company’s assets and operations at June 30, 2007
are located largely in Quebec and in Ontario, Canada. The Company currently
derives the substantial portion of its revenues from its Avensys
subsidiary.
|
3.
|
Basis
of Presentation and Significant Accounting Policies
|
Basis
of
Presentation
These
consolidated financial statements are prepared in conformity with accounting
principles generally accepted (“GAAP”) in the United States of America (“US”)
and are presented in US dollars.
Basis
of
Consolidation
These
consolidated financial statements include the accounts of the Company and
its
subsidiaries. Consolidated companies include: a) 100% of Avensys and its
subsidiaries, Fizians Inc., of which Avensys owns 70% of its outstanding
shares,
and ITF Laboratories Inc. (“ITF”), in which Avensys holds variable interests and
is the primary beneficiary, and b) 100% of C-Chip. All inter-company accounts
and transactions have been eliminated in the consolidation.
Cash
and
Cash Equivalents
The
Company considers all highly liquid instruments with a term to maturity of
three
months or less at the time of acquisition to be cash and cash equivalents.
The
Company invests its excess cash in deposits with major financial institutions.
Accounts
Receivable
Accounts
receivable are stated net of an allowance for doubtful accounts. The Company
establishes an allowance for doubtful accounts based on a detailed assessment
of
the credit risk and collectability of specific customer accounts, as well
as
historical trends and other information. The Company sells the majority of
its
products and services in North America. The Company generally does not require
collateral. Credit losses have not been historically significant.
Fair
Value of Financial Instruments
The
fair
value of cash and cash equivalents, accounts receivable, other receivable,
restricted held-to-maturity securities, due to related parties and accounts
payable and accrued liabilities approximate their carrying value given their
short-term maturity. The derivative financial instruments are carried at
fair
value. The Company has estimated the fair value of its bank loan and other
loans
payable, long-term debt, capital leases, convertible debentures and balance
of
purchase price payable by discounting future cash flows using interest rates
which the Company could obtain for loans with similar terms conditions and
maturity dates. The fair value and carrying value of all such debt instruments,
as at June 30, 2007, amounted to approximately $5,462,000 and $5,426,000,
respectively (June 30, 2006 - $5,849,000 and $4,925,000,
respectively).
Advertising
The
Company’s advertising costs, which amounted to $139,975 for the year ended June
30, 2007 (2006 - $80,499), are expensed as incurred.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company tests long-lived assets or asset groups for
future recoverability when events or changes in circumstances indicate that
their carrying amount may not be recoverable. Circumstances which could trigger
a review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or
legal
factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period
cash
flow or operating losses combined with a history of losses or a forecast
of
continuing losses associated with the use of the asset; and current expectation
that the asset will more likely than not be sold or disposed significantly
before the end of its estimated useful life. The Company’s long-lived assets
consist primarily of property and equipment and intangible assets.
Recoverability
of a long-lived asset is assessed by comparing the carrying amount of the
asset
to the sum of the estimated undiscounted future cash flows expected from
its use
and the eventual disposal of the asset. An impairment loss is recognized
when
the carrying amount of a long-lived asset is not recoverable and the amount
of
such impairment loss is determined as the excess of the carrying amount over
the
asset’s fair value.
Basis
of
Presentation and Significant Accounting Policies (continued)
Foreign
Currency
The
Company's functional currency is the Canadian dollar. Accordingly, the
consolidated financial statements are converted into the reporting currency
(the
US dollar) using the current rate method. Under this method, the consolidated
financial statements are converted into US dollars as follows: assets and
liabilities are converted at the exchange rate in effect at the date of the
balance sheet, and revenue and expenses are converted using the average exchange
rate for the period. All gains and losses resulting from the conversion of
the
consolidated financial statements into the reporting currency are included
in
other comprehensive income or loss for the period and accumulated in a separate
component of stockholders’ equity as accumulated other comprehensive income or
loss.
|
b)
|
Foreign
Currency Transactions
|
Transactions
denominated in currencies other than the functional currency are converted
into
Canadian dollars (the functional currency) using the exchange rate in effect
at
the date of the transaction or the average rate for the period in the case
of
recurring revenue and expense transactions. Monetary assets and liabilities
are
revalued into the functional currency at each balance sheet date using the
exchange rate in effect at that date, with any resulting exchange gains or
losses being credited or charged to the statement of operations. Non-monetary
assets and liabilities are recorded in the functional currency using the
exchange rate in effect at the date of the transaction and are not revalued
for
subsequent changes in exchange rates.
Use
of
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
Management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosure of contingent liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for revenue recognition,
establishment of certain expenses, allowance for doubtful accounts, impairments
of long-lived assets and goodwill, accounting for certain financing
transactions, stock-based compensation and income taxes, among others.
Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the Consolidated Financial Statements in the period they are
determined to be necessary. Management bases its estimates on historical
experience, industry standards and on various other assumptions believed
to be
reasonable under the circumstances. Actual results could differ materially
from
those estimates.
Net
Profit (Loss) Per Share
Basic
net
profit (loss) per share is computed by dividing the net profit (loss) applicable
to common stockholders for the period by the weighted average number of shares
of common stock outstanding during the period. Diluted net profit (loss)
per
share is computed by dividing the net profit (loss) applicable to common
stockholders for the period by the weighted average number of shares of common
stock and potential common stock outstanding during the period, such as stock
options, warrants and conversion rights on convertible debentures, if dilutive.
Since the Company has not recorded a positive basic net profit per share
for all
periods presented, there is no difference between basic and diluted per share
figures. The items of potential common stock noted above are anti-dilutive
and
have therefore been excluded from the calculation.
Basis
of
Presentation and Significant Accounting Policies (continued)
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), Share Based
Payments. SFAS 123R requires all entities to recognize compensation cost
for
share-based awards, including options granted to employees. SFAS 123R eliminates
the ability to account for share-based compensation transactions using the
Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock
Issued To Employees, and generally requires instead that such transactions
be
accounted for using a fair-value based method. Public companies are required
to
measure stock-based compensation classified as equity by valuing the instrument
the employee receives at its grant-date fair value. The Company implemented
SFAS
123R commencing July 1, 2006 using the modified prospective transition approach.
SFAS 123R requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The Company recognizes
the
expense over the period during which an employee is required to provide service
in exchange for the award.
The
impact, for the Company, of applying SFAS 123R are described in Note 18 .
Prior
to the implementation of SFAS 123R, the Company was applying the intrinsic
value
method of accounting for stock options granted to employees.
SFAS
123R
does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in Statement of Financial Accounting
Standards No. 123 (“SFAS 123”) Accounting for Stock-Based Compensation as
originally issued and Emerging Issues Task Force Issue No.96-18, Accounting
for
Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in
Conjunction with Selling, Goods or Services.
Revenue
Recognition
The
Company recognizes revenue in accordance with Staff Accounting Bulletin No.
104
(SAB104), “Revenue Recognition" issued by the Securities and Exchange
Commission.
Avensys
generates revenues from the sale of fibre-based sensors, instruments and
components, and environmental monitoring products. Revenue is recognized
when
there exists persuasive evidence of an arrangement, the sales price is fixed
or
determinable, the product has been delivered and collectability is reasonably
assured.
For
periods prior to December 1, 2006, C-Chip derived revenues from the sale
of
credit management devices and associated services. The devices were bundled
with
service agreements which provided the customer with access to C-Chip’s web-based
application, thus allowing the customer to locate and disable subject vehicles
during the service period, which were generally three years. Since the services
were essential to the functionality of the device, revenues from the sale
of
devices (including services) were deferred and recognized as revenue over
the
contractual service period and the related cost of revenues was deferred
and
amortized to cost of revenues over the corresponding period. Such items were
described on the Consolidated Balance Sheet as Deferred Revenue and Deferred
Contract Costs. In addition to the up-front fees charged to a customer, C-Chip
could also earn other amounts during the service period, which were charged
to
the customer on a pay per use basis, for which revenue and the related costs
were recognized when the related service was provided.
The
revenue recognition policy for C-Chip, as noted above, was applied until
November 30, 2006. Effective December 1, 2006, in conjunction with the
ratification of a new Technology License Agreement, C-Chip’s revenue stream was
modified. C-Chip now earns royalties from the granting of licenses, based
on the
number of devices sold by the Licensee (Note 4). Revenue is recognized when
proof is obtained that the end-user has been delivered the devices by the
Licensee and collectability is reasonably assured.
Basis
of
Presentation and Significant Accounting Policies (continued)
Business
Combinations and Goodwill
Acquisitions
of businesses are accounted for using the purchase method and, accordingly,
the
results of operations of the acquired businesses are included in the
Consolidated Statement of Operations effective from their respective dates
of
acquisition.
Goodwill
represents the excess of the purchase price of acquired businesses over the
fair
values of the identifiable tangible and intangible assets acquired and
liabilities assumed. Pursuant to SFAS No. 141, the Company does not amortize
goodwill, but tests for impairment of goodwill at least annually. The Company
evaluates the carrying value of goodwill in accordance with the guidelines
set
forth in Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets” (SFAS142). Management tests for impairment of goodwill
on an annual basis and at any other time if events occur or circumstances
change
that would indicate that it is more likely than not that the fair value of
the
reporting unit has been reduced below its carrying amount. 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
acquired assets or the strategy for the overall business, significant negative
industry or economic trends, a significant decline in the stock price for
a
sustained period and the Company’s market capitalization relative to net book
value.
The
goodwill impairment test is a two-step process. Step one consists of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the
fair
value of a reporting unit may be based on one or more fair value measures
including present value techniques of estimated future cash flows and estimated
amounts at which the unit as a whole could be bought or sold in a current
transaction between willing parties. If the carrying amount of the reporting
unit exceeds the fair value, step two requires the fair value of the reporting
unit to be allocated to the underlying tangible and intangible assets and
liabilities of that reporting unit, resulting in an implied fair value of
goodwill. If the carrying amount of the goodwill of the reporting unit exceeds
the implied fair value of that goodwill, an impairment loss equal to the
excess
is recorded in the Consolidated Statement of Operations and Comprehensive
Loss.
Restricted
Held-to-Maturity Security
An
irrevocable letter of credit for $93,861 (CAD$100,000) was issued by Manaris
to
partially guarantee the Avensys line of credit (Note 13). A term deposit,
maturing on October 17, 2007 and bearing interest at 3.0% per annum, is
designated as collateral for this amount and accounted for at cost.
Property
and Equipment
The
Company's property and equipment are recorded at cost. The Company provides
for
depreciation and amortization using the following methods and applying rates
estimated to amortize the cost over the useful life of the assets:
Computer
equipment
|
|
Declining
balance
|
|
30%-331/3%
|
Furniture
and fixture
|
|
Declining
balance
|
|
20%
|
Leasehold
improvements
|
|
Straight-line
over the lease terms
|
|
5
to 8 years
|
Laboratory
equipment
|
|
Declining
balance
|
|
20%
|
Automotive
equipment and software
|
|
Declining
balance
|
|
30%
|
Machinery
and office equipment
|
|
Declining
balance
|
|
20%
|
Capital
leases
|
|
Straight-line
and declining balance over the lease terms
|
|
3
years
|
Capital
Leases
The
Company enters into leases relating to computer equipment in which substantially
all the benefits and risks of ownership are transferred to the Company and
are
recorded as capital leases and classified as property and equipment and long
term borrowings. All other leases are classified as operating leases under
which
leasing costs are expensed in the period in which they are
incurred.
Basis
of
Presentation and Significant Accounting Policies (continued)
Inventory
Inventory
consists of finished products available for sale to customers, raw materials
and
components. Raw materials are stated at the lower of cost and replacement
cost.
Finished goods are stated at the lower of cost and net realizable value.
Cost of
materials inventory is determined on an average cost basis. The Company
evaluates ending inventories for estimated excess quantities and obsolescence.
This evaluation includes analyses of inventory turnover by item within specific
time horizons.
Intangible
Assets
An
acquired intangible asset of a technological product or service that has
reached
technological feasibility is capitalized at cost. Intangible assets with
definite lives are reported at cost, less accumulated amortization. The Company
does not have any identified intangible assets with an indefinite life. Acquired
in-process research and development is charged to operations in the period
of
acquisition. The Company provides for amortization on a straight-line basis
over
the following periods:
Customer
relationships
|
|
3-10
years
|
Technology
|
|
4-5
years
|
Trade
names
|
|
7
years
|
Research
and Development Expenses and Investment Tax Credits
Research
and development expenses are expensed as they are incurred. Investment tax
credits (“ITCs”) arising from research and development activities are accounted
for as a reduction of the income tax provision for the year. Refundable tax
credits and non-refundable tax credits are recorded in the year in which
the
related expenses are incurred. A valuation allowance is provided against
such
tax credits to the extent that the recovery is not considered to be more
likely
than not.
The
Company is subject to examination by taxation authorities in various
jurisdictions. The determination of tax liabilities and ITCs recoverable
involve
certain uncertainties in the interpretation of complex tax regulations. As
a
result, the Company provides potential tax liabilities and ITCs recoverable
based on Management’s best estimates. Differences between the estimates and the
ultimate amounts of taxes and ITCs are recorded in earnings at the time they
can
be determined.
Income
Taxes
The
Company utilizes the tax liability method to account for income taxes as
set
forth in SFAS No. 109, "Accounting for Income Taxes" (SFAS109). Under this
method, deferred future income tax assets and liabilities are determined
based
on the differences between the carrying value and the tax bases of assets
and
liabilities.
This
method also requires the recognition of deferred income tax benefits and
a
valuation allowance is recognized to the extent that, in the opinion of
Management, it is more likely than not that the future income tax assets
will
not be realized. The Company has incurred Canadian operating losses of
approximately $23.1 million from its inception which are available and which
expire starting in 2008. For Canadian income tax purposes, the Company also
has
approximately $2.3 million of Scientific Research and Experimental Development
unclaimed expenses available indefinitely to reduce taxable income in future
years. The potential benefit of operating losses has not been recognized
in
these financial statements because the Company cannot be assured it is more
likely than not it will utilize the operating losses carried forward in future
years (refer to Note 22).
Deferred
income tax assets and liabilities are measured by applying enacted tax rates
and
laws at the date of the financial statements for the years in which the
differences are expected to reverse.
Shipping
and Handling Costs
The
Company’s shipping and handling costs are included in cost of
revenues.
Basis
of
Presentation and Significant Accounting Policies (continued)
a)
Recent
Accounting Pronouncements Adopted During 2007
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current year Financial Statements (“SAB 108”). SAB
108 provides interpretive guidance on how the effects of prior year uncorrected
misstatements should be considered when quantifying misstatements in the
current
year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement (“rollover”) and balance sheet
(“iron curtain”) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors
are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach,
no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings as of the beginning of the fiscal year of adoption.
SAB 108
is effective for fiscal years ending after November 15, 2006.
The
Company initially applied the provisions of SAB 108 during the year ended
June
30, 2007, prior to which, the Company evaluated misstatements using only
the
iron curtain method. In applying the provisions of SAB 108, the Company made
a
cumulative effect adjustment to correct an error, which originated during
the
year ended June 30, 2005 and which had previously been, and continues to
be,
considered to be immaterial to the financial statements for that fiscal year.
This error resulted from the use of an exchange rate other than the current
exchange rate to translate the elements related to certain intangible assets
and
goodwill from the functional currency to the reporting currency. The carrying
values of intangible assets and goodwill should have been translated at the
exchange rate at the balance sheet date and the amortization expense related
to
intangible assets and impairment charge for goodwill should have been translated
at the average exchange rate for the year. The following summarizes the impact
of the error on the financial statements for the year ended June 30, 2006,
along
with the adjustments made to the corresponding accounts as of July 1,
2006:
Account
|
|
Cumulative
impact as at June 30, 2006 of the misstatement originating during
the year
ended
June
30, 2005
|
|
Adjustments
recorded as of
July
1, 2006
|
|
Understatement
of intangible assets
|
|
|
554,017
|
|
|
554,017
|
|
Understatement
of goodwill
|
|
|
171,736
|
|
|
171,736
|
|
Understatement
of accumulated other comprehensive income
|
|
|
992,458
|
|
|
(992,458
|
)
|
Understatement
of net loss
|
|
|
266,705
|
|
|
-
|
|
Overstatement
of comprehensive loss
|
|
|
725,753
|
|
|
-
|
|
Understatement
of deficit
|
|
|
266,705
|
|
|
266,705
|
|
b)
Recent
Accounting Pronouncements Not Yet Adopted
In
May
2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections
- a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces
APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting
Changes
in Interim Financial Statements, changes the requirements for the accounting
for
and reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS 154 provides guidance
on
the accounting for and reporting of accounting changes and error corrections.
It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
It
also provides guidance for determining whether retrospective application
of a
change in accounting principle is impracticable and for reporting a change
when
retrospective application is impracticable. The correction of an error in
previously issued financial statements is not an accounting change. However,
the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retrospectively. Therefore, the reporting of a correction
of
an error by restating previously issued financial statements is also addressed
by
this
Statement. The provisions of SFAS 154 apply for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after May 2005. SFAS 154 does not change the
transition provisions of any existing accounting pronouncements. This FASB
Statement was implemented by the Company commencing July 1, 2006 and such
did
not have a material effect on the Company's results of operations or financial
position.
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements Not Yet Adopted (continued)
In
February 2006, FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 144. SFAS 155 amends
FASB Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS 155
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS 133; establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; clarifies that concentrations of credit
risk
in the form of subordination are not embedded derivatives; and amends SFAS
140
to eliminate the prohibition on a qualifying special purpose entity from
holding
a derivative financial instrument that pertains to a beneficial interest
other
than another derivative financial instrument. SFAS 155 will be effective
for all
financial instruments acquired, issued, or subject to a re-measurement (new
basis) event occurring after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. The Company is evaluating the impact of
the
adoption of this standard on the Company's results of operations and financial
position.
In
June
2006, FASB issued Interpretation No. 48 - an interpretation of FASB Statement
No. 109, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
in
accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. It also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. The evaluation of a tax position
in accordance FIN 48 is a two-step process. The first step is recognition:
The
enterprise determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The
second step is measurement: A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. Under FIN 48, differences resulting
from
this evaluation of tax positions would result in either of an increase of
liabilities or decrease of assets. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is evaluating the impact of
the
adoption of this interpretation on the Company's results of operations and
financial position.
In
September 2006, FASB issued Statement of Financial Accounting Standards No.
157
(“SFAS 157”), Fair Value Measurements, which defines fair value, establishes
guidelines for measuring fair value and expands disclosures regarding fair
value
measurements. SFAS 157 does not require any new fair value measurements but
rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. Earlier adoption is permitted, provided the Company has not yet
issued
financial statements, including for interim periods, for that fiscal year.
The
Company is evaluating the impact of the adoption of this standard on its
consolidated financial position and results of operations.
In
February 2007, FASB issued SFAS No.159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies the
option, at specified election dates, to measure financial assets and liabilities
at their current fair value, with the corresponding changes in fair value
from
period to period recognized in the income statement. Additionally, SFAS 159
establishes presentation and disclosure requirements designated to facilitate
comparisons between companies that choose different measurement attributes
for
similar assets and liabilities. SFAS 159 is effective as of the beginning
of the
first fiscal year that begins after November 15, 2007. The Company is evaluating
the impact of the adoption of this standard on its consolidated financial
position and results of operations.
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements Not Yet Adopted (continued)
In
June
2007, FASB issued EITF Issue 07-3 “Accounting for Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities” (EITF 07-3).
The scope of this issue is limited to non-refundable advance payments for
goods
and services related to research and development activities. EITF 07-3 requires
that all non-refundable advance payments for R&D activities that will be
used in future periods be capitalized until used. In addition, the deferred
research and development costs need to be assessed for recoverability. The
Company is required to adopt EITF 07-3 effective July 1, 2008. As of June
30,
2007, the Company does not have any arrangements that would be subject to
the
scope of EITF 07-3.
Comparative
Financial Statements
The
comparative Consolidated Financial Statements have been reclassified from
statements previously presented to conform to the presentation adopted in
the
current year.
|
4.
|
Technology
License Agreement
|
On
December 22, 2006, with an effective date of December 1, 2006, C-Chip entered
into a Technology License Agreement (“Agreement”) with a supplier of the
Company. Pursuant to the Agreement, C-Chip has granted this supplier an
exclusive license to manufacture and sell devices based on C-Chip’s technology
in the sub-prime used vehicle market. As consideration for the License, C-Chip
shall recognize and record royalties equal to the greater of: (i) $20 per
device
sold or (ii) $30,000 per month. C-Chip will not collect any other revenues
and
it will not be responsible for manufacturing costs, sales or servicing or
other
incidental costs relating to the production and marketing of the device.
The
royalties payable will be applied against the principal and interest balance
of
a loan made to C-Chip from the former supplier (Note 13), which at the time
of
the Agreement had a balance outstanding of $1,143,321. By virtue of the
Agreement, C-Chip was relieved of any obligations with respect to the delivery
of services pertaining to devices sold prior to December 1, 2006. Such
obligations are now the responsibility of the licensee. As such, previously
deferred revenues of $1,685,566 and deferred contract costs of $1,586,814
were
credited to revenues and applied to costs of revenues, respectively, effective
December 1, 2006. In addition, as further consideration for C-Chip’s prior
years’ input and development of the technology, the outstanding principal amount
of the loan was reduced by $200,000. The associated gain was included in
other
income in the second quarter.
The
initial term of the Agreement ends on the first anniversary of the date that
the
outstanding principal amount of the loan will have been satisfied as a result
of
the royalties being applied thereto (“Repayment Date”). The licensee shall
thereafter have an option to purchase C-Chip’s intellectual property within 90
days of the Repayment Date.
|
5.
|
Discontinued
operations
|
CLI
On
February
8,
2006,
as part of efforts to streamline operations, the Company signed a Share Purchase
Agreement (the "Agreement") to sell all of the shares of its wholly-owned
subsidiary, 6327915 Canada Inc., the holding company of Chartrand Laframboise
Inc. and Bureau de crédit commercial Inc. (the "CLI Group") to The Garda
Security Group Inc. (the “Purchaser”) for a purchase price of $4,284,123
(CAD$5,000,000) resulting in gross cash proceeds to the Company of $3,341,616
(CAD$3,900,000) of which $1,285,237 (CAD$1,500,000) was placed in trust.
The
deposit in trust partially represented a holdback in the amount of $214,206
which would become payable by the purchaser no later than 10 days following
acceptance by the purchaser of the unaudited financial statements of the
CLI
Group for the period from July 1, 2005 to February 18, 2006. The remaining
amount of $1,071,030 represented withholding tax of 25% of the sale price
which
was required to be withheld under Section 116 of the Canadian Income Tax
Act
since the Company is not a Canadian resident corporation. The withholding
tax
amount has been remitted to the Company as Canada Revenue Agency delivered
a
certificate of compliance with respect to this transaction. At June 30, 2006,
there remained $79,781 (CAD$88,956) in trust. The Agreement stipulated a
price
adjustment based on certain financial criteria which resulted in a purchase
price adjustment of $45,917 (CAD$51,538), which was paid to the purchaser
subsequent to the year end. Following the payment of the price adjustment,
Manaris received the balance of the funds held in trust.
In
conjunction with the Agreement, the purchaser assumed the Company’s obligations
to two executives of the CLI Group for settlement of long-term notes payable
amounting to $942,507 issued by Manaris when the CLI Group was originally
acquired in February 2005. Manaris was required to repay advances from the
CLI
Group totaling $214,206 and accrued interest on the debt obligations of $40,978.
In addition, the Company settled the majority of the remaining obligations
to
the two CLI Group executives in the amount of $481,444 by a payment of cash
consideration totaling $257,047 and the issuance of 631,038 shares with a
fair
value of $224,397 or approximately $0.3556 per share. These payments resulted
in
net cash proceeds from the disposal of $2,644,871. The closing date of the
transaction was February 15, 2006 and the effective date was February 18,
2006.
Discontinued
operations (continued)
CLI
(continued)
The
loss
on disposal included in the results from discontinued operations has been
computed as follows:
Proceeds:
|
|
$
|
|
Cash
|
|
|
3,341,616
|
|
Price
adjustment
|
|
|
(45,917
|
)
|
Total
proceeds:
|
|
|
3,295,699
|
|
Direct
transaction costs
|
|
|
(183,861
|
)
|
Sub-total:
|
|
|
3,111,838
|
|
Net
assets of discontinued operations
|
|
|
(3,186,815
|
)
|
Loss
on disposal of the CLI Group
|
|
|
(74,977
|
)
|
Cash
proceeds noted above were used as follows:
|
|
$
|
|
Total
proceeds
|
|
|
3,295,699
|
|
Direct
transaction costs
|
|
|
(183,862
|
)
|
Settlement
of advances from the CLI Group
|
|
|
(214,206
|
)
|
Settlement
of debt obligations for cash
|
|
|
(257,047
|
)
|
Interest
paid on settlement of debt obligations
|
|
|
(40,978
|
)
|
Net
cash proceeds
|
|
|
2,599,606
|
|
The
cash
proceeds from Discontinued Operations net of cash balance disposed of amounted
to $2,857,895. The net assets of discontinued operations in the above table
are
net of the obligations to the two CLI Group executives assumed by the purchaser
in amount of $942,507.
The
carrying values of the major classes of assets and liabilities disposed of
are
as follows:
|
|
$
|
|
Cash
|
|
|
253,942
|
|
Accounts
receivable
|
|
|
667,585
|
|
Prepaid
expenses
|
|
|
42,448
|
|
Property
and equipment
|
|
|
167,049
|
|
Inventory
|
|
|
76,947
|
|
Goodwill
|
|
|
2,812,293
|
|
Intangible
assets
|
|
|
773,944
|
|
Accounts
payable
|
|
|
(228,723
|
)
|
Accrued
liabilities
|
|
|
(403,893
|
)
|
Deferred
income taxes
|
|
|
(3,659
|
)
|
Long
term debt, current portion
|
|
|
(18,980
|
)
|
Long
term debt, less current portion
|
|
|
(9,631
|
)
|
Net
assets of discontinued operations
|
|
|
4,129,322
|
|
Canadian
Security Agency (2004) Inc.
On
September 22, 2005, Canadian Security Agency (2004) Inc. (“CSA”) entered into an
agreement with Securite Kolossal Inc. to sell its customer list for CAD$100,000,
subject to adjustment. At December 31, 2005, the Company received CAD$50,000.
Following a CAD$10,000 adjustment, the remaining balance of CAD$40,000 was
received in January 2006. The Company has since wound up all remaining
activities of CSA. On November 2, 2005, CSA filed for bankruptcy protection
with
the Superior Court of Quebec, district of Montreal. Pursuant to the Bankruptcy
and Insolvency Act, CSA filed a notice of intention to make a proposal, by
which
the Company intended to settle its payables. All proceedings against CSA
were
stayed.
Discontinued
operations (continued)
Canadian
Security Agency (2004) Inc. (continued)
All
assets related to CSA were written down to their net recoverable amount or
fair
value as appropriate during the three month period ended September 30, 2005,
resulting in a write-off of CAD$124,477, and all liabilities remained at
their
face value, being the amounts expected to be allowed under the bankruptcy
proceedings.
On
April
4, 2006, a meeting of the creditors was concluded with the unanimous approval
of
the settlement proposal brought forward by CSA. The settlement proposal was
ratified by the Superior Court of Quebec on May 3, 2006. This proposal settled
all outstanding liabilities of CSA for $249,688 (CAD$277,507). The settlement
was funded from CSA cash on hand of $137,423 (CAD$153,061), and a payment
of
$112,265 (CAD$124,446) from Manaris. Subsequent to the settlement of CSA’s
obligations under the approved proposal, a gain on settlement of CSA liabilities
of $474,834 (CAD$532,953) was recognized in CSA.
Manaris
on behalf of CSA incurred CAD$25,000 in reorganization expenses, which are
professional fees payable to the Trustee as a result of the bankruptcy
protection filing, of which CAD$12,000 was paid during the three month period
ended December 31, 2005, and CAD$13,000 was paid during the three month period
ended March 31, 2006. These amounts have been included in the results of
discontinued operations.
The
carrying values of the major classes of assets of discontinued operations,
represented by cash and accounts receivable, were not significant as at June
30,
2007 and 2006. There were no recorded liabilities from discontinued operations
as at June 30, 2007 and 2006.
Summary
results of discontinued operations:
|
|
Total
|
|
CLI
|
|
CSA
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from Discontinued Operations
|
|
|
-
|
|
|
3,761,474
|
|
|
-
|
|
|
3,193,451
|
|
|
-
|
|
|
568,023
|
|
Pre-tax
earnings (loss) from Discontinued Operations (1)
|
|
|
-
|
|
|
345,261
|
|
|
-
|
|
|
234,760
|
|
|
-
|
|
|
110,501
|
|
After-tax
earnings (loss) from Discontinued Operations (1)
|
|
|
-
|
|
|
224,614
|
|
|
-
|
|
|
114,113
|
|
|
-
|
|
|
110,501
|
|
Loss
on disposal of the CLI group
|
|
|
-
|
|
|
(74,977
|
)
|
|
-
|
|
|
(74,977
|
)
|
|
-
|
|
|
-
|
|
Results
of Discontinued Operations
|
|
|
-
|
|
|
149,637
|
|
|
-
|
|
|
39,136
|
|
|
-
|
|
|
110,501
|
|
|
(1)
|
CSA
includes gain on settlement of liabilities of $474,834 for the
year ended
June 30, 2006.
|
ITF
On
April
18, 2006, Manaris, Avensys and Avensys Laboratories Inc (“ALI”), entered into an
Asset Purchase Agreement (the “Agreement”) to acquire the manufacturing assets
and research and development assets of ITF Optical Technologies Inc., a designer
and manufacturer of advanced photonic solutions based on proprietary all-fiber
technology. The transaction represents the acquisition of a business, which
adds
complementary products to Avensys' current offerings and provides access
to a
new potential customer base. ITF Optical Technologies Inc. specializes in
providing applications for submarine, military, telecom and industrial
uses.
The
purchase price paid for the manufacturing assets acquired by Avensys, pursuant
to the ITF Agreement, was $1,526,651 (CAD $1,750,000), comprised of $654,279
(CAD $750,000) in cash and $872,372 (CAD$1,000,000) of Manaris common stock
(2,550,795 common shares).
The
2,550,795 common shares were originally issued as restricted stock and became
freely tradable on December 9, 2006 (“Free Date”). The holders of these shares
are permitted to sell, in every three month period following the Free Date, the
lesser of (i) 25% of the shares and (ii) the average weekly reported volume
of
trading in the common shares of Manaris on the OTCBB in the previous three
month
period. Notwithstanding the foregoing, the holders of such shares shall be
permitted to sell any number of the common shares in any three month period
if
the closing price of the common shares of Manaris on the date of the sale
of the
common shares is higher than a specified reference price, which is $0.342.
The
holders of the common shares shall also be permitted to transfer all or any
of
the common shares at any time and at any price by private sale to a bona
fide
third party purchaser. In addition, if within the period ending one year
after
the Free Date (“Period”), the holders of the common shares sell the common
shares through the facilities of the OTCBB at a price which is less than
the
specified reference price, Manaris shall, at the option of the holders of
the
common shares, within five days of the end of the Period, either pay in cash
the
cumulative shortfall, if any, between the specified reference price and the
actual sale price of the common shares or issue that number of free trading
shares of common stock of Manaris equal to the cumulative shortfall. As of
September 18, 2007, the estimated shortfall is approximately $160,000. The
future payment of a shortfall amount, if any, will not have any impact on
the
earnings of the Company.
Business
Combinations (continued)
ITF
(continued)
ALI,
Avensys' research and development partner, also pursuant to the ITF Agreement,
purchased ITF Optical Technologies Inc.’s research and development assets and
intellectual property rights (the "R&D assets") The consideration paid for
the R&D assets was CAD$2,000,000 representing the fair market value of the
R&D assets, payable in 580,000 shares of common stock of ALI and 2,000,000
shares of Class E preferred stock of ALI (the "Avensys Laboratories Shares")
issued to the former shareholders of ITF Optical Technologies Inc. (the "ITF
Preferred Shareholders"). In the aggregate, the Avensys Laboratories Shares
issued pursuant to the ITF Agreement represent 58% of the voting stock of
ALI.
As a result of the ITF Agreement, Avensys' ownership of the voting stock
of ALI
has decreased from 49% to 42%.
In
connection with the ITF Agreement, the following additional agreements were
also
entered into:
|
|
A
License Agreement was entered into between Avensys and ALI, pursuant
to
which Avensys was granted an exclusive license to use ALI's intellectual
property and patent improvements, as defined in the License Agreement,
in
order to develop and sell products incorporating ALI's intellectual
property. As consideration for the license, Avensys will be making
royalty
payments to ALI. Also pursuant to the License Agreement, ALI will
continue
to conduct research and development for the mutual benefit of both
parties.
|
|
|
A
Shareholder Agreement was entered into between Avensys and the
ITF
Preferred Shareholders. Pursuant to the Shareholder Agreement,
the ITF
Preferred Shareholders shall not transfer any Avensys Laboratories
Shares,
subject to limited exceptions. The Shareholder Agreement also stipulates
that, between April 1, 2009 and October 1, 2009, each ITF Preferred
Shareholder shall have an option to (i) sell the Avensys Laboratories
Shares to Avensys for its proportionate share of $1,793,722 (CAD
$2,000,000), or (ii) exchange the Avensys Laboratories Shares for
3,826,531 freely tradable shares of Manaris common shares determined
based
upon its proportionate share of $1,345,291 (CAD $1,500,000) divided
by a
reference per share price of $0.342 (CAD $0.39), the “call
option”.
|
As
a
result of the above arrangements, ALI has been determined to be a variable
interest entity for which Avensys is the primary beneficiary. Accordingly,
ALI
is accounted for as a consolidated subsidiary. The Preferred Shareholder
arrangement entitling these shareholders to a right to receive a fixed amount
of
CAD$2,000,000 or a fixed number of the Company’s common shares has been
accounted for as a convertible liability consisting of a debt instrument
with an
embedded conversion option. The debt instrument has been measured at its
present
value using a discount rate of 30% resulting in a net present value of $794,148
on the date of issuance. This carrying value will be accreted to the face
amount
of CAD$2,000,000 using the effective interest rate method to the first date
the
shareholders could require a payment. The embedded conversion option has
been
classified as a liability and was recognized at its fair value on the date
of
issuance of $503,814. Subsequently, this conversion option is measured at
fair
value with changes in fair value included in the Statement of Operations.
The
fair value of the embedded conversion option is determined by using the
Black-Scholes model.
Business
Combinations (continued)
ITF
(continued)
The
purchase price of the acquired assets was calculated as follows:
|
|
$
|
|
Manufacturing
Assets
|
|
|
|
Cash
|
|
|
654,279
|
|
Fair
value of Manaris shares issued
|
|
|
872,372
|
|
|
|
|
1,526,651
|
|
R&D
Assets
|
|
|
|
|
Balance
of purchase price payable
|
|
|
794,148
|
|
Fair
Value of Derivative Instrument
|
|
|
503,814
|
|
|
|
|
1,297,962
|
|
|
|
|
|
|
Transaction
Costs
|
|
|
139,493
|
|
|
|
|
2,964,106
|
|
The
fair
value of Manaris shares issued was determined based upon the average share
price
for a period of three days before and after the date the terms of the
acquisitions were negotiated and announced, being April 4, 2006.
Business
Combinations (continued)
ITF
(continued)
The
purchase price was allocated to the following assets and
liabilities:
|
|
$
|
|
|
|
|
|
Current
Assets
|
|
|
506,960
|
|
Depreciable
Fixed Assets
|
|
|
2,599,190
|
|
Developed
Technologies
|
|
|
209,509
|
|
Trade
Name
|
|
|
111,738
|
|
Current
Liabilities
|
|
|
(463,291
|
)
|
|
|
|
2,964,106
|
|
The
Company is amortizing the fair value of the purchased intangible assets on
a
straight-line basis over the remaining estimated useful life of five (5)
years
for Developed Technologies and seven (7) years for Trade Names.
Unaudited
Pro Forma Results of Operations
The
pro
forma data of the Company set forth below is unaudited and gives effect to
the
ITF purchase transaction completed in fiscal 2006 as if it had occurred at
the
beginning of fiscal 2006 (being July 1, 2005). The unaudited pro forma financial
information is not intended to represent or be indicative of the consolidated
results of operations or financial condition of the Company that would have
been
reported had the acquisition been completed as of the dates presented, and
should not be taken as representative of the future consolidated results
of
operations or financial condition of the Company.
|
|
June
30,
|
|
|
|
2006
|
|
(In
thousands, except per share amounts)
|
|
$
|
|
|
|
|
|
Pro
forma net revenues
|
|
|
13,227
|
|
Pro
forma net loss applicable to common shareholders
|
|
|
(17,257
|
)
|
Pro
forma net loss per share (basic and diluted)
|
|
|
(0.24
|
)
|
7.
|
Property
and Equipment
|
|
|
June
30, 2007
|
|
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Automotive
equipment
|
|
|
41,951
|
|
|
31,035
|
|
|
10,916
|
|
Computer
equipment
|
|
|
484,675
|
|
|
436,862
|
|
|
47,813
|
|
Furniture
and fixtures
|
|
|
343,047
|
|
|
328,306
|
|
|
14,741
|
|
Laboratory
equipment
|
|
|
1,998,053
|
|
|
429,231
|
|
|
1,568,822
|
|
Leasehold
improvements
|
|
|
437,836
|
|
|
179,548
|
|
|
258,288
|
|
Machinery
and office equipment
|
|
|
773,965
|
|
|
498,694
|
|
|
275,271
|
|
Software
|
|
|
148,750
|
|
|
87,615
|
|
|
61,135
|
|
Capital
leases - computer equipment
|
|
|
96,617
|
|
|
53,630
|
|
|
42,987
|
|
Total
property and equipment
|
|
|
4,324,894
|
|
|
2,044,921
|
|
|
2,279,973
|
|
Depreciation
during the year
|
|
|
|
|
|
|
|
|
532,064
|
|
|
|
June
30, 2006
|
|
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Automotive
equipment
|
|
|
43,141
|
|
|
24,845
|
|
|
18,296
|
|
Computer
equipment
|
|
|
470,631
|
|
|
395,952
|
|
|
74,679
|
|
Furniture
and fixtures
|
|
|
327,787
|
|
|
309,461
|
|
|
18,326
|
|
Laboratory
equipment
|
|
|
2,762,980
|
|
|
323,812
|
|
|
2,439,168
|
|
Leasehold
improvements
|
|
|
383,364
|
|
|
73,408
|
|
|
309,956
|
|
Machinery
and office equipment
|
|
|
315,328
|
|
|
184,581
|
|
|
130,747
|
|
Software
|
|
|
127,632
|
|
|
61,755
|
|
|
65,877
|
|
Capital
leases - computer equipment
|
|
|
49,039
|
|
|
23,686
|
|
|
25,353
|
|
Total
property and equipment
|
|
|
4,479,902
|
|
|
1,397,500
|
|
|
3,082,402
|
|
Depreciation
during the year
|
|
|
|
|
|
|
|
|
270,270
|
|
The
following table presents details of the Company’s purchased intangible assets
with definite lives:
|
|
June
30, 2007
|
|
|
|
Weighted
Average
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
Life
in Years
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
3.75
|
|
|
225,418
|
|
|
56,354
|
|
|
169,064
|
|
Customer
relationships
|
|
|
7.67
|
|
|
4,825,298
|
|
|
1,125,903
|
|
|
3,699,395
|
|
Trade
name
|
|
|
5.75
|
|
|
120,222
|
|
|
21,468
|
|
|
98,754
|
|
Total
intangible assets
|
|
|
7.46
|
|
|
5,170,938
|
|
|
1,203,725
|
|
|
3,967,213
|
|
|
|
June
30, 2006
|
|
|
|
Weighted
Average
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
Life
in Years
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
4.80
|
|
|
209,509
|
|
|
8,313
|
|
|
201,196
|
|
Customer
relationships
|
|
|
8.97
|
|
|
4,286,704
|
|
|
839,106
|
|
|
3,447,598
|
|
Trade
name
|
|
|
6.80
|
|
|
111,738
|
|
|
3,260
|
|
|
108,478
|
|
Total
intangible assets
|
|
|
8.68
|
|
|
4,607,951
|
|
|
850,679
|
|
|
3,757,272
|
|
The
estimated future amortization expense of purchased intangible assets
with
definite lives for the next five
years
is
as follows:
|
|
$
|
|
2008
|
|
|
544,789
|
|
2009
|
|
|
544,789
|
|
2010
|
|
|
544,789
|
|
2011
|
|
|
533,518
|
|
2012
|
|
|
499,705
|
|
Thereafter
|
|
|
1,299,623
|
|
|
|
|
3,967,213
|
|
Intangible
Assets (continued)
The
changes in the carrying amount of intangible assets during the years ended
June
30, 2006, and 2007 are as follows:
Balance
as of June 30, 2005
|
|
|
2,931,984
|
|
Acquisition
of intangible assets
|
|
|
321,247
|
|
Adjustment
upon finalization of purchase price allocation (1)
|
|
|
1,387,841
|
|
Impairment
of intangible assets during fiscal 2006 (2)
|
|
|
(107,715
|
)
|
Amortization
during year
|
|
|
(776,085
|
)
|
Balance
as of June 30, 2006
|
|
|
3,757,272
|
|
Adjustment
following correction of an error (Note 3)
|
|
|
554,017
|
|
Impact
of foreign exchange
|
|
|
168,693
|
|
Amortization
during year
|
|
|
(512,769
|
)
|
Balance
as of June 30, 2007
|
|
|
3,967,213
|
|
|
(1)
|
During
the second quarter of fiscal 2006, the Company completed the purchase
price allocation related to the acquisition of Avensys, which resulted
in
an increase in the carrying value of customer relationships and
a
corresponding decrease in goodwill.
|
|
(2)
|
Management
recorded an intangible assets impairment charge of $107,715 in
the
Consolidated Statement of Operations for
the
year ended June 30, 2006 relating to intangible assets of Manaris
which
were no longer in use.
|
The
changes in the carrying amount of goodwill pertaining to Avensys during the
years ended June 30, 2006 and 2007 is as follows:
Balance
as of June 30, 2005
|
|
|
6,679,608
|
|
Impairment
of goodwill
|
|
|
(1,529,767
|
)
|
Adjustment
of goodwill following finalization of Avensys purchase
price
|
|
|
|
|
allocation
|
|
|
(1,387,841
|
)
|
Balance
as of June 30, 2006
|
|
|
3,762,000
|
|
Adjustment
following correction of an error (Note 3)
|
|
|
171,736
|
|
Impact
of foreign exchange
|
|
|
183,136
|
|
Balance
as of June 30, 2007
|
|
|
4,116,872
|
|
During
the fourth quarter of fiscal 2006, the Company completed its annual goodwill
impairment test. In evaluating whether there was an impairment of goodwill,
management compared the fair value of the Avensys reporting unit against
its
carrying amount, including the goodwill. Measurement of the fair value was
based
on the reporting unit’s present value of expected future cash flows. As the
carrying amount exceeded the estimated fair value, the fair value was allocated
to the reporting unit’s underlying assets and liabilities, and management then
determined that the carrying value of the goodwill exceeded the implied fair
value of the goodwill. Accordingly, the Company recorded a goodwill impairment
charge (labeled "Loss on Impairment of Goodwill") of $1,529,767 in the
Consolidated Statement of Operations for the fiscal year ended June 30, 2006.
Management believes this impairment arose primarily as a result of an increase
in the timeframe for realizing growth objectives and anticipated cash flows
of
the Avensys reporting unit.
Intangible
Assets (continued)
During
the fourth quarter of fiscal 2007, the Company completed its annual goodwill
impairment test. In evaluating whether there was an impairment of goodwill,
management compared the fair value of the Avensys reporting unit against
its
carrying amount, including the goodwill. Measurement of the fair value was
based
on the reporting unit’s present value of expected future cash flows. As the
estimated fair value exceeded the carrying amount, Management determined
that
there was no adjustment necessary to the reporting unit’s underlying assets and
liabilities and the goodwill recorded.
|
10.
|
Balance
Sheet Details
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Other
Receivables
|
|
|
|
|
|
Investment
tax credits receivable
|
|
|
1,081,787
|
|
|
117,190
|
|
Sales
tax receivable
|
|
|
39,825
|
|
|
151,332
|
|
Grants
receivable
|
|
|
9,877
|
|
|
-
|
|
Other
|
|
|
35,752
|
|
|
107,220
|
|
|
|
|
1,167,241
|
|
|
375,742
|
|
Inventories
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
726,484
|
|
|
635,405
|
|
Work
in process
|
|
|
179,659
|
|
|
120,864
|
|
Finished
goods
|
|
|
572,692
|
|
|
807,536
|
|
|
|
|
1,478,835
|
|
|
1,563,805
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,961,952
|
|
|
3,911,609
|
|
Payroll
and benefits
|
|
|
585,909
|
|
|
184,785
|
|
Income
taxes payable
|
|
|
4,188
|
|
|
1,794
|
|
Rent
payable
|
|
|
34,648
|
|
|
12,894
|
|
Deferred
revenue
|
|
|
173,517
|
|
|
151,272
|
|
Lease
termination
|
|
|
78,323
|
|
|
-
|
|
Other
|
|
|
154,310
|
|
|
404,504
|
|
|
|
|
3,992,847
|
|
|
4,666,858
|
|
|
11.
|
Variable
Interest Entity
|
The
Financial Accounting Standards Board (“FASB”) finalized FASB Interpretation No.
46R, “Consolidation of Variable Interest Entities—An Interpretation of ARB51”
(“FIN46R”) in December 2003. FIN46R expands the scope of ARB51 and can require
consolidation of "variable interest entities” (“VIEs”). Once an entity is
determined to be a VIE, the primary beneficiary is required to consolidate
that
entity.
During
the year ended June 30, 2005, Avensys transferred its research activities
to
Avensys Laboratories Inc. (“ALI”). Avensys owned at the time 49% of ALI and the
two entities entered into an agreement (the “ALI Agreement”) whereby ALI would
perform research and development activities for Avensys. The ALI Agreement
was
for a period of five years with a two-year renewal period and calls for ALI
to
provide Avensys with a commercialization license for products developed in
return for a royalty of 5% of sales generated. Avensys sold intellectual
property related to research & development projects to ALI for tax planning
purposes in return for 500,000 preferred shares redeemable for $429,037
(CAD$500,000). ALI provided research & development for Avensys only.
However, it may also have entered into agreements with third parties. ALI
has no
financing other than amounts received from Avensys.
As
a
result of the above, ALI had been included in the consolidated financial
statements commencing in the year ended June 30, 2005 since Avensys was the
primary beneficiary.
During
the year ended June 30, 2006
,
ALI
purchased
ITF's
R&D assets as part of a business combination. As a result of the ITF
transaction, Avensys' ownership of the voting stock of ALI decreased from
49% to
42%. Following this acquisition, ALI continues to qualify as a VIE, of which
Avensys is the primary beneficiary. Consequently, ALI will continue to be
consolidated by Avensys and Manaris following the ITF transaction. Following
this transaction, ALI changed its name to ITF Laboratories Inc.
ITF
Laboratories Inc. provides research & development to Avensys and other
parties. As a result, ITF Laboratories Inc. continues to be included in the
consolidated financial statements of the Company for the year ended June
30,
2007, since Avensys is the primary beneficiary. The impact of including the
accounts of ITF Laboratories Inc. in the consolidated balance sheet as at
June
30, 2007 consists of additions to current assets of $1,862,614 (June 30,
2006 -
$967,397), net property and equipment of $903,564 (June 30, 2006 - $1,201,358),
intangible assets of $344,892 (June 30, 2006 - $343,717) and current liabilities
of $867,218 (June 30, 2006 - $1,138,306). The impact on the consolidated
statement of operations for years ended June 30, 2007 and 2006 was an increase
in revenue of $1,595,618 and approximately $180,000, respectively, an increase
in expenses of $760,553 and approximately $1,300,000, respectively, and an
increase in the income tax benefit from refundable investment tax credits
of
$1,217,948 and $351,242, respectively. The increase in expenses includes
an
amount for research and development expenses of $746,111 and approximately
$1,100,000, respectively.
|
12.
|
Related
Party Transactions and Balances
|
The
total
amount due to a shareholder of the Company at June 30, 2007 is $40,000 (June
30,
2006 - $40,000). The amount due is non-interest bearing, unsecured and has
no
fixed terms of repayment.
|
13.
|
Bank
and Other Loans Payable
|
Avensys
maintains a line of credit from a financial institution for an authorized
amount
of $1,276,516 (CAD$1,360,000), which bears interest at the Canadian bank
prime
rate (June 30, 2007 - 6%; June 30, 2006 - 6%) plus 1.5%. The outstanding
balance
under the line of credit as at June 30, 2007 amounted to $253,125 (CAD$269,679)
(June 30, 2006 $967,004 - CAD$1,078,209). Avensys has designated its accounts
receivable totaling $3,666,040 (CAD$3,905,799) and inventories totaling
$1,478,835 (CAD$1,575,551) as collateral for the line of credit. According
to
terms of the credit agreement, the Company is subject to certain financial
covenants which were all respected as at June 30, 2007.
In
2005,
a supplier of C-Chip extended a credit facility with an original maximum
amount
of $1,000,000 (principal and interest) which bears interest at a rate of
10% per
annum (June 30, 2006 - 10%). The supplier subsequently permitted C-Chip to
exceed the maximum amount of the credit facility. Effective December 1, 2006,
the supplier signed a Technology License Agreement (“Agreement”) with C-Chip to
manufacture and sell devices based on C-Chip’s technology in the sub-prime used
vehicle market. As a result of this Agreement, as described in Note 4, the
balance outstanding under the facility as at June 30, 2007 was reduced to
$708,245 (CAD$754,564) (June 30, 2006 $1,364,692 - CAD$1,521,632).
Avensys
obtained investment tax credit financing during fiscal 2007 in the form of
a
demand loan in the amount of $397,099.(CAD$460,000) Avensys repaid $304,231
(CAD$361,058) of the demand loan during the fiscal 2007 leaving a balance
owing
at June 30, 2007 of $92,868. The demand loan bears interest at 18%, with
interest payable on a monthly basis, and is secured by the Federal and
Provincial tax credits receivables and the assets of ITF Laboratories
Inc.
|
14.
|
Balance
of Purchase Price and Derivative Liability on ITF
Purchase
|
Since
the
acquisition of ITF (see Note 6), the Company has recorded a balance of purchase
price payable and derivative liability related to an embedded conversion
option.
The
Preferred Shareholder arrangement entitling the ITF Preferred Shareholders
to a
right to receive a fixed amount of CAD$2,000,000 or a fixed number of the
Company’s common shares has been accounted for as a convertible liability
consisting of a debt instrument with an embedded conversion option. The debt
instrument has been originally measured at its present value using a discount
rate of 30% resulting in a net present value of $794,148 on the date of
issuance. This carrying value is accreted to the face amount of CAD$2,000,000
using the effective interest rate method to the first date the Preferred
Shareholders could require a payment. The carrying value of the note as at
June
30, 2006 was $877,675. The carrying value of the note as at June 30, 2007
was
$1,194,096. The embedded conversion option has been classified as a liability
and was originally recognized at its fair value of $503,814 on the date of
issuance. Subsequently, this conversion option is re-measured at fair value
with
changes in fair value included in the Statement of Operations. The fair value
of
this embedded conversion option was $458,271 as of June 30, 2006. The fair
value
of this embedded conversion option was $17,045 as of June 30, 2007. The fair
value of the embedded conversion option is determined by using the Black-Scholes
model.
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Mortgage
loan secured by Avensys’ intangible and movable tangible assets (June 30,
2007-CAD$245,000),
bearing
interest at the lender's prime rate (June 30, 2007 - 8.25%; June
30, 2006
- 8.0%) plus 1.75%, payable in monthly instalments of CAD$7,000
plus
interest, maturing in May 2010
|
|
|
229,961
|
|
|
295,067
|
|
Capital
lease obligations (June 30,2007-CAD$41,304), bearing interest
between
6.17% and 9.83%, maturing
between
October 2007 and May 2010
|
|
|
38,768
|
|
|
25,353
|
|
Note
payable (June 30, 2007-CAD$0), non-interest bearing, payable
in monthly
instalments of $691, unsecured,
matured
in April 2007
|
|
|
-
|
|
|
6,197
|
|
|
|
|
268,729
|
|
|
326,617
|
|
Less:
Current portion of long-term debt
|
|
|
94,317
|
|
|
103,717
|
|
Long-term
debt
|
|
|
174,412
|
|
|
222,900
|
|
Principal
payments on long-term debt and capital leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
2008
|
|
|
94,317
|
|
2009
|
|
|
92,637
|
|
2010
|
|
|
81,775
|
|
2011
|
|
|
-
|
|
2012
|
|
|
-
|
|
Total
|
|
|
268,729
|
|
|
16.
|
Convertible
Debentures
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Series
A Senior Secured Convertible Debentures bearing interest at 7%,
capital
repayments
for 20 months beginning June 16, 2005, interest payable each
June
and
December, maturing January 31, 2007, original principal amount
of
$4,675,000
(Note 16 (a))
|
|
|
-
|
|
|
188,328
|
|
Series
B Subordinated Secured Convertible Debentures (original principal
amount
of $3,622,143) and Original Issue Discount Series B Subordinated
Secured
Convertible debentures (original principal amount equal to 15%
of the
Series B debentures), maturing February 11, 2009 (Note 16
(b))
|
|
|
2,470,867
|
|
|
-
|
|
Unsecured
Convertible Debentures bearing interest at 15%, maturing September
1,
2007, original principal amount of $457,575 (CAD$487,500) (Note
16
(c))
|
|
|
-
|
|
|
399,563
|
|
Unsecured
Convertible Debentures bearing interest at 12% maturing March
1, 2008,
original principal amount of $375,446 (CAD$400,000) (Note 16
(c))
|
|
|
373,110
|
|
|
343,109
|
|
|
|
|
2,843,977
|
|
|
931,000
|
|
Less:
Current portion of convertible debentures
|
|
|
1,568,519
|
|
|
587,891
|
|
Convertible
debentures
|
|
|
1,275,458
|
|
|
343,109
|
|
Principal
payments on the convertible debentures for the next five years
are as
follows:
|
|
|
|
|
|
|
|
|
$
|
|
2008
|
|
|
1,568,519
|
|
2009
|
|
|
1,275,458
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
2012
|
|
|
-
|
|
Total
|
|
|
2,843,977
|
|
|
a)
|
Series
A Senior Secured Convertible
Debentures
|
On
February 16, 2005, the Company issued Series A Senior Secured Convertible
Notes
(“Series A Notes”) and Series E and F Warrants (see Note 18(b)) for an aggregate
principal amount of $4,675,000.
In
accordance with EITF 98-5 “
Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios
”
and
with EITF 00-27 “
Application
of Issue No. 98-5 to Certain Convertible Instruments
”,
the
Company allocated $1,863,870 to the Warrants Series E, $339,456 to the Warrants
Series F and recognized an embedded beneficial conversion feature of $2,470,674
accounted for as additional paid-in capital and an equivalent discount against
the Notes. The carrying amount of the Notes was being increased monthly by
periodic accretion under the effective interest method. At the time of issuance,
the Company was obligated for the entire contractual balance of the Notes
of
$4,675,000. At June 30, 2007, the outstanding principal amount on the Notes
was
zero as a result of the last monthly installment having been made in January
2007.
These
Series A Notes bore interest at 9% per year from February 16, 2005 until
the
first principal payment date on June 16, 2005 and 7% per year after this
date.
The principal amount on these Notes was payable in twenty (20) equal monthly
installments of $233,750 subject to certain adjustments. Interest on these
Notes
was payable on the last day of June and December of each year commencing
on June
30, 2005.
All
payments of interest could be made, at the option of the Company, (a) in
cash;
(b) by the issuance of additional Series A Notes in the principal amount
equal
to the interest payment due; or (c) in shares of common stock of the Company
valued at 90% of the average price of such security in the most recent five
trading days (“Market Price”).
Convertible
Debentures (continued)
Series
A
Senior Secured Convertible Debentures (continued)
All
payments of principal could be made, at the option of the Company, (a) in
cash
with a premium equal to 10% of the cash amount paid; or (b) in shares of
common
stock of the Company valued at 85% of the Market Price.
All
payments made by the issuance of shares were acceptable only if the related
shares of the Company had first been registered with the Securities and Exchange
Commission.
The
holders of these Series A Notes had the right, at their option at any time,
to
convert some or all of the Notes including the principal amount and the amount
of any accrued but unpaid interest into a number of common shares of the
Company
valued initially at $0.65 per share, subject to certain adjustments as described
in the purchase agreement. As part of a special warrant offering, the conversion
price on such notes was reduced to $0.35.
In
connection with the placement of these Series A Notes, the Company issued
Warrant Series: IB1, IB2, IB3, IB4, and IB5 granting the right to acquire
up to
881,538 shares of the Company’s common stock at prices ranging from $0.01 to
$0.76 per share subject to certain adjustments, (see Note 18(b)) and expiring
from three months following the date of their Registration until February
16,
2010.
The
Company valued the warrants at $486,586 and recognized this amount to additional
paid in capital of Warrants Series IB1, IB2 and, IB3, IB4, and IB5 and as
deferred issue expenses for the Series A Notes and issue expenses for the
Warrants Series E and F.
To
secure
payment of the principal amount of the Series A Notes and the interest thereon,
the Company hypothecated, in favor of the note holders, the universality
of all
of the immovable and movable assets, corporeal and incorporeal, present and
future of the Company. As a result of the last monthly installment having
been
made in January 2007, the security relating to the Series A Notes has been
released.
The
purchase agreement with respect to these Notes contained certain covenants
(a)
related to the conduct of the business of the Company and its subsidiaries;
(b)
related to creation or assumption of liens other than liens created pursuant
to
the Security Documents and Permitted Liens, as defined in the purchase
agreement; (c) for so long as at least $2,500,000 principal amount of these
Notes remained outstanding, the Company shall not, without the consent of
holders representing at least 50% of the then outstanding principal amount,
create, incur, guarantee, issue, assume or in any manner become liable in
respect of any indebtedness, other than permitted indebtedness or issue other
securities that rank senior to these Notes provided however that the Company
could have outstanding bank debt.
|
b)
|
Series
B Subordinated Secured Convertible
Debentures
|
On
August
11, 2006, the Company entered into a Note and Warrant Purchase Agreement
for the
sale of Series B Subordinated Secured Convertible Notes (“Series B Notes”), for
a principal amount of $2,112,917, Original Issue Discount Series B Subordinated
Secured Convertible Notes (“OID Notes”), for a principal amount of $316,938, and
Series Y and Z Warrants (see Note 17(b)). Such amounts represented the first
tranche of the debt financing. On November 17, 2006, the Company received
the
second tranche of the Series B Notes, for a principal amount of $1,509,226,
and
OID Notes, for a principal amount of $226,384. After deducting commissions
and
other debt issue expenses, the net proceeds to the Company of the first tranche
were $1,819,612 and were $1,360,238 for the second tranche.
In
accordance with EITF 00-19 “
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock
”,
the
Company allocated, with respect to the first tranche, $14,179 to the Warrants
Series Y, $266,168 to the Warrants Series Z, and recognized an embedded
conversion option feature of $608,440. The warrants and the embedded conversion
option feature components are accounted for as a derivative liability. The
Company allocated the remaining proceeds to the Series B Notes in the amount
of
$1,064,461 and to the OID Notes in the amount of $159,669. The Company also
allocated $84,049 to the Placement Fee Warrants made up of Warrants Series
Y,
Warrants Series Z and Warrants Series W and such are also accounted for as
derivative liabilities. The Company allocated, with respect to the second
tranche, $6,146 to the Warrants Series Y, $120,870 to the Warrants Series
Z, and
recognized an embedded conversion option feature of $236,230. The warrants
and
the embedded conversion option feature components, as in the first tranche,
are
accounted for as a derivative liability. The Company allocated the remaining
proceeds to the Series B Notes in the amount of $996,504 and to the OID Notes
in
the amount of $149,476. The Company also allocated $37,948 to the Placement
Fee
Warrants made up of Warrants Series Y, Warrants Series Z and Warrants Series
W
and such are also accounted for as derivative liabilities. The carrying amounts
of the Series B Notes and the OID Notes are being increased monthly by periodic
accretion under the effective interest method. The Company used the
Black-Scholes option pricing model to value the warrants and the embedded
conversion option feature at the issue date and uses the same model to value
these elements on a quarterly basis At June 30, 2007, the outstanding principal
amount on the Notes was $3,286,100.
Convertible
Debentures (continued)
Series
B
Subordinated Secured Convertible Debentures (continued)
The
following table illustrates the values of the various components at the issue
dates, August 11, 2006 for the first tranche and November 17, 2006 for the
second tranche, and the balance sheet date, June 30, 2007.
|
|
Issue
Date
|
|
Expiry
Date
|
|
Value
at
August
11,
2006
|
|
Value
at
November
17,
2006
|
|
Value
at
June
30,
2007
|
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Series
B Notes
|
|
|
8/11/2006
|
|
|
2/11/2009
|
|
|
529,078
|
|
|
|
|
|
5,448
|
|
OID
Notes
|
|
|
8/11/2006
|
|
|
2/11/2009
|
|
|
79,362
|
|
|
|
|
|
817
|
|
Series
B Notes
|
|
|
11/17/2006
|
|
|
2/11/2009
|
|
|
|
|
|
205,417
|
|
|
4,447
|
|
OID
Notes
|
|
|
11/17/2006
|
|
|
2/11/2009
|
|
|
|
|
|
30,813
|
|
|
667
|
|
Series
Y Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
14,179
|
|
|
|
|
|
612
|
|
Series
Z Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
266,168
|
|
|
|
|
|
15,412
|
|
Series
Y Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
6,146
|
|
|
436
|
|
Series
Z Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
120,870
|
|
|
11,009
|
|
|
|
|
|
|
|
|
|
|
888,787
|
|
|
363,246
|
|
|
38,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value of Subordinated Secured Convertible
Debentures
|
|
|
|
|
|
|
Series
B Notes
|
|
|
8/11/2006
|
|
|
2/11/2009
|
|
|
1,064,461
|
|
|
|
|
|
1,175,220
|
|
OID
Notes
|
|
|
8/11/2006
|
|
|
2/11/2009
|
|
|
159,669
|
|
|
|
|
|
176,283
|
|
Series
B Notes
|
|
|
11/17/2006
|
|
|
2/11/2009
|
|
|
|
|
|
996,504
|
|
|
980,464
|
|
OID
Notes
|
|
|
11/17/2006
|
|
|
2/11/2009
|
|
|
|
|
|
149,476
|
|
|
138,900
|
|
|
|
|
|
|
|
|
|
|
1,224,130
|
|
|
1,145,980
|
|
|
2,470,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of Series B Notes
|
|
|
|
|
2,112,917
|
|
|
1,509,226
|
|
|
2,509,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities (Placement Fees)
|
|
|
|
|
|
|
|
|
|
Series
W Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
60,920
|
|
|
|
|
|
3,705
|
|
Series
Y Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
1,170
|
|
|
|
|
|
50
|
|
Series
Z Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
21,959
|
|
|
|
|
|
1,272
|
|
Series
W Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
27,552
|
|
|
2,646
|
|
Series
Y Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
502
|
|
|
36
|
|
Series
Z Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
9,894
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
84,049
|
|
|
37,948
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivative Liabilities
|
|
|
|
|
972,836
|
|
|
401,194
|
|
|
47,465
|
|
The
convertible notes include both Series B Notes and OID Notes. The Series B
Notes
are non-interest bearing and the OID Notes effectively provide the interest
component on the Series B Notes. Pursuant to the Purchase Agreement, the
Company
issued four year warrants to purchase shares of the Company's common stock
in an
amount equal to 37.5% of the number of common shares underlying the Series
B
Notes at $0.45 per share (the "Series Z Warrants") and 2.5% of the number
of
common shares underlying the Series B Notes at $0.65 per share (the "Series
Y
Warrants").
The
Series B Notes and OID Notes mature thirty (30) months from the date of issuance
(the "Maturity Date") and are convertible at any time into shares of the
Company's common stock at a fixed conversion price of $0.42, subject to a
conversion price reset of $0.35. The conversion price of the Series B Notes
and
OID Notes are subject to adjustment for certain events, including dividends,
distributions or split of the Company's common stock, or in the event of
the
Company's consolidation, merger or reorganization. Beginning nine months
from
the issuance date, the Company is required to make principal payments equal
to
one-ninth of the aggregate principal amount of the Series B Notes and OID
notes
on a quarterly basis commencing February 1, 2007. The Company may pay the
principal payment in either cash plus a premium of 7% of each principal payment
or in shares of registered common stock at a 15% discount to the market price
of
the Company's common stock. The Series B and OID noteholders, upon notification
by the Company that they will be repaid in shares at the particular repayment
date, may elect the date, without limitation, upon which to base the number
of
common shares to be received for the principal amount owing at the repayment
date. At June 30, 2007, Series B and OID principal, for which noteholders
had
not accepted their common shares as repayment, amounted to $46,296 and has
been
included in the carrying value of the subordinated secured convertible
debentures. Such amount was converted to common shares on July 18, 2007
resulting in an additional 649,955 common shares being issued to repay the
principal amount.
Convertible
Debentures (continued)
The
Company's obligations under the Purchase Agreement and the Notes are secured
by
a subordinated lien on substantially all of the assets of the Company, pursuant
to a Pledge and Security Agreement. The purchase agreement with respect to
these
Notes contain certain covenants (a) related to the conduct of the business
of
the Company and its subsidiaries; (b) related to creation or assumption of
lien
other than liens created pursuant to the Security Documents and Permitted
Liens,
as defined in the purchase agreement;(c) related to permitted acquisitions
and
disposition of the assets; (d)
for
so
long as the Notes remain outstanding, the Company shall not issue any securities
that rank pari passu or senior to the Notes without the prior written consent
of
a majority of the principal amount of the Notes outstanding at such time
except
for secured non-equity linked commercial debt which shall rank senior to
the
Notes in an amount equal to the greater of (i) $2,000,000 or (ii) fifty percent
(50%) of the Purchase Price.
Subsequent
to the year end, as described in Note 23, the Company redeemed its outstanding
Series B and Series B OID Notes.
|
c)
|
Unsecured
Convertible Debentures
|
With
the
acquisition of Avensys, the Company assumed 15% unsecured convertible debentures
having a nominal value of $918,068 (CAD$1,125,000) and maturing on September
1,
2007. When the debentures were originally issued, Avensys recorded an equity
component of $378,445 (CAD$463,747) and a liability component of $539,623
(CAD$661,253), for a total of $918,068 (CAD$1,125,000). In April 2005, the
Company issued 680,000 shares in settlement of $520,238 (CAD$637,500) of
the
debentures outstanding, the value of the debt settlement representing the
fair
value of the shares. The remainder of the debentures, $397,829 (CAD$487,500)
was
replaced by a new 15% unsecured debenture. The new debenture is convertible
into
shares of the Company using the following formula: principal and interest
divided by a 17.5% discount on the 10 day weighted average price of the
Company’s shares. At June 30, 2006, the discount related to the conversion
feature was $37,657. On August 10, 2006 the debenture was fully converted
into
1,654,394 common shares of Manaris. Pursuant to the conversion agreement,
the
Company has filed a registration statement that includes the said shares.
On
October 9, 2006, the Company’s registration statement became effective enabling
the shares to be issued The shares were issued on April 2, 2007.The share
price
was calculated using the following formula: principal and interest divided
by a
17.5% discount on the 10 day weighted average price of the Company’s shares
which equalled $0.26 (CAD$0.29) per share. The transaction resulted in the
Company recognizing a loss on conversion of $129,922 in the first quarter
of
fiscal 2007.
With
the
acquisition of Avensys, the Company also assumed 12% unsecured convertible
debentures having a nominal value of $652,848 (CAD$800,000) and maturing
on
March 1, 2008. When the debentures were originally issued, Avensys recorded
an
equity component of $305,857 (CAD$374,797) and a liability component of $346,991
(CAD$425,203), for a total amount of $652,848 (CAD$800,000). In April 2005,
the
Company issued 426,667 shares in settlement of $326,424 (CAD$400,000) of
the
debentures outstanding, the value of the debt settlement representing the
fair
value of the shares. The remainder of the debentures, $346,440 (CAD$400,000)
were modified to be convertible into 330,251 shares of the Company. At June
30,
2007, the discount related to the conversion feature is $2,336 (June 30,
2006 -
$15,635).
At
June
30, 2007, the Company is authorized to issue 500,000,000 shares of common
stock.
At June 30, 2007, the Company has 93,437,654 (June 30, 2006 - 77,671,281)
common
shares issued and outstanding and 406,562,346 common shares available for
issuance.
For
the
year ended June 30, 2007:
|
a)
|
In
the third and fourth quarters of fiscal 2007, the Company issued
12,450,353 common shares representing scheduled principal payments
on the
Series B Notes and the OID Notes.
|
|
b)
|
In
April 2007, pursuant to the conversion of the unsecured convertible
debentures described in Note 16(c), the Company issued 1,654,394
common
shares.
|
|
c)
|
In
February 2007, the Company issued 40,000 restricted common shares
as
compensation for legal services.
|
|
d)
|
In
November 2006, the Company issued 6,055 common shares in connection
with
the Series A Notes as an adjustment to a previous issuance for
principal
payment.
|
Common
Stock (continued)
|
e)
|
During
the first quarter of fiscal 2007, the Company issued 1,277,558
common
shares in connection with the Series A Notes. Of that amount, 1,094,949
common shares with a fair value of $341,458 were issued for scheduled
principal payments. Since the Company had been accreting the debt
on the
basis that the principal payments would be settled in shares, no
gain or
loss was recorded upon issuance of shares and the $341,458 was
removed
from the carrying value of the convertible debentures and credited
to
capital stock and additional paid in capital. Also, a total of
182,609
common shares, with a fair value of $58,410, were issued for interest
payments. Since the Company had been accruing interest on the basis
that
the interest would be settled in shares, no gain or loss was recorded
upon
issuance of shares.
|
|
f)
|
In
September 2006, pursuant to the ITF transaction and in connection
with the
Company’s failure to file the required registration statement within the
time period required by the Asset Purchase Agreement, the Company
issued
255,079 restricted common stock shares to the ITF preferred shareholders.
The fair value of the shares at the issue date that was expensed
in the
financial statements was $73,463.
|
|
g)
|
In
August 2006, the Company issued 82,934 common shares to settle
outstanding
payables in the amount of
$25,709.
|
For
the
fiscal year ended June 30, 2006:
|
a)
|
The
Company issued 1,758,000 common shares for total proceeds of $100,013
from
the exercise of stock options.
|
|
b)
|
The
Company issued 10,221,522 common shares in connection with the
Series A
Notes. Of that amount, 5,897,695 common shares, with a fair value
of
$2,099,793, were issued for scheduled principal payments. Since
the
Company had been accreting the debt on the basis that the principal
payments would be settled in shares, no gain or loss was recorded
and the
$2,099,792 was removed from the carrying value of the convertible
debentures and credited to capital stock and additional paid in
capital.
In addition, the holders of the convertible debentures converted
debentures with a principal amount of $1,249,360 into 3,575,008
common
shares at the existing conversion rate of $0.35. This amount has
been
removed from the carrying value of the convertible debentures and
credited
to capital stock and additional paid in capital, and the unamortized
accretion in the amount of $1,181,188 has been charged as additional
accretion expense and credited to capital stock and additional
paid in
capital. Furthermore, a total of 748,819 common shares, with a
fair value
of $265,436, were issued for interest payments. Since the company
had been
accruing interest on the basis that the interest would be settled
in
shares, no gain or loss was
recorded.
|
|
c)
|
The
Company issued 7,525,124 common shares for total proceeds of $2,309,296
following the exercise of 7,525,124
warrants.
|
|
d)
|
A
total of 257,000 stock options were exercised after issuance to
settle
outstanding payables in the amount of $105,501. The fair value
of the
options issued was $136,860 resulting in a loss of $31,359, which
has been
charged to other expense.
|
|
e)
|
In
February 2006, the Company issued 631,038 common shares valued
at $224,397
as the repayment of secured convertible debentures with a principle
amount
of $224,397 in accordance with the original terms of the debt.
Since the
Company had been accounting for this debt on the basis that the
principal
payments would be made in shares, no gain or loss was
recorded.
|
|
f)
|
In
April 2006, the Company issued 2,550,795 restricted common shares
having a
value of $872,372 for the acquisition of ITF assets. (Note
6)
|
|
g)
|
In
April 2006, the Company cancelled 70,000 restricted common shares
out of
120,000 restricted common shares issued in May 2005 for consulting
fees.
These shares had originally been issued and held in escrow with
10,000
shares being released from escrow each month. Consequently, there
was no
unearned compensation expense to reverse upon
cancellation.
|
Common
Stock (continued)
Common
stock reserved for issuance at June 30, 2007, before and after taking into
consideration the effect of the redemption of the Series B Notes and OID
Notes,
as described in Note 23 (e), the exercise on a cashless basis of the Series
G
and I warrants, as described in Note 23 (b), the new Employee Stock Plan,
as
described in Note 23 (c), and the augmentation of the 2006 Non Qualified
Stock
Option Plan, as described in Note 23 (d), were as follows:
|
|
2007(Note
23) (1)
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
8,661,070
|
|
|
8,661,070
|
|
|
4,486,750
|
|
Reserved
for future issuance
|
|
|
5,365,244
|
|
|
365,244
|
|
|
4,539,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Plan
|
|
|
|
|
|
|
|
|
|
|
Reserved
for future issuance
|
|
|
4,000,000
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
15,099,037
|
|
|
17,752,882
|
|
|
13,015,714
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A Notes
|
|
|
-
|
|
|
-
|
|
|
2,487,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B Notes and OID Notes
|
|
|
649,955
|
|
|
48,325,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of unsecured convertible debentures
|
|
|
330,251
|
|
|
330,251
|
|
|
1,984,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,105,557
|
|
|
75,434,447
|
|
|
26,514,266
|
|
(1)
June
30, 2007 adjusted for impact of subsequent events.
|
18.
|
Stock
Options and Warrants
|
Under
the
Manaris 2006 Nonqualified Stock Option Plan (‘Plan”), the Company may grant
options to its Directors, Officers and employees for up to 15,000,000 common
shares. Stock options are generally granted with an exercise price equal
to the
common share’s fair market value at the date of grant. Options are granted
periodically and both the maximum term of an option and the vesting period
are
set at the Board of Directors’ discretion. Subsequent to the year end, as
described in Note 23 (d), the Plan was amended and restated as the Amended
and
Restated 2006 Nonqualified Stock Option Plan and augmented by 5,000,000 stock
options.
During
the year ended June 30, 2007, 4,499,069 (June 30, 2006 - 1,863,000) stock
options were granted to employees and directors.
During
the year ended June 30, 2007, 64,834 (June 30, 2006 - 915,000) stock options
were granted to non-employees.
During
the year ended June 30, 2007, 64,834 stock options were granted to non-employees
with exercise prices below the market price (64,834 stock options granted
at
.00001) on the respective grant dates. During the year ended June 30, 2006,
915,000 stock options were granted to non-employees with exercise prices
below
the market price (915,000 stock options granted at .00001) on the respective
grant dates. During the year ended June 30, 2006, no stock options were granted
to non-employees with exercise prices at the market price on the respective
grant dates. During the year ended June 30, 2006, 800,000 stock options were
granted to employees and directors with exercise prices below the market
price
(800,000 stock options granted at .00001) on the respective grant
dates.
During
the year ended June 30, 2007, a certain director resigned and is no longer
providing any services to Manaris. Under his stock option agreement, the
director forfeited the stock options that would have vested beyond his
termination date and the Company also reverses the respective stock-based
compensation expense that was expensed for the forfeited stock options.
A
summary
of the changes in the Company’s common share stock options is presented
below:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
Number
of
|
|
exercise
price
|
|
Number
of
|
|
exercise
price
|
|
|
|
options
|
|
($)
|
|
options
|
|
($)
|
|
Balance
at beginning of the period
|
|
|
4,486,750
|
|
|
0.60
|
|
|
3,842,500
|
|
|
0.65
|
|
Granted
|
|
|
4,563,903
|
|
|
0.22
|
|
|
2,778,000
|
|
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
(2,015,000
|
)
|
|
(0.05
|
)
|
Forfeited
|
|
|
(389,583
|
)
|
|
(0.25
|
)
|
|
(118,750
|
)
|
|
(0.78
|
)
|
Balance
at end of the period
|
|
|
8,661,070
|
|
|
0.42
|
|
|
4,486,750
|
|
|
0.60
|
|
Stock
Options and Warrants (continued)
Additional
information regarding options outstanding as at June 30, 2007 is as
follows:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
Range
of
|
|
|
|
remaining
|
|
average
|
|
|
|
average
|
|
Exercise
prices
|
|
Number
of
|
|
contractual
|
|
exercise
price
|
|
Number
of
|
|
exercise
price
|
|
$
|
|
shares
|
|
life
(years)
|
|
$
|
|
shares
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
- 0.25
|
|
|
2,464,131
|
|
|
7.58
|
|
|
0.15
|
|
|
2,340,078
|
|
|
0.15
|
|
0.26
- 0.50
|
|
|
3,078,189
|
|
|
6.63
|
|
|
0.31
|
|
|
1,724,780
|
|
|
0.33
|
|
0.51
- 0.75
|
|
|
1,895,000
|
|
|
1.96
|
|
|
0.67
|
|
|
1,895,000
|
|
|
0.67
|
|
0.76
- 1.00
|
|
|
1,223,750
|
|
|
2.26
|
|
|
0.83
|
|
|
1,223,750
|
|
|
0.83
|
|
|
|
|
8,661,070
|
|
|
5.26
|
|
|
0.42
|
|
|
7,183,608
|
|
|
0.45
|
|
The
weighted average fair value of options granted for the years ended June 30,
2007
and 2006 was $0.18 and $0.32, respectively, as summarized below.
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
average
|
|
average
|
|
|
|
Number
of
|
|
exercise
|
|
grant-date
|
|
|
|
options
|
|
price
|
|
fair
value
|
|
|
|
|
|
|
|
|
|
Options
granted during the year ended June 30,
|
|
|
|
|
|
|
|
|
|
|
2007,
exercise prices below market price at time of
|
|
|
|
|
|
|
|
|
|
|
grant
|
|
|
64,834
|
|
|
0.00001
|
|
|
0.17
|
|
Options
granted during the year ended June 30,
|
|
|
|
|
|
|
|
|
|
|
2007,
exercise prices equal to market price at time of
|
|
|
|
|
|
|
|
|
|
|
grant
|
|
|
4,499,069
|
|
|
0.23
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted during the year ended June 30, 2007
|
|
|
4,563,903
|
|
|
0.22
|
|
|
0.18
|
|
|
|
Number
of options
|
|
Weighted
average exercise price
|
|
Weighted
average grant-date fair value
|
|
|
|
|
|
|
|
|
|
Options
granted during the year ended June 30, 2006, exercise prices
below market
price at time of grant
|
|
|
1,715,000
|
|
|
0.00001
|
|
|
0.39
|
|
Options
granted during the year ended June 30, 2006, exercise prices
equal to
market price at time of grant
|
|
|
1,063,000
|
|
|
0.36
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted during the year ended June 30, 2006
|
|
|
2,778,000
|
|
|
0.14
|
|
|
0.32
|
|
Stock
Options and Warrants (continued)
Commencing
July 1, 2006 and as described in the Company’s accounting policy relating to
stock-based compensation, the Company began to expense the compensation cost
relating to employee share-based payment transactions The Company recognized
stock-based compensation for employees and directors in the amount of $442,185
for the year ended June 30, 2007. The Company recognized stock-based
compensation for non-employees in the amount of $11,021 and $490,795 for
the
years ended June 30, 2007 and 2006, respectively. Had the Company determined
compensation cost based on the fair value at the date of grant for its employee
stock options, the net loss would have increased by $396,588 for the year
ended
June 30, 2006 as described in the following table:
|
|
Year
ended
|
|
|
|
June
30, 2006
|
|
|
|
$
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
|
(14,099,739
|
)
|
Add:
Stock-based compensation expense included in net loss - as
reported
|
|
|
490,795
|
|
Less:
Stock-based compensation expense determined under fair value
method
|
|
|
(887,383
|
)
|
|
|
|
|
|
Net
loss applicable to common stockholders - pro forma
|
|
|
(14,496,327
|
)
|
|
|
|
|
|
Net
loss per share (basic and diluted) - as reported
|
|
|
(0.20
|
)
|
|
|
|
|
|
Net
loss per share (basic and diluted) - pro forma
|
|
|
(0.21
|
)
|
Stock
Options and Warrants (continued)
As
a
result of the adoption of SFAS 123(R), the Company’s fiscal 2007 financial
results were lower than under the previous accounting method for share-based
compensation by the following amounts:
|
|
Year
ended
|
|
|
|
June
30, 2007
|
|
|
|
$
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
442,185
|
|
|
|
|
|
|
Net
Loss
|
|
|
442,185
|
|
|
|
|
|
|
Net
Loss applicable to common stockholders
|
|
|
442,185
|
|
|
|
|
|
|
Net
Loss from continuing operations per share - Basic
|
|
|
|
|
and
Diluted
|
|
|
0.01
|
|
|
|
|
|
|
Net
Loss per share - Basic and Diluted
|
|
|
0.01
|
|
The
fair
value of the options granted during the year was measured at the date of
grant
using the Black-Scholes option pricing model with the following weigthed-average
assumptions:
|
|
Year
ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Risk
- free interest rate
|
|
|
4.33
|
%
|
|
3.28
|
%
|
Expected
volatility
|
|
|
100.00
|
%
|
|
100.95
|
%
|
As
at
June 30, 2007, the Company has $342,193 of total unrecognized stock-based
compensation expense related to non-vested stock options granted under the
Company’s stock option plan that it expects to recognize over a period of two
years (June 30, 2008 - $223,754 and June 30, 2009 - $118,439).
There
were no stock options exercised during the year ended June 30, 2007. The
Company
received cash of $100,013 from stock options exercised during the year ended
June 30, 2006. The impact of these cash receipts is included in financing
activities in the accompanying consolidated statements of cash
flows.
Stock
Options and Warrants (continued)
Warrants
outstanding as at June 30, 2007
|
|
|
|
Warrant
exercise
|
|
|
|
Outstanding
|
|
prices
|
|
Series
E
|
|
|
1,803,333
|
|
|
0.31
|
|
Series
G
|
|
|
3,797,976
|
|
|
0.05
|
|
Series
H
|
|
|
890,593
|
|
|
0.35
|
|
Series
I
|
|
|
3,797,976
|
|
|
0.05
|
|
Series
J
|
|
|
1,781,184
|
|
|
0.50
|
|
Series
W
|
|
|
711,492
|
|
|
0.35
|
|
Series
Y
|
|
|
233,392
|
|
|
0.65
|
|
Series
Z
|
|
|
3,500,865
|
|
|
0.45
|
|
IB-01
|
|
|
7,692
|
|
|
0.00001
|
|
IB-02
|
|
|
248,532
|
|
|
0.48
|
|
IB-03
|
|
|
374,171
|
|
|
0.53
|
|
IB-06
|
|
|
605,676
|
|
|
0.05
|
|
Total
|
|
|
17,752,882
|
|
|
0.25
|
|
Changes
in the warrants outstanding for the year ended June 30, 2007
are as
follows:
|
Exercise
prices
|
|
0.00001
|
|
0.05
|
|
0.31
|
|
0.35
|
|
0.45
|
|
0.48
|
|
0.50
|
|
0.53
|
|
0.59
|
|
0.65
|
|
0.67
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
7,692
|
|
|
-
|
|
|
-
|
|
|
6,890,400
|
|
|
-
|
|
|
-
|
|
|
5,579,160
|
|
|
-
|
|
|
215,385
|
|
|
-
|
|
|
323,077
|
|
|
13,015,714
|
|
Ratchet
pricing effect
|
|
|
-
|
|
|
8,201,628
|
|
|
1,803,333
|
|
|
(5,999,807
|
)
|
|
-
|
|
|
248,532
|
|
|
(3,797,976
|
)
|
|
374,171
|
|
|
(215,385
|
)
|
|
-
|
|
|
(323,077
|
)
|
|
291,419
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
711,492
|
|
|
3,500,865
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
233,392
|
|
|
-
|
|
|
4,445,749
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at June 30, 2007
|
|
|
7,692
|
|
|
8,201,628
|
|
|
1,803,333
|
|
|
1,602,085
|
|
|
3,500,865
|
|
|
248,532
|
|
|
1,781,184
|
|
|
374,171
|
|
|
-
|
|
|
233,392
|
|
|
-
|
|
|
17,752,882
|
|
Weigthed
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
contractual life (years)
|
|
|
2.63
|
|
|
2.78
|
|
|
2.64
|
|
|
2.99
|
|
|
3.36
|
|
|
2.63
|
|
|
2.63
|
|
|
2.63
|
|
|
-
|
|
|
3.36
|
|
|
-
|
|
|
2.83
|
|
Subsequent
to the year end, as described in Note 23 (b), the holders of Series G and
Series
I warrants exercised, on a cashless basis, 2,653,845 warrants, respectively.
The
exercise price of the Series G and Series I warrants, on a cashless basis,
was
$0.052. The contractual provisions of the Series G warrants stipulate that
for
each such warrant exercised, a new Series K warrant shall be issued carrying
exercise price of $0.70. Therefore, as a result of the exercise of 2,653,845
Series G warrants, 2,653,845 Series K warrants were issued to the same holders
of such warrants. There remains 1,144,131 Series G and Series I warrants
outstanding.
Certain
warrants issued by the Company contain either full ratchet or weighted average
ratchet provisions, which reduce the exercise price of the warrant and/or
increase the number of shares issuable on exercise, if common stock is issued
by
the Company below the existing exercise price of those warrants. Certain
warrants do not contain ratchet provisions and their exercise price is not
adjusted. The reconciliation of warrants, with respect to outstanding amounts
and exercise prices, reflects the effect of changes in the number of warrants
and their exercise price that have occurred as a result of the existing full
ratchet and weighted average ratchet provisions contained in the original
warrant agreements.
Stock
Options and Warrants (continued)
Warrants
outstanding as at June 30, 2006
|
|
|
|
Warrant
exercise
|
|
|
|
Outstanding
|
|
prices
|
|
Series
E
|
|
|
1,596,155
|
|
|
0.35
|
|
Series
G
|
|
|
3,797,976
|
|
|
0.35
|
|
Series
H
|
|
|
890,593
|
|
|
0.35
|
|
Series
I
|
|
|
3,797,976
|
|
|
0.50
|
|
Series
J
|
|
|
1,781,184
|
|
|
0.50
|
|
IB-01
|
|
|
7,692
|
|
|
0.00001
|
|
IB-02
|
|
|
215,385
|
|
|
0.59
|
|
IB-03
|
|
|
323,077
|
|
|
0.67
|
|
IB-06
|
|
|
605,676
|
|
|
0.35
|
|
Total
|
|
|
13,015,714
|
|
|
0.48
|
|
Changes
in the warrants outstanding for the year ended June 30, 2006
are as
follows:
|
Range
of exercise prices
|
|
0.00001
|
|
0.001
|
|
0.35
|
|
0.50
|
|
0.59
|
|
0.63
|
|
0.67
|
|
0.70
- 1.10
|
|
Total
|
|
Balance
at June 30, 2005
|
|
|
120,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
215,385
|
|
|
107,693
|
|
|
343,077
|
|
|
13,604,307
|
|
|
14,390,654
|
|
Repriced
|
|
|
-
|
|
|
-
|
|
|
13,604,307
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,604,307
|
)
|
|
-
|
|
Granted
|
|
|
-
|
|
|
52,289
|
|
|
5,294,245
|
|
|
5,579,160
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,925,694
|
|
Exercised
|
|
|
(112,500
|
)
|
|
(52,289
|
)
|
|
(7,360,335
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,525,124
|
)
|
Expired
|
|
|
-
|
|
|
-
|
|
|
(4,647,817
|
)
|
|
-
|
|
|
-
|
|
|
(107,693
|
)
|
|
(20,000
|
)
|
|
-
|
|
|
(4,775,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
7,692
|
|
|
-
|
|
|
6,890,400
|
|
|
5,579,160
|
|
|
215,385
|
|
|
-
|
|
|
323,077
|
|
|
-
|
|
|
13,015,714
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
life
(years)
|
|
|
3.6
|
|
|
-
|
|
|
3.2
|
|
|
3.6
|
|
|
3.6
|
|
|
-
|
|
|
3.6
|
|
|
-
|
|
|
3.4
|
|
In
July
2005, the company completed a special warrant offering to certain of the
company’s warrant holders. Under the terms of the offer, the exercise price of
13,604,307 warrants held by holders participating in the offer was reduced
to
$0.35. In connection with this offer, a total of 7,360,335 warrants were
exercised for total proceeds amounting to $2,576,118. Upon exercise of the
warrants under the offer, the holders collectively received 4,688,566 new
warrants at an exercise price of $0.35 per share and 5,579,160 warrants at
an
exercise price of $0.50 per share.
As
a
result of the above offer, the exercise price of 666,154 warrants held by
holders who did not participate in the offer was reduced by between $0.06
and
$0.08 per share to exercise prices ranging between $0.59 and $0.67 per share
which is due to an anti-dilution provision.
The
reduction of the exercise price of the warrants held by holders who participated
in the offer has been accounted for as an inducement. Accordingly, an amount
of
$1,609,000 representing the excess of the aggregate fair value of the new
shares
and warrants issued over the carrying value of the warrants subject to the
reduction less the cash received and the fair value of the broker warrant
issued
has been credited to additional paid in capital and charged to deficit. The
reduction of the exercise price of the warrants held by holders who did not
participate in the offer has been accounted for as a modification of the
outstanding warrants. Accordingly, an amount of $589,000 representing the
excess
of the fair value of the warrants immediately after the reduction over the
fair
value of those warrants immediately prior to the reduction, has been credited
to
additional paid in capital and charged to deficit.
The
above
offering also triggered an anti-dilution provision with respect to the Senior
Secured Convertible Notes issued on February 16, 2005, pursuant to which
the
conversion price on such notes was reduced from $0.65 to $0.35. As a result,
investors holding $985,985 of Senior Secured Convertible Notes exercised
their
rights to convert such notes into 2,817,098 common shares.
19.
Commitments
and Contingencies
Commitments
Minimum
lease payments for the next five years are as follows:
|
|
$
|
|
2008
|
|
|
449,456
|
|
2009
|
|
|
379,148
|
|
2010
|
|
|
253,971
|
|
2011
|
|
|
12,561
|
|
2012
|
|
|
-
|
|
|
|
|
1,095,136
|
|
The
Company leases premises for its various offices located across Canada. Total
rent expense was $647,955 and $400,934 for the year ended June 30, 2007 and
2006, respectively. Total rent expense for the year ended June 30, 2007 includes
an amount recorded as a result of an abandonment of office premises in advance
of the expiration of the lease term. An expense and liability in the amount
of
$111,893 was recorded, calculated using discounted cash flows of the lease
payments remaining, reduced by estimated sublease rentals, with a
credit-adjusted risk-free rate of 6%. The amount will be amortized over the
remaining period of the lease which expires on May 31, 2010.
Litigation
and Settlement Costs
|
i)
|
On
February 7, 2007, a lawsuit was filed by a former employee in Superior
Court of Quebec for a total amount of $256,530 (CAD $273,307),
with
regards to alleged breach of employment contract and wrongful dismissal.
The Company is in the process of preparing its response and intends
to
contest the case vigorously.
|
|
ii)
|
On
March 29, 2007, a lawsuit was filed by Gestion Cheers (Pointe-Claire)
Inc.
under Quebec Law in the Superior Court of Quebec against Canadian
Security
Agency (2004) Inc. (“CSA”), a former operating subsidiary of Manaris. The
plaintiff is suing CSA, amongst other parties, as a defendant in
warranty
and is claiming a total amount of $585,414 (CAD $623,700). The
Company
responded and obtained the Court’s rejection of the
case.
|
|
iii)
|
On
September 27, 2006 our subsidiary C-Chip received a letter claiming
that
the Company is infringing on a patent of another similar device
to that
being sold by C-Chip. C-Chip responded to the alleged claim, following
which verbal communications were exchanged between the parties.
No further
legal action or claim has been undertaken by either of the
parties.
|
|
iv)
|
A
lawsuit was originally filed on December 3, 2002 with the Quebec
Labor
Commission alleging wrongful dismissal. The former employee was
claiming
an indemnity of approximately $143,498 (CAD $160,000). The case
was
brought before the Quebec Court of Appeal, which ordered Avensys
in August
2006 to follow the Quebec Labor Tribunal's decision, and pay an
indemnity
of $160,731 (CAD $179,215) to the former employee. This indemnity
was
recorded as a liability in the consolidated financial statements
of the
Company as at June 30, 2006. During the Fiscal year 2007, payments
were
made to the former employee and the matter was discharged for
approximately the same amount as was accrued in the preceding fiscal
year.
|
20.
Research
and Development Investment Tax Credits
The
Company’s investment tax credit claims previously calculated for the fiscal year
ended June 30, 2006 have been reviewed by the tax authorities, and as a result
of this review, the Company has collected $475,193 more than what had been
originally recorded. The Company records investment tax credits arising from
research and development activities as a reduction of the income tax provision
for the year. The Company applied the above noted excess as a further reduction
of the income tax provision for fiscal 2007.
The
investment tax credits recorded by the Company are subject to review and
approval by taxation authorities and it is possible that the amounts granted
will be different from the amounts recorded by the Company.
21.
Segment Disclosure
The
Company reports segment information in accordance with SFAS No. 131, “Disclosure
About Segments of an Enterprise and Related Information”. Reporting segments are
based upon the Company’s internal organization structure, the manner in which
the Company’s operations are managed, the criteria used by the Company’s chief
operating decision-maker to evaluate segment performance and the availability
of
separate financial information.
The
Company identifies a reportable segment through the internal organizational
structure. The Company’s structure is distributed among two reporting segments,
Fiber & Monitoring and Credit Management, each with different product and
service offerings. The Fiber & Monitoring reporting segment is comprised of
the operations of Avensys and ITF and provides fiber-based technologies and
environmental monitoring solutions. The Credit Management reporting segment
is
comprised of the operations of C-Chip, and offers products and services to
the
credit management marketplace.
Direct
contribution consists of revenues less direct costs. Direct costs include
specific costs of net revenues, sales and marketing expenses, and general
and
administrative expenses over which segment managers have direct discretionary
control, such as marketing and sales programs, customer support expenses,
bank
charges and bad debt write-offs. Expenses over which segment managers do
not
currently have discretionary control, such as site operations costs, product
development expenses, and general and administrative costs, are monitored
by
corporate management and are not evaluated in the measurement of segment
performance.
For
the year ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
Fiber
&
|
|
Credit
|
|
|
|
|
|
Monitoring
|
|
Management
|
|
Consolidated
|
|
Net
revenues from external customers
|
|
|
16,576,124
|
|
|
2,164,437
|
|
|
18,740,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
10,473,196
|
|
|
1,753,608
|
|
|
12,226,804
|
|
Marketing
and sales expense
|
|
|
2,126,108
|
|
|
101,337
|
|
|
2,227,445
|
|
Administrative
expense
|
|
|
1,287,346
|
|
|
325,372
|
|
|
1,612,718
|
|
Research
& development
|
|
|
1,571,572
|
|
|
-
|
|
|
1,571,572
|
|
Depreciation
& amortization
|
|
|
305,209
|
|
|
24,509
|
|
|
329,718
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
15,763,431
|
|
|
2,204,826
|
|
|
17,968,257
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
812,693
|
|
|
(40,389
|
)
|
|
772,304
|
|
Other
operating expenses & indirect costs of net revenues
|
|
|
|
|
|
|
|
|
(3,174,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
(2,401,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
372,269
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
(902,509
|
)
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
(658,630
|
)
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
1,217,948
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
(2,370,754
|
)
|
(1)
-
Relates entirely to the Research & Development activities of the Fiber &
Monitoring segment.
Segment
Disclosure (continued)
For
the year ended June 30, 2006 (Restated) (2)
|
|
|
|
|
|
|
|
|
|
Fiber
&
|
|
Credit
|
|
|
|
|
|
Monitoring
|
|
Management
|
|
Consolidated
|
|
Net
revenues from external customers
|
|
|
10,179,426
|
|
|
319,079
|
|
|
10,498,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
7,059,045
|
|
|
405,665
|
|
|
7,464,710
|
|
Marketing
and sales expense
|
|
|
1,918,171
|
|
|
394,327
|
|
|
2,312,498
|
|
Administrative
expense
|
|
|
1,263,369
|
|
|
537,235
|
|
|
1,800,604
|
|
Research
& development
|
|
|
1,105,484
|
|
|
775
|
|
|
1,106,259
|
|
Depreciation
& amortization
|
|
|
197,492
|
|
|
5,440
|
|
|
202,932
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
11,543,561
|
|
|
1,343,442
|
|
|
12,887,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
(1,364,135
|
)
|
|
(1,024,363
|
)
|
|
(2,388,498
|
)
|
Other
operating expenses & indirect costs of net revenues
|
|
|
|
|
|
|
|
|
(5,238,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
(7,627,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
(18,187
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
(762,488
|
)
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
(3,991,229
|
)
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
351,242
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
(3,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
(12,052,080
|
)
|
|
(1)
-
|
Relates
entirely to the Research & Development activities of the Fiber &
Monitoring segment.
|
|
(2)
-
|
Starting
in fiscal year 2007, the Company revised the measure of segment
profit
regularly reviewed by the Chief Operating Decision Maker. The new
presentation adopted provides research and development expenses
and
depreciation and amortization for each reporting unit. The reporting
units
themselves have not changed from fiscal 2006. As a result, the
fiscal year
2006 information originally presented has been restated to reflect
the
presentation adopted in the current
year.
|
Revenue
from two customers of the Company’s Fiber & Monitoring segment for the year
ended June 30, 2007 and one customer for the year ended June 30, 2006,
represented approximately $9,605,000 (Customer 1 represented approximately
$6,855,000 and Customer 2 represented approximately $2,750,000) and $3,290,000,
respectively, of which the outstanding receivable balances amounted to
approximately $1,838,000 (Customer 1 represented approximately $1,024,000
and
Customer 2 represented approximately $814,000) and $880,000 at June 30, 2007
and
2006, respectively.
The
Company’s long-lived assets, comprised of property, plant & equipment,
intangible assets, and goodwill, substantially all of which are located
in
Canada, are allocated as follows:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Fiber
& Monitoring
|
|
|
10,340,652
|
|
|
10,523,564
|
|
Credit
Management
|
|
|
-
|
|
|
22,567
|
|
All
Other
|
|
|
23,406
|
|
|
55,543
|
|
Total
long-lived assets
|
|
|
10,364,058
|
|
|
10,601,674
|
|
The
Company has three geographic business areas, Americas, Europe and Asia,
determined based on the locations of the customers. The revenues for the
year
ended June 30, 2007 and 2006 for the Americas include approximately $9,299,000
and $1,679,000, respectively, of sales to the United States of America and
approximately $5,968,000 and $5,339,000, respectively, of sales to Canada.
The
revenues for Asia for the year ended June 30, 2007 and 2006 include sales
of
approximately $2,147,000 and $2,888,000, respectively, to China.
Segment
Disclosure (continued)
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Americas
|
|
|
15,471,407
|
|
|
7,018,155
|
|
Europe
|
|
|
962,176
|
|
|
518,072
|
|
Asia
|
|
|
2,306,978
|
|
|
2,962,278
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,740,561
|
|
|
10,498,505
|
|
22.
Income
Taxes
The
Company utilizes the liability method of accounting for income taxes as set
forth in SFAS No. 109, “Accounting for Income Taxes”. Under the liability
method, deferred taxes are determined based on the temporary differences
between
the financial statement and tax bases of assets and liabilities using enacted
tax rates. A valuation allowance is recorded when it is more likely than
not
that some of the deferred tax assets will not be realized. Pursuant to SFAS
109
the Company is required to compute tax asset benefits for net operating losses
carried forward. In assessing the recoverability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all
of the deferred tax assets will not be realized. The ultimate realization
of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. The amount of the deferred tax asset considered realizable could
change materially in the near term based on future taxable income during
the
carry forward period. The potential benefit of net operating losses has not
been
recognized in these financial statements because the Company cannot be assured
it is more likely than not it will utilize the net operating losses carried
forward in future years.
A
reconciliation of the benefit for income taxes at the combined U.S. and Canadian
tax rate compared to the Company’s effective tax rate is as
follows:
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Income
tax at Federal US statutory rate (recovery)
|
|
|
(1,220,801
|
)
|
|
(4,215,777
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
Stock
based compensation not deductible
|
|
|
137,775
|
|
|
137,093
|
|
Change
in valuation allowance
|
|
|
632,423
|
|
|
3,270,461
|
|
Impairment
of goodwill
|
|
|
-
|
|
|
477,593
|
|
Research
and development tax credits
|
|
|
(1,217,948
|
)
|
|
(351,242
|
)
|
Income
tax rate differential of foreign subsidiaries
|
|
|
102,501
|
|
|
311,026
|
|
Change
in income tax rate
|
|
|
-
|
|
|
47,115
|
|
Non-deductible
items and other elements
|
|
|
348,102
|
|
|
(27,511
|
)
|
Income
tax benefit
|
|
|
(1,217,948
|
)
|
|
(351,242
|
)
|
Income
Taxes (continued)
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
tax losses and scientific and experimental development expenses
carried
forward
|
|
|
7,349,975
|
|
|
6,049,110
|
|
Difference
between book and tax depreciation
|
|
|
91,889
|
|
|
110,050
|
|
Reserves
and accruals not deductible for tax purposes
|
|
|
-
|
|
|
345,599
|
|
Research
and development tax credits
|
|
|
94,286
|
|
|
228,125
|
|
Total
deferred tax assets
|
|
|
7,536,150
|
|
|
6,732,884
|
|
Valuation
allowance
|
|
|
(6,216,450
|
)
|
|
(5,584,027
|
)
|
|
|
|
1,319,700
|
|
|
1,148,857
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Difference
between book and tax depreciation
|
|
|
(1,071,869
|
)
|
|
(893,155
|
)
|
Long-term
debt
|
|
|
(247,831
|
)
|
|
(255,702
|
)
|
Investment
tax credits
|
|
|
-
|
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
(1,319,700
|
)
|
|
(1,148,857
|
)
|
Net
tax assets
|
|
|
-
|
|
|
-
|
|
Approximately
$1,000,000 of the valuation allowance disclosed above relates to losses incurred
by Avensys prior to the date of the acquisition by Manaris. Accordingly,
any
reversal of this portion of the valuation allowance in future periods will
be
recorded as a reduction of goodwill and intangible assets when realized.
For
Canadian income tax purposes, the Company has approximately $2,250,000 of
Scientific Research and Experimental Development expenses available indefinitely
to reduce taxable income in future years.
The
Company's Canadian operating losses expire as follows:
|
|
$
|
|
2009
|
|
|
354,486
|
|
2010
|
|
|
2,238,863
|
|
2014
|
|
|
2,489,604
|
|
2015
|
|
|
6,532,362
|
|
2026
|
|
|
9,090,910
|
|
2027
|
|
|
2,378,405
|
|
|
|
|
|
|
|
|
|
23,084,630
|
|
23.
Subsequent
Events
|
a)
|
President
of Subsidiary Company
|
On
July
16, 2007, the Company announced the departure of the President of Avensys.
The
Company will accrue approximately $212,000 of salary expense and $64,684
in
stock-based compensation expense in the first quarter of fiscal 2008 as a
result
of a mutually agreed upon severance agreement (“Agreement”). As part of the
Agreement, the former President has 90 days from the date of the Agreement
to
exercise all vested stock options granted to him in prior periods.
|
b)
|
Cashless
exercise of Series G and Series I warrants
|
In
August
2007, the holders of Series G and Series I warrants exercised, on a cashless
basis, 2,653,845 warrants, respectively, resulting in the issuance of 2,709,090
common shares. The exercise price of the Series G and Series I warrants,
on a
cashless basis, was $0.052. The contractual provisions of the Series G warrants
stipulate that for each such warrant exercised, a new Series K warrant shall
be
issued carrying an exercise price of $.70. Therefore, as a result of the
exercise of 2,653,845 Series G warrants, 2,653,845 Series K warrants were
issued
to the same holders of such warrants. There remains 1,144,131 Series G and
Series I warrants outstanding.
On
August
21, 2007, the Company filed an S-8 with the Securities and Exchange Commission
establishing an Employee Compensation Plan (“Plan”). The Plan is designed to
retain employees, consultants, advisors and professionals (“Participants”) and
reward them for making major contributions to the success of the Company.
These
objectives are accomplished by making long-term incentive awards under the
Plan
thereby providing Participants with a proprietary interest in the growth
and
performance of the Company. The Company registered 4,000,000 common shares
under
the Plan.
|
d)
|
Amended
and Restated 2006 Non Qualified Stock Option Plan
|
On
September 5, 2007, the 2006 Non Qualified Stock Option Plan was amended and
restated to augment the Plan by 5,000,000 stock options.
|
e)
|
Redemption
of Series B Notes and Series B OID
Notes
|
During
the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated
Secured Convertible Promissory Notes and its Original Issue Discount Series
B
Subordinated Secured Convertible Promissory Notes, both originally due February
11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the
holders of the Notes, the Company also redeemed half of the associated Series
Y
and Series Z Warrants (collectively the “Warrants”) previously issued in August
2006 and November 2006 relating to the redeemed Notes. The total purchase
price
for the redemption of the Notes and half of the Warrants was $3.4 million.
The
remaining half of the Warrants that are retained by the holders of the Notes
will have their exercise prices reduced to and fixed at $0.11 per share,
with no
further ratchet or anti-dilution provisions. In connection with the redemption
of the Notes, the Company received a $3.4 million secured loan facility from
Imperium Master Fund, LTD (the “Investor”). The terms of the loan facility state
that interest will be paid by the Company on the unpaid principal amount
at an
annual rate equal to 8.5%. It was the intention of the Company and the Investor
to replace the secured loan facility with a comprehensive refinancing to
facilitate a capital restructuring that will provide the Company with
additional working capital and credit facilities. On September 24, 2007,
the
Company entered into a Securities Purchase and Loan Agreement (“SPL Agreement”)
with the Investor for the sale of a 6% Original Issue Discount Senior Secured
Convertible Note (“Convertible Note”) in the amount of $4,708,900. The principal
value and the gross proceeds of the Convertible Note is $4,000,000. The gross
proceeds will be used to repay the secured loan facility, with the balance
of
funds to be used for working capital purposes. The Convertible Note matures
on
September 24, 2012 and the original principal amount is convertible into
common
shares of the Company at a conversion price of $0.11. The principal value
will
accrete to the value of the Convertible Note over a two year period and will
subsequently accrue interest at 6%. Monthly installments of principal and
interest will be payable commencing after the second year up to the maturity
date. The SPL Agreement also provides the holder of the Convertible Note
with a
Warrant to purchase up to 20,276,190 shares of the Company’s outstanding common
stock on a fully diluted basis. On August 22, 2007, the Company issued to
the
holder of the Convertible Note a Warrant to purchase up to 5% of the Company’s
outstanding common stock on a fully diluted basis. In addition, the SPL
Agreement provides the Company with a $2,500,000 Working Capital Facility.
In
connection with the redemption of the Notes, the Company will record a non-cash
charge of approximately $1.4 million in the first quarter of fiscal
2008.