Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Avensys
Corporation (the “Company”) operates the following wholly-owned
subsidiaries:
|
|
·
|
Avensys
Inc. ("AVI"), which develops optical components & sensors and provides
environmental monitoring solutions. AVI 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
Technology License Agreement (Note 3), 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,
and in December 2007, to Avensys Corporation. The Company has achieved
significant revenue from acquired companies and also has disposed of companies.
The Company’s assets and operations at December 31, 2007 are located largely in
Quebec and in Ontario, Canada. The Company currently derives the substantial
portion of its revenues from its AVI subsidiary.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
2.
|
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.
Interim
Financial Information
The
financial information as at December 31, 2007 and for the three and six month
periods ended December 31, 2007 and 2006 is unaudited. In the opinion of
management, all adjustments necessary to present fairly the results of these
periods have been included. The adjustments made were of a normal-recurring
nature. The results of operations for the six month period ended December 31,
2007 are not necessarily indicative of the operating results anticipated for
the
full year. The financial statements follow the same accounting principles and
methods of their application as the financial statements for the year ended
June
30, 2007, except for the provisions of FIN 48, which were applied effective
July
1, 2007.
Basis
of
Consolidation
These
consolidated financial statements include the accounts of the Company and its
subsidiaries. Consolidated companies include: a) 100% of AVI and its
subsidiaries, Fizians Inc., of which AVI owns 70% of its outstanding shares,
and
ITF Laboratories Inc. (“ITF”), which has been determined to be a variable
interest entity and for which AVI 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.
Advertising
The
Company’s advertising costs, which amounted to $23,013 and $27,317 for the three
and six month periods ended December 31, 2007, respectively, and $35,627 and
$60,127 for the three and six month periods ended December 31, 2006,
respectively, 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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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.
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.
AVI
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 3). Revenue is recognized when
proof is obtained that the end-user has been delivered the devices by the
Licensee and collectability is reasonably assured.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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 $100,878 (CAD$100,000) was issued by Avensys
Corporation to partially guarantee the AVI line of credit (Note 7). A term
deposit, maturing on October 15, 2008 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
|
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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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. Work in process inventory includes direct materials, direct
labor
and the proportionate share of production overhead costs.
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, as at
June
30, 2007, 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, as at June 30, 2007, approximately $2.8 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.
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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements
a)
Recent
Accounting Pronouncements Adopted During Fiscal Year 2008
The
Company, as required, adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”
(“SFAS 109”), effective July 1, 2007. FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. With respect to a minimum recognition
threshold, FIN 48 requires that the Company recognize, in its financial
statements, the impact of a tax position if that position is more likely than
not of being sustained on an audit, based on the technical merits of the
position. In addition, FIN 48 specifically excludes income taxes from the scope
of Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies”. FIN 48 applies to all tax positions related to income taxes that
are subject to SFAS 109, including tax positions considered to be routine.
As a
result of the implementation, no adjustment was required to the amount of the
unrecognized tax benefits.
The
Company recognizes interest and penalties related to uncertain tax positions
in
interest expense. As at September 30, 2007, the Company made no provisions
for
interest or penalties related to uncertain tax positions.
The
Company and its subsidiaries file income tax returns in Canadian and U.S.
federal jurisdictions, and various provincial jurisdictions. The Company’s
federal income tax returns are generally subject to examination for a period
of
three years after filing of the respective return in the U.S. and four years
in
Canada.
In
addition, upon inclusion of the Canadian operating losses and Experimental
Development unclaimed expenses carryforward tax benefits, from prior tax years,
in future tax returns, the related tax benefit for the period in which the
benefit arose may be subject to examination.
b)
Recent
Accounting Pronouncements Adopted During Fiscal Year 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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
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
|
|
c)
Recent
Accounting Pronouncements Not Yet Adopted
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.
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
In
December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, Business Combinations. SFAS 141R
expands the definition of a business combination and requires the acquisition
method of accounting to be used for all business combinations and an acquirer
to
be identified for each business combination. SFAS 141R also requires that all
assets, liabilities, contingent considerations, and contingencies of an acquired
business be recorded at fair value at the acquisition date. In addition, SFAS
141R establishes requirements in the recognition of acquisition costs,
restructuring costs and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties. SFAS 141R is to be applied
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating the impact of the adoption of the provisions of SFAS 141R on its
consolidated financial statements.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, SFAS 160 requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the non-controlling interest will be included in consolidated net income on
the
face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest.
In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the non-controlling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parents and its non-controlling interest. SFAS is effective
for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. The Company is
currently evaluating the impact of the adoption of the provisions of SFAS 160
on
its consolidated financial statements.
The
comparative Consolidated Financial Statements have been reclassified from
statements previously presented to conform to the presentation adopted in the
current year.
|
3.
|
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 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 were originally to be applied against the principal and
interest balance of a loan made to C-Chip from the former supplier (Note 7),
which at the time of the Agreement had a balance outstanding of $1,143,321.
Effective July 1, 2007, the Company and the former supplier signed an amendment
to the Agreement whereby the royalties payable and the loan repayment would
each
be settled on a cash basis on the first working day following the end of each
quarter. The amendment is applicable to all royalties earned since the inception
of the Agreement. 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 of fiscal
2007.
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 thereafter
shall have an option to purchase C-Chip’s intellectual property within 90 days
of the Repayment Date.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Other
Receivables
|
|
|
|
|
|
|
Investment
tax credits receivable
|
|
|
1,366,351
|
|
|
1,081,787
|
|
|
Sales
tax receivable
|
|
|
35,465
|
|
|
39,825
|
|
|
Grants
receivable
|
|
|
-
|
|
|
9,877
|
|
|
Other
|
|
|
6,600
|
|
|
35,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,408,416
|
|
|
1,167,241
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
867,845
|
|
|
726,484
|
|
|
Work
in process
|
|
|
200,328
|
|
|
179,659
|
|
|
Finished
goods
|
|
|
1,078,751
|
|
|
572,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146,924
|
|
|
1,478,835
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,810,085
|
|
|
2,961,952
|
|
|
Payroll
and benefits
|
|
|
704,597
|
|
|
510,777
|
|
|
Income
taxes payable
|
|
|
1,795
|
|
|
4,189
|
|
|
Rent
payable
|
|
|
37,237
|
|
|
34,648
|
|
|
Deferred
revenue
|
|
|
164,389
|
|
|
173,517
|
|
|
Lease
termination
|
|
|
60,745
|
|
|
78,323
|
|
|
Sales
tax payable
|
|
|
72,110
|
|
|
14,494
|
|
|
Provision
for Warranty
|
|
|
223,405
|
|
|
151,987
|
|
|
Other
|
|
|
215,644
|
|
|
62,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,290,006
|
|
|
3,992,847
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
5.
|
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, AVI 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 AVI. The ALI Agreement was
for a
period of five years with a two-year renewal period and calls for ALI to provide
AVI 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 $504,388 (CAD$500,000). ALI provided
research & development for AVI only. However, it may also have entered into
agreements with third parties. ALI has no financing other than amounts received
from AVI.
As
a
result of the above, ALI had been included in the consolidated financial
statements commencing in the year ended June 30, 2005 since AVI was the primary
beneficiary.
During
the year ended June 30, 2006
,
ALI
purchased
the
R&D assets of ITF Optical Technologies Inc. (‘ITF transaction”) as part of a
business combination. As a result of the ITF transaction, AVI's ownership of
the
voting stock of ALI decreased from 49% to 42%. Following this acquisition,
ALI
continues to qualify as a VIE, of which AVI is the primary beneficiary.
Consequently, ALI will continue to be consolidated by AVI and Avensys
Corporation following the ITF transaction. Following this transaction, ALI
changed its name to ITF Laboratories Inc.
ITF
Laboratories Inc. (“ITF”) provides research & development to AVI and other
parties. As a result, ITF continues to be included in the consolidated financial
statements of the Company for the three and six month periods ended December
31,
2007, since AVI is the primary beneficiary. The impact of including the accounts
of ITF in the consolidated balance sheet as at December 31, 2007 consists of
additions to current assets of $2,659,091 (June 30, 2007 - $1,862,614), net
property and equipment of $968,960 (June 30, 2007 - $903,564), intangible assets
of $273,044 (June 30, 2007 - $344,892) and current liabilities of $1,382,545
(June 30, 2007 - $867,218). The impact on the consolidated statement of
operations for the three and six month periods ended December 31, 2007 was
an
increase in revenue of $975,448 and $1,337,889, respectively (three and six
month periods ended December 31, 2006, $444,769 and $895,436, respectively),
an
increase in expenses of $1,466,691 and $1,663,891, respectively (three and
six
month periods ended December 31, 2006, $37,439 and $340,053, respectively),
and
an increase in the income tax benefit from refundable investment tax credits
of
$425,422 and $594,423, respectively (three and six month periods ended December
31, 2006, $164,501 and $529,102, respectively). The increase in expenses
includes an amount for research and development expenses of $1,247,362 and
$1,592,981, respectively (three and six month periods ended December 31, 2006,
$123,017 and $499,764, respectively).
|
6.
|
Related
Party Transactions and Balances
|
The
total
amount due to a shareholder of the Company at December 31, 2007 is $40,000
(June
30, 2007 - $40,000). The amount due is non-interest bearing, unsecured and
has
no fixed terms of repayment.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
7.
|
Bank
and Other Loans Payable
|
AVI
maintains a bank line of credit from a financial institution for an authorized
amount of $1,371,936 (CAD$1,360,000), which bears interest at the Canadian
bank
prime rate (December 31, 2007 - 6%; June 30, 2007 - 6%) plus 1.5%. The
outstanding balance under the line of credit as at December 31, 2007 amounted
to
$262,013 (CAD $259,733) (June 30, 2007 $253,125 - CAD$269,679). AVI has
designated its accounts receivable totaling $3,631,596 (CAD $3,600,001) and
inventories totaling $2,146,924 (CAD $2,128,246) as collateral for the line
of
credit. AVI renewed the bank line of credit in December 2007. According to
terms
of the new bank line of credit agreement, AVI is subject to certain financial
covenants, which are to be calculated as at the fiscal year end of AVI, June
30,
2008.
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 3, the
balance outstanding under the facility as at December 31, 2007 was reduced
to
$355,733 - CAD $352,639 (June 30, 2007 $708,245 - CAD $754,564).
AVI
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 fiscal 2007 leaving a balance owing
at
June 30, 2007 of $92,868 (CAD $98,942). AVI repaid the balance of the demand
loan during the quarter ended September 30, 2007. It also obtained additional
investment tax credit financing during the quarter ended September 30, 2007
in
the amount of $605,266 (CAD $600,000). 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.
In
connection with the issue of a Senior Secured Original Issue Discount
Convertible Debenture (Note 10 b), the Company obtained access to a $2,500,000
Working Capital Facility (the “Facility”). On November 2, 2007, the Company
obtained $500,000 from the Facility in the form of a Senior Secured Working
Capital Note (“WC Note”), bearing interest at 8.5% payable at maturity, maturing
on February 2, 2008 and repayable on demand. The balance outstanding on the
note
at December 31, 2007 was $500,000. On February 2, 2008, the Company renewed
the
$500,000 WC Note on the same terms and conditions and the maturity date was
extended to May 2, 2008.
The
details of bank and other loans payable is as follows:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Secured
bank line of credit, bearing interest at Canadian bank prime rate
plus
1.5%
|
|
|
262,013
|
|
|
253,125
|
|
|
Credit
facility, bearing interest at 10%
|
|
|
355,733
|
|
|
708,245
|
|
|
Investment
tax credit financing, bearing interest at 18%, repayable on
demand
|
|
|
605,266
|
|
|
92,868
|
|
|
Senior
Secured Working Capital Note, bearing interest at 8.5%, maturing
February
2, 2008, repayable on demand
|
|
|
500,000
|
|
|
-
|
|
|
|
|
|
1,723,012
|
|
|
1,054,238
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
8.
|
Balance
of Purchase Price and Derivative Liability on ITF
Purchase
|
Since
the
acquisition of ITF, the Company has recorded a balance of purchase price payable
and derivative liability related to an embedded conversion option.
The
ITF
transaction Preferred Shareholder arrangement entitling the ITF Preferred
Shareholders, being the former shareholders of ITF Optical Technologies Inc.,
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 convertible
liability debt instrument as at December 31, 2007 was $1,462,423 (June 30,
2007
- $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 $8,201 as of December 31, 2007 (June 30,
2007 - $17,045). The fair value of the embedded conversion option is determined
by using the Black-Scholes model.
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Mortgage
loan secured by the universality of AVI's intangible and movable
tangible
assets (December 31, 2007 - CAD $224,000), bearing interest at
the
lender's prime rate (December 31, 2007 - 8.00%; June 30, 2007 -
6.0%) plus
1.75%, payable in monthly instalments of CAD$7,000 plus interest,
maturing
in November 2010.
|
|
|
225,966
|
|
|
229,961
|
|
|
Capital
lease obligations (December 31, 2007 - CAD $35,705), bearing interest
at
rates between 6.17% and 10.37%, maturing between May 2008 and November
2010.
|
|
|
36,018
|
|
|
38,768
|
|
|
Secured
note collateralized by the financed asset (December 31, 2007 -
CAD
$28,244), bearing zero interest, payable in 48 monthly instalments
of CAD
$614, maturing October 2011.
|
|
|
28,492
|
|
|
-
|
|
|
|
|
|
290,476
|
|
|
268,729
|
|
|
Less:
Current portion of long-term debt
|
|
|
86,622
|
|
|
94,317
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
203,854
|
|
|
174,412
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt, capital leases, and secured note are
as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
86,622
|
|
|
|
|
|
2009
|
|
|
109,078
|
|
|
|
|
|
2010
|
|
|
88,583
|
|
|
|
|
|
2011
|
|
|
6,194
|
|
|
|
|
|
2012
|
|
|
-
|
|
|
|
|
|
Total
|
|
|
290,476
|
|
|
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
|
10.
|
Convertible Debentures
|
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
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 10
(a))
|
|
|
-
|
|
|
2,470,867
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Original Issue Discount Convertible Debenture at 6% (original
principal amount of $4,000,000) maturing September 24, 2012 (Note
10(b))
|
|
|
986,238
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Convertible Debentures bearing interest at 12% maturing March 1,
2008,
original principal amount of $402,091 (CAD$400,000) (Note 10
(c))
|
|
|
403,511
|
|
|
373,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389,749
|
|
|
2,843,977
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Current portion of convertible debentures
|
|
|
403,511
|
|
|
1,568,519
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
986,238
|
|
|
1,275,458
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments on the convertible debentures, by fiscal year, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
403,511
|
|
|
|
|
|
2009
|
|
|
-
|
|
|
|
|
|
2010
|
|
|
1,177,225
|
|
|
|
|
|
2011
|
|
|
1,569,633
|
|
|
|
|
|
2012
|
|
|
1,569,633
|
|
|
|
|
|
Thereafter
|
|
|
392,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,112,411
|
|
|
|
|
|
Less:
Impact of accretion / present value
|
|
|
3,722,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,389,749
|
|
|
|
|
|
|
a)
|
Series
B Subordinated Secured Convertible
Debentures
|
During
the first quarter, 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
have had 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 recorded a non-cash
charge of $1,422,577 in the first quarter which is included as part of Other
Expenses in the Statement of Operations and Comprehensive Loss. At December
31,
2007, the outstanding principal amount on the Notes was zero.
As
a
result of the redemption of the Notes, the security relating to the Notes has
been released.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Convertible
Debentures (continued)
Prior
to
the redemption, the Company recorded the issuance of the Series B Subordinated
Secured Convertible Debentures as follows:
|
|
(i)
|
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.
|
|
|
(ii)
|
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 were 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,
were 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 were also accounted
for
as derivative liabilities. The carrying amounts of the Series B Notes
and
the OID Notes were 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 used the same model to value these
elements
on a quarterly basis.
|
|
|
(iii)
|
The
convertible notes included both Series B Notes and OID Notes. The
Series B
Notes were non-interest bearing and the OID Notes effectively provided
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").
|
|
|
(iv)
|
The
Series B Notes and OID Notes would mature thirty (30) months from
the date
of issuance (the "Maturity Date") and were 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 were 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
was 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 have
paid 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 would be
repaid in
shares at the particular repayment date, could 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 was 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.
|
|
|
(v)
|
The
Company's obligations under the Purchase Agreement and the Notes
were
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 contained 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.
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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 dates, June 30, 2007 and December 31,
2007.
|
|
|
Issue
Date
|
|
Expiry
Date
|
|
Value
at August 11, 2006
|
|
Value
at November 17, 2006
|
|
Value
at June 30, 2007
|
|
Value
at December 31, 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
|
|
|
2,587
|
|
|
Series
Z Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
266,168
|
|
|
|
|
|
15,412
|
|
|
38,795
|
|
|
Series
Y Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
6,146
|
|
|
436
|
|
|
1,847
|
|
|
Series
Z Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
120,870
|
|
|
11,009
|
|
|
27,711
|
|
|
|
|
|
|
|
|
|
|
|
888,787
|
|
|
363,246
|
|
|
38,848
|
|
|
70,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
70,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities (Placement Fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
W Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
60,920
|
|
|
|
|
|
3,705
|
|
|
4,141
|
|
|
Series
Y Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
1,170
|
|
|
|
|
|
50
|
|
|
317
|
|
|
Series
Z Warrants
|
|
|
8/11/2006
|
|
|
11/9/2010
|
|
|
21,959
|
|
|
|
|
|
1,272
|
|
|
4,759
|
|
|
Series
W Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
27,552
|
|
|
2,646
|
|
|
2,958
|
|
|
Series
Y Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
502
|
|
|
36
|
|
|
227
|
|
|
Series
Z Warrants
|
|
|
11/17/2006
|
|
|
11/9/2010
|
|
|
|
|
|
9,894
|
|
|
908
|
|
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
84,049
|
|
|
37,948
|
|
|
8,617
|
|
|
15,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivative Liabilities
|
|
|
|
|
|
|
|
|
972,836
|
|
|
401,194
|
|
|
47,465
|
|
|
86,741
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Convertible
Debentures (continued)
|
|
b)
|
Senior
Secured Original Issue Discount Convertible
Debenture
|
In
connection with the redemption of the Notes described in Note 10(a), 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 would 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% Senior Secured Original Issue Discount Convertible Debenture (“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 were used to repay
the
secured loan facility of $3.4 million, being the amount which had been used
to
repay the Notes described in Note 10(a), with the balance of funds, $0.6
million, for the Company’s working capital purposes.
The
Convertible Debenture 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
instalments 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 Series Q warrants to purchase, subject to
adjustment, 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 Series P warrants, representing compensation for advisory
services rendered to the Company, to purchase up to 5% of the Company’s
outstanding common stock, initially amounting to 8,091,403 shares and subject
to
adjustment, on a fully diluted basis. The warrants have an exercise price of
$0.11, subject to adjustment, and expire after five years. In addition, the
SPL
Agreement provides the Company with a $2,500,000 Working Capital Facility.
In
accordance with EITF 00-19, EITF 05-2, EITF 05-4, FASB 133 and APB 14, the
Company allocated $479,816 to the Series P Warrants and recognized an embedded
conversion option feature of $1,711,199. The Series P warrants and the embedded
conversion option feature components are accounted for as derivative
liabilities. The Company allocated $162,500 and $53,624, respectively, to the
common stock and warrants issued to the placement agent, and allocated $960,259
to the Series Q warrants, all of which were recorded as additional paid-in
capital. The Company allocated the remaining proceeds to the Convertible
Debenture in the amount of $848,725. The carrying amount of the Convertible
Debenture will be increased by periodic accretion under the effective interest
method. The Company used the Black-Scholes option pricing model to value the
Series P warrants and the embedded conversion option feature, recorded as
derivative liabilities, at the issue date and uses the same model to value
these
elements on a quarterly basis. The Company recorded deferred financing costs
of
$446,124 at the issue date, representing common stock and warrants issued to
the
placement agent valued at $162,500 and $53,624, respectively, and cash fees
paid
of $230,000. These deferred financing costs will be amortized on a straight-line
basis over the term of the Convertible Debenture. At December 31, 2007, 2007,
the outstanding principal amount on the Convertible Debenture was $4,089,259.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Convertible
Debentures (continued)
The
following table illustrates the values of the various components of the
financing at the issue date, September 24, 2007, and the balance sheet date,
December 31, 2007.
|
|
|
|
|
|
|
Value
at
September
24,
2007
|
|
Value
at
December
31,
2007
|
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Series
P warrants
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
479,816
|
|
|
332,708
|
|
|
Beneficial
Conversion Option - Convertible debenture
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
1,711,199
|
|
|
1,533,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,191,015
|
|
|
1,866,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value of Original Issue Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Convertible Debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
848,725
|
|
|
986,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for fees (1)
|
|
|
9/24/2007
|
|
|
|
|
|
162,500
|
|
|
162,500
|
|
|
Warrants
issued for fees
|
|
|
9/24/2007
|
|
|
|
|
|
53,624
|
|
|
53,624
|
|
|
Series
Q warrants
|
|
|
9/24/2007
|
|
|
|
|
|
960,259
|
|
|
960,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,176,383
|
|
|
1,176,383
|
|
|
Total
|
|
|
|
|
|
|
|
|
4,216,123
|
|
|
4,028,825
|
|
(1)
Common shares to the Placement Agent totaling 1,477,273 were issued in the
third
quarter of fiscal year 2008.
In
connection with this financing, specifically the shares to be delivered upon
potential conversion of the Convertible Debenture and the exercise of the
Warrants, the Company was obligated to file a registration statement with the
Securities and Exchange Commission (“SEC”). The Company’s registration
statement, filed with the SEC, became effective as of January 14, 2008.
To
secure
payment of the principal amount of the Convertible Note, the Company
hypothecated, in favour of the holder of the Convertible Debenture, the
universality of all of the immoveable and moveable assets, corporeal and
incorporeal, present and future of the Company.
The
Convertible Debenture contains events of default that would permit the Investor
to demand repayment.
The
SPL
Agreement with respect to this Convertible Debenture contains certain covenants
(a) related to the conduct of the business of the Company and its subsidiaries;
(b) related to certain financial covenants; (c) related to creation or
assumption of liens other than liens created pursuant to the SPL Agreement,
as
defined in the SPL Agreement; (d) for so long as this Note remains outstanding,
the Company shall not, without the consent of the holder of the Convertible
Debenture, 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 this Convertible Debenture provided
however that the Company could have a certain maximum amount of outstanding
bank
debt.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Convertible
Debentures (continued)
|
|
c)
|
Unsecured
Convertible Debentures
|
With
the
acquisition of AVI in February 2005, 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,
AVI
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 the Company. Pursuant to the conversion agreement,
the Company filed a registration statement that included 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 AVI, 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, AVI 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, $403,511 (CAD$400,000)
were modified to be convertible into 330,251 shares of the Company. At December
31, 2007, the discount related to the conversion feature is zero (June 30,
2007
- $2,336).
At
December 31, 2007, the Company is authorized to issue 500,000,000 shares of
common stock. At December 31, 2007, the Company has 97,096,844 (June 30, 2007
-
93,437,654) common shares issued and outstanding and 402,903,156 common shares
available for issuance.
For
the
six month period ended December 31, 2007:
|
|
a)
|
In
the quarter ended September 30, 2007, the Company issued 649,955
common
shares representing scheduled principal payments on the Series B
Notes and
the OID Notes.
|
|
|
b)
|
In
August 2007, pursuant to the cashless exercise of warrants described
in
Note 12(b) and other warrants exercised on a cashless basis, the
Company
issued 2,759,235 common shares.
|
|
|
c)
|
In
August 2007, the Company issued 250,000 registered common shares
as
compensation for legal services.
|
For
the
six month period ended December 31, 2006:
|
|
a)
|
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.
|
|
|
b)
|
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 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.
|
|
|
c)
|
The
Company issued 82,933 common shares to settle outstanding payables
in the
amount of $25,709.
|
|
|
d)
|
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 255,080
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.
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Common
Stock (continued)
Common
stock reserved for issuance at December 31, 2007 was as
follows:
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
Options
outstanding
|
|
|
7,789,273
|
|
|
8,661,070
|
|
|
Reserved
for future issuance
|
|
|
6,237,041
|
|
|
365,244
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Plan (1)
|
|
|
|
|
|
|
|
|
Reserved
for future issuance
|
|
|
3,750,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
44,125,399
|
|
|
17,752,882
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of OID Senior Secured Convertible Note
|
|
|
36,363,636
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B Notes and OID Notes
|
|
|
-
|
|
|
48,325,000
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of unsecured convertible debentures
|
|
|
330,251
|
|
|
330,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,595,600
|
|
|
75,434,447
|
|
|
|
(1)
|
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. In
August
2007, the Company issued 250,000 common shares from the Plan as
compensation for legal services.
|
|
12.
|
Stock
Options and Warrants
|
Under
the
Avensys Corporation 2006 Nonqualified Stock Option Plan (‘Plan”), the Company
may grant options to its Directors, Officers and employees for the acquisition
of 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. On
September 5, 2007, 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 three and six month periods ended December 31, 2007, zero and 200,000 (three
and six month periods ended December 31, 2006, 2,650,000 and 2,700,000,
respectively) stock options were granted to employees and
directors.
During
the three and six month period ended December 31, 2007, zero and 200,000 stock
options were granted to employees and directors with exercise prices at the
market price on the respective grant dates (three and six month periods ended
December 31, 2006, 2,650,000 and 2,700,000, respectively).
During
the three and six month period ended December 31, 2007, zero stock options
were
granted to employees and directors with exercise prices below the market price
on the respective grant dates (zero for the three and six month periods ended
December 31, 2006).
During
the three and six month periods ended December 31, 2007, zero (zero for the
three and six month periods ended December 31, 2006) stock options were granted
to non-employees.
During
the three and six months periods ended December 31, 2007, zero stock options
were granted to non-employees with exercise prices at the market price on the
respective grant dates (zero for three and six month periods ended December
31,
2006)
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Stock
Options and Warrants (continued)
During
the three and six month periods ended December 31, 2007, zero stock options
were
granted to non-employees with exercise prices below the market price on the
respective grant dates (zero for the three and six month periods ended December
31, 2006).
During
the year ended June 30, 2007, a certain director resigned and is no longer
providing any services to Avensys Corporation. Under his stock option agreement,
the director forfeited the stock options that would have vested beyond his
termination date, and no stock based compensation expense was recorded for
the
forfeited stock options.
|
A
summary of the changes in the Company's common share stock options
is
presented below:
|
|
|
|
December
31, 2007
|
|
June
30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Number
of
|
|
Average
Exercise
|
|
Number
of
|
|
Average
Exercise
|
|
|
|
|
Options
|
|
Price
($)
|
|
Options
|
|
Price
($)
|
|
|
Balance
at beginning of the year
|
|
|
8,661,070
|
|
|
0.42
|
|
|
4,486,750
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
200,000
|
|
|
0.08
|
|
|
4,563,903
|
|
|
0.22
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Forfeited
|
|
|
(1,071,797
|
)
|
|
(0.23
|
)
|
|
(389,583
|
)
|
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
7,789,273
|
|
|
0.43
|
|
|
8,661,070
|
|
|
0.42
|
|
Additional
information regarding options outstanding as at December 31, 2007 is as
follows:
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
|
|
|
|
Weighted
average
exercise
price
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
0.00
– 0.25
|
|
|
1,592,334
|
|
|
6.27
|
|
|
0.09
|
|
|
1,573,584
|
|
|
0.09
|
|
|
0.26
– 0.50
|
|
|
3,078,189
|
|
|
6.12
|
|
|
0.31
|
|
|
1,737,280
|
|
|
0.33
|
|
|
0.51
– 0.75
|
|
|
1,895,000
|
|
|
1.46
|
|
|
0.67
|
|
|
1,895,000
|
|
|
0.67
|
|
|
0.76
– 1.00
|
|
|
1,223,750
|
|
|
1.76
|
|
|
0.83
|
|
|
1,223,750
|
|
|
0.83
|
|
|
|
|
|
7,789,273
|
|
|
4.33
|
|
|
0.43
|
|
|
6,429,614
|
|
|
0.47
|
|
The
weighted average fair value of options granted for the three and six month
periods ended December 31, 2007 and 2006 was nil and $0.07, respectively, as
summarized below.
|
|
|
Number
of options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
grant-date
fair value
|
|
|
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Options
granted during the six month periods ended December 31, 2007and
2006,
exercise prices below market price at time of grant
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Options
granted during the three month periods ended December 31, 2007
and 2006,
exercise prices equal to market price at time of grant
|
|
|
200,000
|
|
|
2,700,000
|
|
|
0.08
|
|
|
0.25
|
|
|
0.08
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted during the three month periods ended December 31, 2007and
2006
|
|
|
200,000
|
|
|
2,700,000
|
|
|
0.08
|
|
|
0.25
|
|
|
0.08
|
|
|
0.21
|
|
Stock
Options and Warrants (continued)
The
Company recognized stock-based compensation for employees and directors in
the
amount of $152,146 and $87,422 for the six month periods ended December 31,
2007
and 2006, respectively, and $40,107 and $69,694 for the three month periods
ended December 31, 2007 and 2006, respectively. The Company had no amounts
of
stock-based compensation to non-employees for the three and six month periods
ended December 31, 2007 and 2006, respectively.
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:
|
|
|
Six
month period ended
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Risk
- free interest rate
|
|
|
4.29
|
%
|
|
3.96
|
%
|
|
Expected
volatility
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Expected
life of stocks options (in years)
|
|
|
5.16
|
|
|
5.95
|
|
|
Assumed
dividends
|
|
|
None
|
|
|
None
|
|
As
at
December 31, 2007, the Company has $200,179 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 - $79,206, and June 30, 2009 - $120,973).
There
were no stock options exercised during the six month period ended December
31,
2007. There were no stock options exercised during the year ended June 30,
2007.
The impact of cash receipts from the exercise of stock options would be included
in financing activities in the accompanying consolidated statements of cash
flows.
Warrants
outstanding as at December 31, 2007
|
|
|
Outstanding
|
|
Warrant
exercise prices
|
|
|
Series
E
|
|
|
1,803,333
|
|
|
0.31
|
|
|
Series
G
|
|
|
1,144,131
|
|
|
0.05
|
|
|
Series
H
|
|
|
890,593
|
|
|
0.35
|
|
|
Series
I
|
|
|
1,144,131
|
|
|
0.05
|
|
|
Series
J
|
|
|
1,781,184
|
|
|
0.50
|
|
|
Series
K
|
|
|
2,653,845
|
|
|
0.70
|
|
|
Series
P
|
|
|
8,091,403
|
|
|
0.11
|
|
|
Series
Q
|
|
|
20,276,190
|
|
|
0.11
|
|
|
Series
T
|
|
|
1,936,937
|
|
|
0.11
|
|
|
Series
W
|
|
|
711,492
|
|
|
0.35
|
|
|
Series
Y
|
|
|
162,794
|
|
|
0.11
|
|
|
Series
Z
|
|
|
2,441,873
|
|
|
0.11
|
|
|
IB-01
|
|
|
7,692
|
|
|
0.00001
|
|
|
IB-02
|
|
|
248,532
|
|
|
0.48
|
|
|
IB-03
|
|
|
374,171
|
|
|
0.53
|
|
|
IB-06
|
|
|
457,098
|
|
|
0.05
|
|
|
Total
|
|
|
44,125,399
|
|
|
0.18
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Stock
Options and Warrants (continued)
Changes
in the warrants outstanding for the three month period ended December 31,
2007
was as follows:
|
Exercise
prices
|
|
0.00001
|
|
0.05
|
|
0.11
|
|
0.31
|
|
0.35
|
|
0.45
|
|
0.48
|
|
0.50
|
|
0.53
|
|
0.65
|
|
0.70
|
|
Total
|
|
|
Balance
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
|
|
|
Ratchet
pricing effect
|
|
|
-
|
|
|
-
|
|
|
3,734,257
|
|
|
-
|
|
|
-
|
|
|
(3,500,865
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(233,392
|
)
|
|
-
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
30,304,530
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,653,845
|
|
|
32,958,375
|
|
|
Exercised
|
|
|
-
|
|
|
(5,456,268
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,456,268
|
)
|
|
Expired
/ Forfeited
|
|
|
-
|
|
|
-
|
|
|
(1,129,590
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,129,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2007
|
|
|
7,692
|
|
|
2,745,360
|
|
|
32,909,197
|
|
|
1,803,333
|
|
|
1,602,085
|
|
|
-
|
|
|
248,532
|
|
|
1,781,184
|
|
|
374,171
|
|
|
-
|
|
|
2,653,845
|
|
|
44,125,399
|
|
|
Weigthed
Average remaining contractual life (years)
|
|
|
2.13
|
|
|
2.20
|
|
|
4.41
|
|
|
2.13
|
|
|
2.45
|
|
|
-
|
|
|
2.13
|
|
|
2.13
|
|
|
2.13
|
|
|
-
|
|
|
1.65
|
|
|
3.82
|
|
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.
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.
|
13.
|
Commitments
and Contingencies
|
Commitments
|
Minimum
lease payments for the next five years are as
follows:
|
|
|
|
$
|
|
|
2008
|
|
|
213,917
|
|
|
2009
|
|
|
373,837
|
|
|
2010
|
|
|
236,058
|
|
|
2011
|
|
|
13,500
|
|
|
2012
|
|
|
-
|
|
|
|
|
|
837,313
|
|
The
Company leases premises for its offices located across Canada. Total rent
expense was $110,273 and $206,856 for the three and six month periods ended
December 31, 2007, respectively, and $223,571 and $376,877 for the three and
six
month periods ended December 31, 2006, respectively. Total rent expense for
the
three and six month periods ended December 31, 2006 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 is being amortized over the remaining period of the lease which expires
on May 31, 2010.
Litigation
and Settlement Costs
On
February 7, 2007, a lawsuit was filed by a former employee in Superior Court
of
Quebec for a total amount of $275,706 (CAD $273,307), with regards to alleged
breach of employment contract and wrongful dismissal. The Company has filed
its
response, and is in the process of contesting the case vigorously.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Commitments
and Contingencies (continued)
Contingency
On
April
18, 2006, Avensys Corporation, AVI 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.
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 Avensys Corporation
common stock (2,550,795 common shares).
The
2,550,795 common shares were originally issued as restricted stock and became
freely tradable on November 9, 2006 (“Free Date”). The holders of these shares
were 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 Avensys Corporation on the OTCBB in the previous
three month period. Notwithstanding the foregoing, the holders of such shares
were permitted to sell any number of the common shares in any three month period
if the closing price of the common shares of Avensys Corporation on the date
of
the sale of the common shares was higher than a specified reference price,
which
was $0.342. The holders of the common shares were also 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 sold their
common shares through the facilities of the OTCBB at a price which was less
than
the specified reference price, Avensys Corporation would, 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 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 Avensys Corporation equal to the cumulative shortfall.
On November 9, 2007, the shortfall based on actual common shares sold was
$34,653 and the holders elected to be paid in common shares using the November
9, 2007 closing share price of $0.075, with such amount totaling 462,035 common
shares. These shares shall be issued in the third quarter of fiscal year 2008.
The payment of a shortfall amount will not have any impact on the earnings
of
the Company.
14.
Research
and Development Investment Tax Credits
The
Company’s investment tax credit recovery for the six month periods ended
December 31, 2007 and 2006 were positively affected as a result of revisions
to
amounts previously calculated for the fiscal years ended June 30, 2007 and
2006.
As a result of these revisions, the Company expected to recover, for the six
month periods ended December 31, 2007 and 2006, $92,301 and $185,482,
respectively, more than what had been originally recorded. The Company includes
investment tax credits arising from research and development activities as
part
of the income tax provision for the year. The Company’s income tax provision for
the three and six month periods ended December 31, 2007 includes only such
tax
credits, arising from research and development activities.
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.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
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. Commencing on July 1, 2007, and as a result of changes in business
operations, the Company’s current structure is distributed among two reporting
segments, Fiber Technologies and Environmental Solutions, each with different
product and service offerings. The Fiber Technologies reporting segment is
comprised of the operations of Avensys Tech and ITF and provides fiber-based
technologies and products. The Environmental Solutions reporting segment is
comprised of the operations of Avensys Environmental Solutions and offers
products and services to the environmental monitoring solutions marketplace.
The
“Other” column indicated refers to the previously identified, prior to July 1,
2007, Credit Management reporting segment and has been included for
reconciliation purposes only.
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 three months ended December 31,
2007
|
|
|
|
Fiber
Technologies
|
|
Environmental
Solutions
|
|
Other
|
|
Consolidated
|
|
|
Net
revenues from external customers
|
|
|
3,108,425
|
|
|
971,994
|
|
|
226,228
|
|
|
4,306,647
|
|
|
Cost
of net revenues
|
|
|
2,217,962
|
|
|
593,842
|
|
|
-
|
|
|
2,811,805
|
|
|
Marketing
and sales expense
|
|
|
174,308
|
|
|
399,669
|
|
|
-
|
|
|
573,976
|
|
|
Administrative
expense
|
|
|
126,570
|
|
|
153,595
|
|
|
8,532
|
|
|
288,698
|
|
|
Research
& development
|
|
|
697,951
|
|
|
-
|
|
|
-
|
|
|
697,951
|
|
|
Depreciation
& amortization
|
|
|
73,853
|
|
|
8,360
|
|
|
-
|
|
|
82,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
3,290,644
|
|
|
1,155,467
|
|
|
8,532
|
|
|
4,454,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
(182,219
|
)
|
|
(183,472
|
)
|
|
217,696
|
|
|
(147,996
|
)
|
|
Other
operating expenses & indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
(901,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,049,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
(9,611
|
)
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(177,818
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
392,000
|
|
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
|
|
|
425,422
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
(419,824
|
)
|
(1)
-
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Segment
Disclosure (continued)
For
the three months ended December 31, 2006
|
|
|
Fiber
Technologies
|
|
Environmental
Solutions
|
|
Other
|
|
Consolidated
|
|
|
Net
revenues from external customers
|
|
|
1,976,885
|
|
|
1,114,524
|
|
|
1,774,056
|
|
|
4,865,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
1,554,712
|
|
|
690,119
|
|
|
1,702,433
|
|
|
3,947,264
|
|
|
Marketing
and sales expense
|
|
|
181,922
|
|
|
272,618
|
|
|
33,723
|
|
|
488,263
|
|
|
Administrative
expense
|
|
|
134,272
|
|
|
106,722
|
|
|
75,598
|
|
|
316,592
|
|
|
Research
& development
|
|
|
365,957
|
|
|
-
|
|
|
-
|
|
|
365,957
|
|
|
Depreciation
& amortization
|
|
|
86,550
|
|
|
4,350
|
|
|
22,295
|
|
|
113,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
2,323,412
|
|
|
1,073,810
|
|
|
1,834,049
|
|
|
5,231,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
(346,527
|
)
|
|
40,713
|
|
|
(59,993
|
)
|
|
(365,807
|
)
|
|
Operating
expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
(749,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,115,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
204,519
|
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(189,011
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
(524,272
|
)
|
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
|
|
|
164,501
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
|
|
|
(1,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,461,023
|
)
|
(1)
-
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
For
the six months ended December 31, 2007
|
|
|
Fiber
Technologies
|
|
Environmental
Solutions
|
|
Other
|
|
Consolidated
|
|
|
Net
revenues from external customers
|
|
|
6,793,718
|
|
|
2,084,710
|
|
|
398,100
|
|
|
9,276,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
4,287,486
|
|
|
1,273,710
|
|
|
-
|
|
|
5,561,197
|
|
|
Marketing
and sales expense
|
|
|
267,566
|
|
|
767,714
|
|
|
-
|
|
|
1,035,279
|
|
|
Administrative
expense
|
|
|
289,797
|
|
|
264,442
|
|
|
67,151
|
|
|
621,391
|
|
|
Research
& development
|
|
|
1,162,262
|
|
|
-
|
|
|
-
|
|
|
1,162,262
|
|
|
Depreciation
& amortization
|
|
|
133,489
|
|
|
14,665
|
|
|
-
|
|
|
148,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
6,140,601
|
|
|
2,320,532
|
|
|
67,151
|
|
|
8,528,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
653,117
|
|
|
(235,821
|
)
|
|
330,949
|
|
|
748,245
|
|
|
Other
operating expenses & indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
(1,862,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,113,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
2,339
|
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
(1,422,577
|
)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(515,211
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
(106,365
|
)
|
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
|
|
|
594,423
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
(2,561,677
|
)
|
(1)
-
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Segment
Disclosure (continued)
|
For
the six months ended December 31,
2006
|
|
|
|
Fiber
Technologies
|
|
Environmental
Solutions
|
|
Other
|
|
Consolidated
|
|
|
Net
revenues from external customers
|
|
|
4,501,996
|
|
|
2,255,878
|
|
|
1,865,796
|
|
|
8,623,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
3,188,106
|
|
|
1,394,834
|
|
|
1,753,607
|
|
|
6,336,547
|
|
|
Marketing
and sales expense
|
|
|
407,118
|
|
|
544,726
|
|
|
98,896
|
|
|
1,050,740
|
|
|
Administrative
expense
|
|
|
332,025
|
|
|
209,376
|
|
|
162,455
|
|
|
703,856
|
|
|
Research
& development
|
|
|
742,704
|
|
|
-
|
|
|
-
|
|
|
742,704
|
|
|
Depreciation
& amortization
|
|
|
156,413
|
|
|
8,368
|
|
|
24,509
|
|
|
189,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
4,826,366
|
|
|
2,157,304
|
|
|
2,039,467
|
|
|
9,023,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
(324,370
|
)
|
|
98,573
|
|
|
(173,671
|
)
|
|
(399,468
|
)
|
|
Operating
expenses and indirect costs of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
(1,311,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,710,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
334,174
|
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(435,052
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
(406,748
|
)
|
|
Income
Tax Benefit - Refundable tax credits (1)
|
|
|
|
|
|
|
|
|
|
|
|
529,103
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
(1,690,569
|
)
|
(1)
-
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
Revenue
from two customers of the Company’s Fiber Technologies segment for the three and
six month periods ended December 31, 2007 was as follows:
|
|
|
Period
ended December 31, 2007
|
|
|
|
|
Three
months
|
|
Six
months
|
|
|
|
|
$
|
|
$
|
|
|
Customer
1
|
|
|
1,225,517
|
|
|
3,694,500
|
|
|
Customer
2
|
|
|
818,446
|
|
|
1,295,585
|
|
|
|
|
$
|
2,043,963
|
|
$
|
4,990,085
|
|
The
outstanding receivable balances for these customers at December 31, 2007
amounted to $1,816,929 (Customer 1 represented $876,600 and Customer 2
represented $940,329).
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:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Fiber
Technologies
|
|
|
10,819,063
|
|
|
10,289,619
|
|
|
Environmental
Solutions
|
|
|
72,473
|
|
|
51,033
|
|
|
Credit
Management
|
|
|
-
|
|
|
-
|
|
|
All
Other
|
|
|
18,458
|
|
|
23,406
|
|
|
Total
long-lived assets
|
|
|
10,909,993
|
|
|
10,364,058
|
|
Avensys
Corporation
Notes
to
Interim Consolidated Financial Statements
Unaudited
(Expressed
in U.S. Dollars)
December
31, 2007
Segment
Disclosure (continued)
The
Company has three geographic business areas, Americas, Europe and Asia,
determined based on the locations of the customers. The revenues for the three
and six month periods ended December 31, 2007 for the Americas include
$1,712,418 and $4,433,410, respectively, of sales to the United States of
America and $1,256,454 and $2,591,126, respectively, of sales to Canada. The
revenues for Asia for the three and six month periods ended December 31, 2007
include sales of $922,646 and $1,428,721, respectively, to China.
|
|
|
Period
ended December 31, 2007
|
|
|
|
|
Three
months
|
|
Six
months
|
|
|
|
|
$
|
|
$
|
|
|
Americas
|
|
|
2,968,874
|
|
|
7,028,662
|
|
|
Europe
|
|
|
321,974
|
|
|
677,318
|
|
|
Asia
|
|
|
1,015,799
|
|
|
1,570,548
|
|
|
Total
|
|
|
4,306,647
|
|
|
9,276,528
|
|
|
|
a)
|
Termination
of Technology License Agreement
|
On
February 6, 2008, the Technology License Agreement between C-Chip and its former
supplier was terminated. The agreement to terminate the Technology License
Agreement stipulates that, subsequent to December 31, 2007, no further royalties
would be payable to C-Chip from devices sold and the outstanding balance of
the
C-Chip loan with the former supplier, at December 31, 2007, would be forgiven.
As a result, the Company will recognize a gain of $355,734, during the third
quarter, on the forgiveness of the loan, which represented the outstanding
balance of the loan at December 31, 2007. Royalties payable to C-Chip based
on
devices sold continued to accrue up to and including December 31, 2007 and
were
applied against the loan balance. As part of the termination of the Technology
License Agreement, the former supplier would continue to assume exclusive
responsibility for the manufacturing costs, sales, servicing and other
incidental costs related to the production and marketing of the devices sold
in
the sub-prime used vehicle market.
|
|
b)
|
Long
Term Incentive Stock Option Grants
|
On
January 4, 2008, the Company, as part of a Long Term Incentive plan for certain
key employees, granted stock options to purchase 2,750,000 shares of the
Company’s common stock pursuant to the Company’s Amended and Restated 2006
Nonqualified Stock Option Plan. The stock options have an exercise price of
$0.09 and a term of five years. The stock options vest equally over a period
of
four years commencing on December 31, 2008.
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
management's discussion and analysis of financial condition and results of
operations of Avensys Corporation should be read in conjunction with the
financial statements and notes thereto of the Company for the three and six
month periods ended December 31, 2007 and 2006 as included in this Form
10-Q.
FORWARD
LOOKING STATEMENTS
This
report contains “forward-looking statements” intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1995. Statements included in this quarterly report that are not
historical facts (including any statements concerning plans and objectives
of
management for future operations or economic performance, or assumptions
or
forecasts related thereto), including, without limitation, the information
set
forth in
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
,
are
forward-looking statements. These statements can be identified by the use
of
forward-looking terminology including “may,” “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “continue,” “project,” “plan,” or other similar words.
These statements discuss future expectations, contain projections of results
of
operations or of financial condition, or state other “forward-looking”
information. We and our representatives may from time to time make other
oral or
written statements that are also forward-looking statements.
Such
forward-looking statements are subject to various risks and uncertainties
that
could cause actual results to differ materially from those anticipated as
of the
date of this report. Although we believe that the expectations reflected
in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct.
Important factors that could cause our actual results to differ materially
from
the expectations reflected in these forward-looking statements include, among
other things, those set forth in the Risk Factors section of the Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2007, and those set forth
from
time to time in our filings with the Securities and Exchange Commission (“SEC”),
which are available through the Press Releases link at www.avensys.com and
through the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at
http://www.sec.gov
.
All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result
of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this report
.
CORPORATE
OVERVIEW
During
the three months ended December 31, 2007, we completed the transformation of
our
business to one that focuses primarily on Avensys Inc., our operating
subsidiary. On December 12, 2007, we changed the name of our holding company
from Manaris Corporation to Avensys Corporation to adopt the name of our
operating subsidiary Avensys Inc.
Avensys
Corporation is a holding company which operates the following wholly-owned
subsidiaries
|
|
·
|
Avensys
Inc. operates two divisions: Avensys Tech manufactures and distributes
fiber optical components and sensors worldwide, and Avensys Environmental
Solutions distributes and integrates environmental monitoring
solutions.
|
|
|
·
|
C-Chip
Technologies Corporation (North America) ("C-Chip") licensed its
technology to its partner iMetrik Inc. in December 2006, whereby,
C-Chip
receives royalties from iMetrik for its worldwide sales of GSM-based
“locate and disable” products into the BHPH (“Buy Here Pay Here”) used car
market. The royalties are used to repay a loan from iMetrik to
C-Chip.
|
For
the
three month period ended December 31, 2007, Avensys Corporation’s revenues were
$4.3 million, compared to $4.9 million for the same period in the previous
year
- a decline of 11.5% year on year. Revenues for the six month period ended
December 31, 2007 were $9.3 million, compared to $8.6 million for the same
period the previous year - an increase of 7.6%.
The
decline in Avensys Corporation’s revenues for the three months ended December
31, 2007 was due to a change in the application of a revenue recognition policy
in the second quarter of fiscal year 2007 with respect to revenue from the
C-Chip subsidiary. Prior to signing the technology license agreement in December
2006, C-Chip revenues were being deferred and amortized over 36 months. Once
the
agreement was signed we immediately took all the deferred revenue into income,
and from December 2006 until December 31, 2007, we have been recording revenues
in the form of royalties only. C-Chip royalty revenues for the three months
ended December 31, 2007 and 2006 were $226,000 and $62,000, respectively.
Non-royalty revenues for the three month period ended December 31, 2006 were
$1.7 million. This explains the decline in revenues for Avensys Corporation
for
the 3 months ended December 31, 2007 versus the same period in the previous
year. Revenues for Avensys Corporation for the six month period ended December
31, 2007 increased in spite of the fact that there was $1.8 million of
non-royalty revenues in the results for the six month period ended December
31,
2006.
In
contrast, Avensys Inc., our core operating subsidiary, generated revenues of
$4.1 million for the three months ended December 31, 2007, compared to $3.1
million in the previous year, representing an increase of 32.0%. For the six
month period ended December 31, 2007. Avensys Inc. generated revenues of $8.9
million, compared to $6.8 million in the previous year, representing a 31.4%
over the previous year.
We
are
encouraged by the positive trend in our Avensys business, with its healthy
32.0%
increase in revenues year on year. Demand is strong but our need to divert
qualified technicians from production to training new employees temporarily
slowed down output. However, new employees are now trained and we have expanded
our production capacity. Furthermore, second quarters are generally our weakest
quarters in terms of sales, whereas our third and fourth quarter sales are
stronger. We have no reason to believe that this year will be any different.
The
gross
margin of $1.5 million for the quarter was 34.7% of our consolidated revenues
compared to $0.9 million and 18.9%, respectively, for the same period the
previous year. The improvement in the gross margin over the previous year’s
period occurred despite production difficulties and the strengthening of the
Canadian dollar against the US dollar in the quarter. The prior period
percentage was adversely affected by a very narrow gross margin on the deferred
revenue credit
Our
operating loss of $1 million for the quarter, compared to $1.1 million for
2006,
is virtually unchanged year on year. R&D tax credits reduced our net loss to
$420,000.
Net
cash
used in operating activities during the three month period totaled approximately
$340,000, as compared with net cash used of approximately $81,000 for the same
period last year.
For
fiscal year 2008, our primary objective remains to continue to grow revenues,
to
generate positive cash flow, and to identify potential merger and/or acquisition
targets which would provide complementary product lines, access to new markets
and/or economies of scale. We are also continuously seeking to improve our
manufacturing processes and decrease costs.
OVERVIEW
OF AVENSYS INC. SUBSIDIARY
Avensys
Inc. operates two divisions - Avensys Tech and Avensys Environmental Solutions.
Avensys Tech produces optical components and modules for the telecom, fiber
laser and optical sensor markets. Avensys Environmental Solutions distributes
and integrates environmental monitoring solutions and instrumentation in the
Canadian marketplace.
Avensys
Tech Division of Avensys Inc.
Avensys
Tech sells its optical products and services primarily in North America, Asia,
and Europe to the telecommunications, Fiber laser, and sensors industries.
It
currently operates in three vertical markets within the photonics industry:
the
telecommunications market, fiber laser market and fiber sensor market.
The
acquisition of the assets of ITF Optical has contributed to solidifying our
position in the optical component market. We occupy a dominant position for
some
of the components that we are offering and intend to occupy an even more
important market space in the future through both organic growth and mergers
& acquisitions.
The
successful integration of Avensys’ acquisition of ITF Optical Technologies has
enabled Avensys to concentrate on organic revenue growth namely,
|
|
1-
|
Increase
direct and indirect distribution
channels
|
|
|
2-
|
Improve
operational efficiencies and increase
margins
|
|
|
3-
|
Introduce
new complementary products to our
customers
|
The
market for fiber optics components continued to experience solid growth. The
telecom segment represents about 75% of our optical sales. Fiber laser
components and modules and optical sensors comprise the remaining 25% of optical
sales. Undersea telecom components, DPSK demodulators (“Differential Phase Shift
Keying”) as well as our traditional terrestrial telecom components and fiber
laser components, developed by our R&D partner ITF labs saw important
growth. Our DPSK product line has been qualified by a major telecom manufacturer
of long haul transmission equipment, reinforcing our position as a major
supplier for submarine systems and allowing us to further penetrate terrestrial
transport systems.
Three
major fiber laser providers have chosen to incorporate our technology into
their
product lines. Optical sensors remain part of our long term strategy, although
the current growth of this market segment is still limited to the single digit
range.
We
increased our coverage of the Asian and European market by entering into
distribution agreements with three (3) new partners, who will represent our
product lines in both the telecom and fiber laser markets.
The
optical manufacturing industry has experienced significant pressure on margins
over the last few years. At Avensys Tech, this trend has been compounded by
a
weaker U.S. dollar. The fact that the majority of our optical sales are
conducted in US dollars, while a majority of our cost structure is funded in
Canadian dollars, has put significant additional pressure on our margins.
Despite these negative factors, our gross margins have improved with increased
volume and with the additional flexibility provided by our recent staff training
efforts. Our gross margin for the quarter ended December 31, 2007 was 28.6%
compared to 21.4% for the same period last year.
The
demonstration of above kilowatt operation of our fiber laser components as
well
as our successes with DPSK demodulator modules constitute two areas where we
see
new sources of revenue that are clearly part of our long term path to success.
In addition, the undersea telecom market has been rich in new initiatives with
recent announcement for various long haul systems. Avensys Tech, as one of
the
few components companies in the world with undersea certified production lines,
is often an indirect beneficiary of such large scale projects.
The
Avensys Environmental Solutions Division of Avensys Inc.
Avensys
Environmental Solutions competes in the Canadian environmental monitoring market
providing instrumentation and integrated systems capable of detecting and
quantifying the presence of specific pollutants, gases and other components
in
ambient air, stack emissions, waste water, natural water sources and soil.
The
market for environment monitoring in Canada is quite mature, with specific
areas
growing faster due to increased regulation, pressures on reducing Greenhouse
gas
emissions and emerging opportunities associated with carbon credit trading.
We
anticipate that this market will experience overall growth and consolidation
as
the private and public sectors recognize the value of sustainable development
and environmentally responsible behavior. We intend to be active in any
consolidation movement that may emerge.
We
expect
to realize further growth through both organic initiatives and potential merger
or acquisition opportunities. We continue to be firm believers in this exciting
business segment that has allowed us, through its stability, to be a more solid
organization.
During
the past quarter, we have made a significant investment in training our sales
and technical team specifically to address Air monitoring opportunities and
to
tighten our relationships with potential new business partners. We have also
rebranded the name of the division from Avensys Solutions to Avensys
Environmental Solutions to better represent the essence and focus of our
activities.
OVERVIEW
OF C-CHIP TECHNOLOGIES SUBSIDIARY
Pursuant
to the Licensing Agreement between C-Chip and iMetrik, C-Chip receives royalties
from iMetrik for its worldwide sales of GSM-based “locate and disable” products
into the BHPH used car market. The launch of the new GSM-based Credit Chip
200G,
developed in partnership with iMetrik, has provided a competitive alternative
which has resulted in increased sales and steady royalty revenues. The royalties
were originally to be applied against the outstanding balance from iMetrik
to
C-Chip. Effective July 1, 2007, the Company and the former supplier signed
an
amendment to the Agreement whereby the royalties payable and the loan repayment
would each be settled on a cash basis on the first working day following the
end
of each quarter. The amendment is applicable to all royalties earned since
the
inception of the Agreement.
On
February 6, 2008, the Technology License Agreement between C-Chip and iMetrik
was terminated. The agreement to terminate the Technology License Agreement
stipulates that, subsequent to December 31, 2007, no further royalties will
be
payable to C-Chip from devices sold and the outstanding balance of the C-Chip
loan with the former supplier, at December 31, 2007, was forgiven. As a result,
the Company will recognize a gain of $355,734, during the third quarter, on
the
forgiveness of the loan, which represented the outstanding balance of the loan
at December 31, 2007. Royalties payable to C-Chip based on devices sold
continued to accrue up to and including December 31, 2007 and were applied
against the loan balance. As part of the termination of the Technology License
Agreement, iMetrik will continue to assume responsibility for the manufacturing
costs, sales and other incidental costs related to the production and marketing
of the devices sold in the sub-prime used vehicle market.
Results
of Operations for the three and six month periods ended December 31, 2007
compared to the three and six month periods ended December 31, 2006
Our
first
and second quarter notes to the consolidated financial statements exclude the
Company’s previously disclosed going concern reference. This is a reflection of
the significant progress made by the Company, and the confidence placed in
it by
its new strategic financing partner.
The
results of operations include the accounts of the Company and its
subsidiaries.
|
|
|
Three
Months December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Revenue
|
|
|
4,306,647
|
|
|
4,865,465
|
|
|
(558,818
|
)
|
|
-11.5
|
%
|
|
Cost
of Revenue
|
|
|
2,811,805
|
|
|
3,947,264
|
|
|
(1,135,459
|
)
|
|
-28.8
|
%
|
|
Gross
margin
|
|
|
1,494,842
|
|
|
918,201
|
|
|
576,641
|
|
|
62.8
|
%
|
|
Gross
Margin as % of Revenue
|
|
|
34.7
|
%
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
281,076
|
|
|
215,775
|
|
|
65,301
|
|
|
30.3
|
%
|
|
Selling,
general and administration
|
|
|
1,565,472
|
|
|
1,451,790
|
|
|
113,682
|
|
|
7.8
|
%
|
|
Research
and development
|
|
|
697,951
|
|
|
365,957
|
|
|
331,994
|
|
|
90.7
|
%
|
|
Total
Operating expenses
|
|
|
2,544,499
|
|
|
2,033,522
|
|
|
510,977
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) gain
|
|
|
(1,049,657
|
)
|
|
(1,115,321
|
)
|
|
65,664
|
|
|
-5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
204,571
|
|
|
(508,765
|
)
|
|
713,336
|
|
|
-140.2
|
%
|
|
Income
tax benefits - refundable tax credits
|
|
|
425,422
|
|
|
164,501
|
|
|
260,921
|
|
|
158.6
|
%
|
|
Non-Controlling
interest
|
|
|
(160
|
)
|
|
(1,438
|
)
|
|
1,278
|
|
|
-88.9
|
%
|
|
Net
(loss) income for the period
|
|
|
(419,824
|
)
|
|
(1,461,023
|
)
|
|
1,041,199
|
|
|
-71.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
84,699
|
|
|
104,079
|
|
|
(19,380
|
)
|
|
-18.6
|
%
|
|
Comprehensive
income (loss)
|
|
|
(335,125
|
)
|
|
(1,356,944
|
)
|
|
1,021,819
|
|
|
75.3
|
%
|
|
|
|
Six
Months December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Revenue
|
|
|
9,276,528
|
|
|
8,623,670
|
|
|
652,858
|
|
|
7.6
|
%
|
|
Cost
of Revenue
|
|
|
5,561,197
|
|
|
6,336,547
|
|
|
(775,350
|
)
|
|
-12.2
|
%
|
|
Gross
margin
|
|
|
3,715,331
|
|
|
2,287,123
|
|
|
1,428,208
|
|
|
62.4
|
%
|
|
Gross
Margin as % of Revenue
|
|
|
40.1
|
%
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
489,967
|
|
|
393,643
|
|
|
96,324
|
|
|
24.5
|
%
|
|
Selling,
general and administration
|
|
|
3,177,088
|
|
|
2,861,274
|
|
|
315,814
|
|
|
11.0
|
%
|
|
Research
and development
|
|
|
1,162,262
|
|
|
742,704
|
|
|
419,558
|
|
|
56.5
|
%
|
|
Total
Operating expenses
|
|
|
4,829,317
|
|
|
3,997,621
|
|
|
831,696
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) gain
|
|
|
(1,113,986
|
)
|
|
(1,710,498
|
)
|
|
596,512
|
|
|
-34.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
(2,041,814
|
)
|
|
(507,626
|
)
|
|
(1,534,188
|
)
|
|
302.2
|
%
|
|
Income
tax benefits - refundable tax credits
|
|
|
594,423
|
|
|
529,102
|
|
|
65,321
|
|
|
12.3
|
%
|
|
Non-Controlling
interest
|
|
|
(299
|
)
|
|
(1,547
|
)
|
|
1,248
|
|
|
-80.7
|
%
|
|
Net
(loss) income for the period
|
|
|
(2,561,676
|
)
|
|
(1,690,569
|
)
|
|
(871,107
|
)
|
|
51.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
865,886
|
|
|
102,126
|
|
|
763,760
|
|
|
747.9
|
%
|
|
Comprehensive
income (loss)
|
|
|
(1,695,790
|
)
|
|
(1,588,443
|
)
|
|
(107,347
|
)
|
|
6.8
|
%
|
Revenues
Sales
from the Avensys Tech and Avensys Environmental Solutions divisions of Avensys
Inc., for the three and six month periods ended December 31, 2007, account
for
94.7% and 95.7%, respectively, of our net revenues. Avensys products were sold
directly to customers throughout the world.
Our
revenues were composed of the following:
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Avensys
Tech
|
|
|
3,108,425
|
|
|
1,976,885
|
|
|
1,131,540
|
|
|
57.2
|
%
|
|
Avensys
Solutions
|
|
|
971,994
|
|
|
1,114,524
|
|
|
(142,530
|
)
|
|
-12.8
|
%
|
|
C-Chip
(Royalties)
|
|
|
226,228
|
|
|
61,575
|
|
|
164,653
|
|
|
267.4
|
%
|
|
C-Chip
(Sales)
|
|
|
-
|
|
|
1,712,481
|
|
|
(1,712,481
|
)
|
|
-100.0
|
%
|
|
Revenue
|
|
|
4,306,647
|
|
|
4,865,465
|
|
|
(558,818
|
)
|
|
-11.5
|
%
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Avensys
Tech
|
|
|
6,793,718
|
|
|
4,501,996
|
|
|
2,291,722
|
|
|
50.9
|
%
|
|
Avensys
Solutions
|
|
|
2,084,710
|
|
|
2,255,878
|
|
|
(171,168
|
)
|
|
-7.6
|
%
|
|
C-Chip
(Royalties)
|
|
|
398,100
|
|
|
61,575
|
|
|
336,525
|
|
|
546.5
|
%
|
|
C-Chip
(Sales)
|
|
|
-
|
|
|
1,804,221
|
|
|
(1,804,221
|
)
|
|
-100.0
|
%
|
|
Revenue
|
|
|
9,276,528
|
|
|
8,623,670
|
|
|
652,858
|
|
|
7.6
|
%
|
Our
revenues for the three and six month periods ended December 31, 2007 decreased
by 11.5% and increased by 7.6%, respectively, over the same periods in 2006.
Excluding C-Chip non-royalty revenues included in the comparative periods,
our
revenues for the three and six month periods ended December 31, 2007 increased
by 36.6% and 36.0%, respectively, over the same periods in 2006. The six month
increase is primarily due to our Avensys Tech operating division, whose sales
increased for the three and six month periods ended December 31, 2007 by 57.2%
and 50.9%, respectively. Avensys Tech maintained its strong internal growth
by
the continued expansion and diversification of its product lines and the
addition of new customers. C-Chip’s revenues for the three and six month periods
ended December 31, 2007 represent royalties brought about by a change in its
accounting policy relating to revenue recognition. The change in accounting
policy resulted from a license agreement signed during the second quarter of
fiscal 2007, effective December 1, 2006, whereby C-Chip would receive royalties
from the licensee on the sale of credit management devices.
Cost
of revenue and gross margin
Cost
of
goods sold as a percentage of revenue was 65.3% and 59.9% for the three and
six
month periods ended December 31, 2007 compared with 81.1% and 73.5% for the
same
periods in 2006. Gross margin, relative to revenues, for the three and six
month
periods ended December 31, 2007 increased as a result of improved margins at
Avensys Tech and the new C-Chip business model.
Gross
margins for the Avensys Tech division were 28.6% and 36.9%, respectively, for
the three and six month periods ended December 31, 2007 compared with 21.4%
and
29.2%, respectively, for the same periods in 2006. Gross margins for the Avensys
Environmental Solutions division were 38.9% and 38.9%, respectively, for the
three and six month periods ended December 31, 2007 compared with 38.1% and
38.2%, respectively, for the same periods in 2006.
Avensys
Tech saw significant reductions in the operational costs of production but
these
were partially offset by the negative effects of a weaker U.S. dollar. The
average rate of the U.S. Dollar for the three and six month periods ended
December 31, 2007 was $1.018 and $0.988, respectively, compared to $0.878 and
$0.885, respectively, for the three and six month periods ended December 31,
2006.
Operating
Expenses
Depreciation
and amortization
Depreciation
and amortization expenses for the three and six month periods ended December
31,
2007 increased by $65,301 and $96,324, respectively, over the same periods
in
2006. Avensys continues to invest in production equipment to keep pace with
the
significant increases in revenues.
Selling
General and Administrative expenses
Selling,
general and administrative (SG&A) expenses consisted primarily of general
and administrative expenses, marketing and sales expenses, payroll and related
expenses, and professional fees. SG&A expenses for the three and six month
periods ended December 31, 2007 increased by $113,682 and $315,814,
respectively, compared to the same periods in 2006. SG&A are composed of the
following:
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
General
and administrative
|
|
|
85,033
|
|
|
126,257
|
|
|
(41,224
|
)
|
|
-32.7
|
%
|
|
Marketing
and Sales
|
|
|
206,819
|
|
|
171,736
|
|
|
35,083
|
|
|
20.4
|
%
|
|
Payroll
and related expenses
|
|
|
779,958
|
|
|
705,715
|
|
|
74,243
|
|
|
10.5
|
%
|
|
Professional
fees
|
|
|
426,003
|
|
|
194,617
|
|
|
231,386
|
|
|
118.9
|
%
|
|
Travel
|
|
|
32,064
|
|
|
21,879
|
|
|
10,185
|
|
|
46.6
|
%
|
|
Other
|
|
|
35,595
|
|
|
231,586
|
|
|
(195,991
|
)
|
|
-84.6
|
%
|
|
Selling,
General and Administrative Expenses
|
|
$
|
1,565,472
|
|
$
|
1,451,790
|
|
$
|
113,682
|
|
|
7.8
|
%
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
General
and administrative
|
|
|
226,488
|
|
|
249,857
|
|
|
(23,369
|
)
|
|
-9.4
|
%
|
|
Marketing
and Sales
|
|
|
316,513
|
|
|
388,824
|
|
|
(72,311
|
)
|
|
-18.6
|
%
|
|
Payroll
and related expenses
|
|
|
1,777,031
|
|
|
1,390,768
|
|
|
386,263
|
|
|
27.8
|
%
|
|
Professional
fees
|
|
|
653,823
|
|
|
529,392
|
|
|
124,431
|
|
|
23.5
|
%
|
|
Travel
|
|
|
54,824
|
|
|
40,198
|
|
|
14,626
|
|
|
36.4
|
%
|
|
Other
|
|
|
148,409
|
|
|
262,235
|
|
|
(113,826
|
)
|
|
-43.4
|
%
|
|
Selling,
General and Administrative Expenses
|
|
$
|
3,177,088
|
|
$
|
2,861,274
|
|
$
|
315,814
|
|
|
11.0
|
%
|
|
·
|
General
and administrative expenses for the three and six month periods ended
December 31, 2007 decreased by $41,224 and $23,369, respectively,
compared
with the same periods in 2006. The decrease for the six month period
is
primarily due to aggressive cost control throughout the
Company.
|
|
·
|
Marketing
and sales expenses for the three and six month periods ended December
31,
2007 increased by $35,083 and decreased by $72,311, respectively,
compared
to the same periods in 2006. The decrease for the six month period
is
primarily due to aggressive cost control throughout the
Company.
|
|
·
|
Payroll
expenses for the three and six month periods ended December 31,
2007
increased by $74,243 and $386,263, respectively, compared with
the same
periods in 2006. The increase for the six month period includes
a
severance amount of $215,332 for the former President of Avensys
Inc.
Excluding this charge, payroll for the six month period increased
by
$170,931 or 12.3%.
|
|
·
|
Professional
fees for the three and six month periods ended December 31, 2007
increased
by $231,386 and $124,431 compared with the same periods in 2006.
The
increase for the six month period is primarily attributable to
legal fees
in connection with the Senior Secured Original Issue Discount
financing.
|
|
·
|
SG&A
expenses classified as ‘Other selling, general and administrative’, which
includes stock based compensation, for the three and six month
periods
ended December 31, 2007 decreased by $195,991 and $113,826, respectively,
compared with the same periods in 2006. The decrease for the six
month
period includes a severance amount of stock based compensation
of $64,684
for the former President of Avensys Inc. Excluding this charge,
‘Other
selling, general and administrative’ for the six month period decreased by
$178,510.
|
Research
and Development
For
the
six month period ended December 31, 2007, research and development expenses
primarily consisted of salaries and related expenses for research personnel,
prototype manufacturing and testing at the ITF Labs facility in Montreal,
Quebec.
Research
and development expenses for the three and six month periods ended December
31,
2007 increased by $331,994 and $419,558 compared with the same periods in 2006.
The three and six month periods increase is primarily attributable to the
expanded roster of research and development projects at ITF Labs.
Stock
Based Compensation
Stock
based compensation, which is included in ‘Other selling, general and
administrative’ expenses, for the three and six month periods ended December 31,
2007, was $112,039 and $152,146, respectively, compared to $17,728 and $87,422,
respectively, for the same periods in 2006. The increase for the six month
period is almost entirely attributable to the severance amount for the former
President of Avensys Inc of $64,684.
Other
Income (Expenses)
Other
income (expenses) consists of the following:
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Other
income (expenses), net
|
|
|
(9,611
|
)
|
|
204,519
|
|
|
(214,130
|
)
|
|
-104.7
|
%
|
|
Loss
on redemption of Series B Notes & Series B OID Notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Interest
expense, net
|
|
|
(177,818
|
)
|
|
(189,011
|
)
|
|
11,193
|
|
|
-5.9
|
%
|
|
Debentures
and preferred shares accretion
|
|
|
(218,694
|
)
|
|
(753,462
|
)
|
|
534,768
|
|
|
-71.0
|
%
|
|
Change
in fair value of derivative financial instruments
|
|
|
610,694
|
|
|
229,190
|
|
|
381,504
|
|
|
166.5
|
%
|
|
Other
income (expenses)
|
|
$
|
204,571
|
|
$
|
(508,764
|
)
|
$
|
713,335
|
|
|
-140.2
|
%
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Other
income (expenses), net
|
|
|
2,339
|
|
|
334,174
|
|
|
(331,835
|
)
|
|
-99.3
|
%
|
|
Loss
on redemption of Series B Notes & Series B OID Notes
|
|
|
(1,422,577
|
)
|
|
-
|
|
|
(1,422,577
|
)
|
|
|
|
|
Interest
expense, net
|
|
|
(515,211
|
)
|
|
(435,052
|
)
|
|
(80,159
|
)
|
|
18.4
|
%
|
|
Debentures
and preferred shares accretion
|
|
|
(445,230
|
)
|
|
(1,394,072
|
)
|
|
948,842
|
|
|
-68.1
|
%
|
|
Change
in fair value of derivative financial instruments
|
|
|
338,865
|
|
|
987,324
|
|
|
(648,459
|
)
|
|
-65.7
|
%
|
|
Other
income (expenses)
|
|
$
|
(2,041,814
|
)
|
$
|
(507,626
|
)
|
$
|
(1,534,188
|
)
|
|
302.2
|
%
|
Other
expenses for the three and six month periods ended December 31, 2007 decreased
by $713,335 and increased by $1,534,188 compared with the same periods in 2006.
The increase is primarily due to a loss on redemption of Series B Notes and
Series B OID in the amount of $1,422,577. Also, there was a significant
reduction in debenture and preferred shares accretion for the six month period
of $948,842, which was partially offset by a large decrease of $648,459 in
the
change in fair value of derivative financial instruments (see discussion on
derivative financial instruments under ‘Net Loss’).
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Series
A Notes accretion
|
|
|
-
|
|
|
454,531
|
|
|
(454,531
|
)
|
|
-100.0
|
%
|
|
Series
B Notes & Series B OID Notes accretion
|
|
|
-
|
|
|
238,818
|
|
|
(238,818
|
)
|
|
100.0
|
%
|
|
Senior
Secured OID Convertible Note
|
|
|
128,300
|
|
|
-
|
|
|
128,300
|
|
|
100.0
|
%
|
|
Preferred
shares accretion
|
|
|
90,394
|
|
|
60,113
|
|
|
30,281
|
|
|
50.4
|
%
|
|
Debentures
and preferred shares accretion
|
|
$
|
218,694
|
|
$
|
753,462
|
|
$
|
(534,768
|
)
|
|
-71.0
|
%
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Series
A Notes accretion
|
|
|
-
|
|
|
956,229
|
|
|
(956,229
|
)
|
|
-100.0
|
%
|
|
Series
B Notes & Series B OID Notes accretion
|
|
|
132,379
|
|
|
317,043
|
|
|
(184,664
|
)
|
|
100.0
|
%
|
|
Senior
Secured OID Convertible Note
|
|
|
137,513
|
|
|
-
|
|
|
137,513
|
|
|
100.0
|
%
|
|
Preferred
shares accretion
|
|
|
175,338
|
|
|
120,800
|
|
|
54,538
|
|
|
45.1
|
%
|
|
Debentures
and preferred shares accretion
|
|
$
|
445,230
|
|
$
|
1,394,072
|
|
$
|
(948,842
|
)
|
|
-68.1
|
%
|
Refundable
Tax Credits
Refundable
tax credits for the three and six month periods ended December 31, 2007
increased by $260,921 and $65,321, respectively, compared with the same periods
in 2006. The Company includes investment tax credits arising from research
and
development activities as part of the income tax provision for the year. The
Company’s income tax provision for the three and six month periods ended
December 31, 2007 includes only such tax credits, arising from research and
development activities. The Company’s investment tax credit recovery for the six
month periods ended December 31, 2007 and 2006 were positively affected as
a
result of revisions to amounts previously calculated for the fiscal years ended
June 30, 2007 and 2006. As a result of these revisions, the Company expected
to
recover, for the six month periods ended December 31, 2007 and 2006, $92,301
and
$185,482, respectively, 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 excesses as a further reduction of the income tax provision for
the
six month periods ended December 31, 2007 and 2006.
Net
Loss
Our
net
loss for the three month period ended December 31, 2007 of $419,824 represents
a
decrease of $1,041,199 compared to the net loss of $1,461,023 for the same
period in 2006. Our net loss for the six month period ended December 31, 2007
of
$2,561,676, represents an increase of $871,107 compared to the net loss of
$1,690,569 for the same period in 2006. These changes, however, were affected
by
the addition of derivative financial instruments to our balance sheet and the
loss of $1,422,577 on redemption of Series B and Series OID Notes in August
2007.
We
incurred liabilities that are treated as derivative financial instruments as
part of our acquisition of ITF Optical assets, the August 2006 (First Tranche)
and November 2006 (Second Tranche) financing ("derivative liabilities") and
the
Senior Secured OID Convertible Note issued in September 2007. These derivative
liabilities are re-evaluated at each period end using the Black-Scholes option
pricing model, and are, consequently, sensitive to changes in the market price
of our own shares. Due to this expanded use of derivative financial instruments,
the volatility of our results of operations has increased considerably, as
they
are increasingly affected by fluctuations in the fair value of our shares.
At
December 31, 2007 and 2006, our closing share price was $0.08 and $0.21 a share,
respectively, which impacted the fair values of the derivative liabilities
on
our balance sheet at those dates and decreased our net loss for the three and
six month periods ended December 31, 2007 by $610,694 and $338,865,
respectively, and decreased our net loss for the three and six month periods
ended December 31, 2006 by $229,190 and $987,324, respectively.
Two
non-recurring matters classified under ‘Other income (expenses)’ also had a
significant impact on the net loss for the six month period ended December
31,
2006. A gain on sale of fixed assets amounting to $300,848, recorded in the
first quarter of fiscal 2007, and a revaluation of our estimates for research
and development tax credits receivable amounting to $185,482, also recorded
in
the first quarter of fiscal 2007, with both matters improving our results by
reducing the net loss for the six month period ended December 31, 2006 by a
total of $486,330.
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Net
income (loss) for the period
|
|
|
(419,824
|
)
|
|
(1,461,023
|
)
|
|
1,041,199
|
|
|
-71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on redemption of Series B Notes & Series B OID Notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0
|
%
|
|
Change
in fair value of derivative financial instruments
|
|
|
(610,694
|
)
|
|
(229,190
|
)
|
|
(381,504
|
)
|
|
166
|
%
|
|
Other
non-recurring items
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0
|
%
|
|
Adjusted
non-GAAP net income (loss) for the period
|
|
$
|
(1,030,518
|
)
|
$
|
(1,690,213
|
)
|
$
|
659,695
|
|
|
-39
|
%
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Net
income (loss) for the period
|
|
|
(2,561,676
|
)
|
|
(1,690,569
|
)
|
|
(871,107
|
)
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on redemption of Series B Notes & Series B OID Notes
|
|
|
1,422,577
|
|
|
-
|
|
|
1,422,577
|
|
|
|
|
|
Change
in fair value of derivative financial instruments
|
|
|
(338,865
|
)
|
|
(987,324
|
)
|
|
648,459
|
|
|
-66
|
%
|
|
Other
non-recurring items
|
|
|
-
|
|
|
(486,330
|
)
|
|
486,330
|
|
|
-100
|
%
|
|
Adjusted
non-GAAP net income (loss) for the period
|
|
$
|
(1,477,964
|
)
|
$
|
(3,164,223
|
)
|
$
|
1,686,259
|
|
|
-53
|
%
|
Financial
Condition, Liquidity and Capital Resources
Historically,
our operations have been financed primarily from cash on hand, from the sale
of
common shares or the sale of convertible debentures. The operations of our
subsidiary Avensys have been supported primarily from revenue from the sales
of
its products and services. Avensys recorded a net profit for the first time
in
fiscal year 2007 of $1.5 million and recorded another profit of $0.2 million
in
the first half of fiscal 2008 and thus generated positive cash
flows.
As
at
December 31, 2007, we had working capital surplus of $1,610,635 compared to
a
working capital surplus of $2,262,314 at September 30, 2007 and $596,801 at
June
30, 2007, a decrease of $651,679 from September 30, 2007 and an increase
$1,013,834 from June 30, 2007. The following is included in the figures for
net
working capital:
|
|
|
December
31,
|
|
September
30,
|
|
|
|
|
|
|
|
|
2007
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Cash,
cash equivalents, and short term investments
|
|
|
587,675
|
|
|
743,783
|
|
|
(156,108
|
)
|
|
-21
|
%
|
|
Accounts
receivables
|
|
|
3,722,311
|
|
|
3,923,237
|
|
|
(200,926
|
)
|
|
-5
|
%
|
|
Inventory
|
|
|
2,146,924
|
|
|
1,791,413
|
|
|
355,511
|
|
|
20
|
%
|
|
Other
current assets
|
|
|
1,696,876
|
|
|
1,424,709
|
|
|
272,167
|
|
|
19
|
%
|
|
Current
assets
|
|
|
8,153,786
|
|
|
7,883,142
|
|
|
270,644
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
4,290,006
|
|
|
3,588,942
|
|
|
701,064
|
|
|
20
|
%
|
|
Bank
and other loans payable
|
|
|
1,723,012
|
|
|
1,532,319
|
|
|
190,693
|
|
|
12
|
%
|
|
Other
current liabilities
|
|
|
530,133
|
|
|
499,567
|
|
|
30,566
|
|
|
6
|
%
|
|
Current
Liabilities
|
|
|
6,543,151
|
|
|
5,620,828
|
|
|
922,323
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
working capital (deficiency)
|
|
|
1,610,635
|
|
|
2,262,314
|
|
|
(651,679
|
)
|
|
-29
|
%
|
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
|
|
|
|
2007
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Cash,
cash equivalents, and short term investments
|
|
|
587,675
|
|
|
559,257
|
|
|
28,418
|
|
|
5
|
%
|
|
Accounts
receivables
|
|
|
3,722,311
|
|
|
3,834,474
|
|
|
(112,163
|
)
|
|
-3
|
%
|
|
Inventory
|
|
|
2,146,924
|
|
|
1,478,835
|
|
|
668,089
|
|
|
45
|
%
|
|
Other
current assets
|
|
|
1,696,876
|
|
|
1,474,156
|
|
|
222,720
|
|
|
15
|
%
|
|
Current
assets
|
|
|
8,153,786
|
|
|
7,346,722
|
|
|
807,064
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
4,290,006
|
|
|
3,992,847
|
|
|
297,159
|
|
|
7
|
%
|
|
Bank
and other loans payable
|
|
|
1,723,012
|
|
|
1,054,238
|
|
|
668,774
|
|
|
63
|
%
|
|
Other
current liabilities
|
|
|
530,133
|
|
|
1,702,836
|
|
|
(1,172,703
|
)
|
|
-69
|
%
|
|
Current
Liabilities
|
|
|
6,543,151
|
|
|
6,749,921
|
|
|
(206,770
|
)
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
working capital (deficiency)
|
|
|
1,610,635
|
|
|
596,801
|
|
|
1,013,834
|
|
|
170
|
%
|
We
have
implemented the following measures to address our concerns over the liquidity
of
the Company and its ability to continue as a going concern:
|
·
|
Secured
long-term convertible debt financing and working capital financing,
on
September 24, 2007, to fund our operations and growth, and redeemed
the
Series B Subordinated Secured Convertible Promissory Notes and
its
Original Issue Discount Series B Subordinated Secured Convertible
Promissory Notes. This refinancing of long-term debt will enable
us to
meet immediate working capital requirements and fund future growth,
as
well as reduce the dilutive impact of past financings on our
shareholders.
|
|
·
|
Executed
the Avensys business plan resulting in its generation of positive
cash
flows in fiscal 2007 and the first half of fiscal
2008.
|
|
·
|
Significantly rationalized
the operating
and cost structure of our holding company, Avensys
Corporation.
|
During
the three month period ended December 31, 2007, the Company, having produced
a
net loss of $419,824, used $339,808 of cash to fund Operating Activities from
continuing operations. Excluding working capital items, the Company used
$560,407 of cash to fund Operating Activities from continuing operations. During
the three month period ended December 31, 2006, the Company, having produced
a
net loss of $1,461,023, used $81,321 of cash to fund Operating Activities from
continuing operations. Excluding working capital items, the Company used
$466,820 of cash to fund Operating Activities from continuing operations. An
analysis of the three month periods is as follows:
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Net
(loss) income
|
|
|
(419,824
|
)
|
|
(1,461,023
|
)
|
|
1,041,199
|
|
|
Net
adjustments to reconcile net profit (loss) to cash generated by
(used in)
operating activities
|
|
|
(140,583
|
)
|
|
994,203
|
|
|
(1,134,786
|
)
|
|
|
|
|
(560,407
|
)
|
|
(466,820
|
)
|
|
(93,587
|
)
|
|
Change
in accounts receivable and other receivables
|
|
|
107,160
|
|
|
491,201
|
|
|
(384,041
|
)
|
|
Change
in accounts payable and accrued liabilities
|
|
|
827,385
|
|
|
(127,928
|
)
|
|
955,313
|
|
|
Change
in other current assets and current liabilities
|
|
|
(713,946
|
)
|
|
22,226
|
|
|
(736,172
|
)
|
|
Net
cash generated by (used in) operating activities from continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(339,808
|
)
|
$
|
(81,321
|
)
|
|
(258,487
|
)
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Net
(loss) income
|
|
|
(2,561,676
|
)
|
|
(1,690,569
|
)
|
|
(871,107
|
)
|
|
Net
adjustments to reconcile net profit (loss) to cash
|
|
|
|
|
|
|
|
|
|
|
|
generated
by (used in) operating activities
|
|
|
2,503,549
|
|
|
1,107,327
|
|
|
1,396,222
|
|
|
|
|
|
(58,127
|
)
|
|
(583,242
|
)
|
|
525,115
|
|
|
Change
in accounts receivable and other receivables
|
|
|
71,832
|
|
|
548,155
|
|
|
(476,323
|
)
|
|
Change
in accounts payable and accrued liabilities
|
|
|
236,937
|
|
|
(1,386,136
|
)
|
|
1,623,073
|
|
|
Change
in other current assets and current liabilities
|
|
|
(780,723
|
)
|
|
(323,930
|
)
|
|
(456,793
|
)
|
|
Net
cash generated by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$
|
(530,081
|
)
|
$
|
(1,745,153
|
)
|
|
1,215,072
|
|
During
the six month period ended December 31, 2007, we mainly financed our operations
through the Senior Secured OID Convertible Debenture financing and the positive
cash flow generated by Avensys through the sales of products and
services.
Selected
Balance Sheet information:
|
|
|
December
31,
|
|
June
30,
|
|
|
|
|
|
|
2007
|
|
2007
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Total
Assets
|
|
|
19,596,375
|
|
|
18,193,489
|
|
|
1,402,886
|
|
|
Current
Liabilities
|
|
|
6,543,151
|
|
|
6,749,921
|
|
|
(206,770
|
)
|
|
Long-Term
Liabilities
|
|
|
4,613,662
|
|
|
2,708,476
|
|
|
1,905,186
|
|
|
Non-Controlling
Interest
|
|
|
25,232
|
|
|
23,193
|
|
|
2,039
|
|
|
Total
Stockholder's Equity
|
|
|
8,414,330
|
|
|
8,711,899
|
|
|
(297,569
|
)
|
The
increase in total assets is attributable to increases in inventories of
$668,089, from $1,478,835 to $2,146,924, increases in net property and equipment
of $234,401, from $2,279,973 to $2,514,374, and increases in goodwill of
$307,738, from $4,116,872 to $4,424,610. The decrease in current liabilities
is
mainly attributable to decreases in the current portion of convertible
debentures of $1,165,008, from $1,568,519 to $403,511, offset by increases
in
bank and other loans payable of $668,774, from $1,054,238 to $1,723,012, and
increases in accounts payable of $297,159 from $3,992,847 to $4,290,006. The
increase in long-term liabilities is attributable to increase in the balance
of
purchase price payable of $268,327, from $1,194,096 to 1,462,423, and increases
in derivative financial instruments of $1,896,636, from $64,510 to $1,961,146,
offset by decreases in convertible debentures of $289,220, from $1,275,458
to
$986,238.
As
of
December 31, 2007, the Company had 97,096,844 issued and outstanding shares
compared to 93,437,654 on June 30, 2007. The increase in common shares is mainly
due to the issuance of 649,955 common shares in connection with the Series
B
Notes and to the issuance of 2,759,235 common shares in connection with the
cashless exercise of warrants.
Stock
options outstanding at December 31, 2007 totaled 7,789,273at a weighted average
exercise price of $0.43 and have a weighted average remaining contractual life
of 4.33 years. Stock options outstanding at June 30, 2007 totaled 8,661,070
at a
weighted average exercise price of $0.42 and had a weighted average remaining
contractual life of 5.26 years.
Senior
Secured OID convertible Debentures
During
the first quarter, 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 recorded a non-cash
charge of $1,422,577 in the first quarter which is included as part of Other
Expenses in the Statement of Operations and Comprehensive Loss.
As
a
result of the redemption of the Notes, the security relating to the Notes has
been released.
In
connection with the redemption of the Notes described in Note 10(a), 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 would 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 were used to repay
the
secured loan facility of $3.4 million, with the balance of funds, $0.6 million,
for the Company’s 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 Series Q warrants to purchase, subject to
adjustment, 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 Series P warrants, representing compensation for advisory
services rendered to the Company, to purchase up to 5% of the Company’s
outstanding common stock, initially amounting to 8,091,403 shares and subject
to
adjustment, on a fully diluted basis. In addition, the SPL Agreement provides
the Company with a $2,500,000 Working Capital Facility.
In
connection with this financing, specifically the shares to be received upon
potential conversion of the Convertible Note and the exercise of the Warrants,
the Company was obligated to file a registration statement with the Securities
and Exchange Commission (“SEC”). The registration statement was filed with the
SEC and became effective as of January 14, 2008.
To
secure
payment of the principal amount of the Convertible Note, the Company
hypothecated, in favour of the holder of the Convertible Note, the universality
of all of the immoveable and moveable assets, corporeal and incorporeal, present
and future of the Company.
The
Convertible Note contains events of default that would permit the Investor
to
demand repayment.
The
SPL
with respect to this Convertible Note contains certain covenants (a) related
to
the conduct of the business of the Company and its subsidiaries; (b) related
to
certain financial covenants; (c) related to creation or assumption of liens
other than liens created pursuant to the SPL, as defined in the SPL; (d) for
so
long as this Note remains outstanding, the Company shall not, without the
consent of the holder of the Convertible Note, 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 this
Convertible Note provided however that the Company could have a certain maximum
amount of outstanding bank debt.
Critical
Accounting Policies and Estimates
The
accompanying management discussion and analysis of our results of operations
and
financial condition are based on our consolidated financial statements, which
are prepared in accordance with accounting principles generally accepted in
the
United States of America (U.S. GAAP).
The
preparation of financial statements in conformity with United States Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes estimates about the effects of matters that are
inherently uncertain.
These
estimates form the basis for making judgments about the
financial
position and results of operations, which are integral to understanding the
Company’s financial statements
.
We base
our estimates and judgments on historical experience and on other assumptions
that we believe are reasonable under the circumstances. However, future events
cannot be forecasted with certainty and the best estimates and judgments
routinely require adjustments. We are required to make estimates and judgments
in many areas, including those related to fair value of derivative financial
instruments, recording of various accruals, bad debts and inventory reserves,
the useful lives of long-lived assets such as property and equipment, warranty
obligations and potential losses from contingencies and litigation. We believe
the policies disclosed are the most critical to our financial statements because
their application places the most significant demands on management’s judgment.
Senior management has discussed the development, selection and disclosure of
these estimates with the Audit Committee of our Board of Directors.
There
have been no significant changes during the fiscal year 2007 to the items that
we disclosed as our critical accounting policies and estimates in our discussion
and analysis of financial condition and results of operations in our Form 10-KSB
for the fiscal year ended June 30, 2007, except as noted below for stock-based
compensation and C-Chip’s revenue recognition policy.
Stock-Based
Compensation Expense
Effective
July 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(Revised 2004), “Share-Based Payment. SFAS 123(R) requires the recognition of
the fair value of stock-based compensation as an expense in the calculation
of
net income. Under the fair value recognition provisions of SFAS 123(R),
stock-based compensation cost is estimated at the grant date based on the fair
value of the award and is recognized as expense ratably over the requisite
service period of the award. Determining the appropriate fair value model and
calculating the fair value of stock-based awards requires judgment, including
estimating stock price volatility and expected lives. The Company has elected
the modified prospective transition method for adopting FAS 123(R). Under this
method, the provisions of FAS 123(R) apply to all stock-based awards granted
after the July 1, 2006 effective date. The unrecognized expense of awards not
yet vested as of July 1, 2006, is also recognized as an expense in the
calculation of net income.
C-Chip
Revenue Recognition
C-Chip
derives revenues from the sale of credit management devices and associated
services. The devices are bundled with service agreements which provide 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
is generally three years. Since the services are essential to the functionality
of the device, revenues from the sale of devices (including services) are
deferred and recognized as revenue over the contractual service period and
the
related cost of revenues is deferred and amortized to cost of revenues over
the
corresponding period. Such items are 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 may also earn other amounts during the
service period, which are charged to the customer on a pay per use basis, for
which revenue and the related costs are recognized when proof is obtained that
the end-user has been delivered the devices by the Licensee and collectability
is reasonably assured by the Licensee.
The
revenue recognition policy for C-Chip, as noted above, was applied until
November 30, 2006. Effective December 1, 2006, in accordance with the Technology
License Agreement (“Agreement”) signed by C-Chip, it will commence recording
royalties based on C-Chip’s technology in the credit management devices. As
consideration for the exclusive license, the licensee shall pay to C-Chip
royalties equal to the greater of: (i) $20 per device sold or (ii) $30,000
per
month. As a result of the change in business model and corresponding revenue
recognition policy, all Deferred Revenue and Deferred Contract Costs accumulated
until November 30, 2006 under the previous revenue recognition policy have
been
taken into revenue and expense and thus included in the results of operations
for the year ended June 30, 2007. This resulted in an increase in revenue and
expense for the year ended June 30, 2007 in the amounts of $1,685,566 and
$1,586,814, respectively.
C-Chip
recorded royalties’ income of $226,228 and $398,100 for the three and six month
periods ended December 31, 2007.
Fair
Value of Financial Instruments
The
fair
value of cash and cash equivalents, accounts receivable, restricted marketable
securities, accounts payable and accrued liabilities are comparable to the
carrying amount thereof given their short-term maturity. Bank and other loans
payable, mortgage loan, capital lease obligations and due to related parties
are
recorded at their carrying values which also approximate their fair values.
Other debt instruments, such as the convertible debentures, balance of purchase
price payable and the derivative financial instrument, have been recorded at
discounted values, present values or fair values depending on the nature of
the
debt instrument.
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.
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 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.
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, provided there is reasonable assurance that
the
credits will be realized.
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 ITC’s 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 net operating losses of $23.1 million
from its inception which expire starting in 2015. 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.
Deferred
income tax assets and liabilities are measured by applying enacted or
substantively enacted tax rates and laws at the date of the financial statements
for the years in which the differences are expected to reverse.
Derivative
instruments
In
connection with the sale of debt or equity instruments, we may sell options
or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as conversion options, which in certain circumstances may
be
required to be bifurcated from the associated host instrument and accounted
for
separately as a derivative instrument liability.
The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded
as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated conversion options that are accounted for
as
derivative instrument liabilities, we determine the fair value of these
instruments using the Black-Scholes option pricing model. That model requires
assumptions related to the remaining term of the instruments and risk-free
rates
of return, our current common stock price and expected dividend yield, and
the
expected volatility of our common stock price over the life of the option.
Due
to the fact that the trading history for our common stock is limited, we have
estimated the future volatility of our common stock price based on not only
the
history of our stock price but also the experience of other entities considered
comparable to us. The identification of, and accounting for, derivative
instruments and the assumptions used to value them can significantly affect
our
financial statements.
Recent
Accounting Pronouncements
|
a)
|
Recent
Accounting Pronouncements Adopted During
2008
|
The
Company, as required, adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”
(“SFAS 109”), effective July 1, 2007. FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. With respect to a minimum recognition
threshold, FIN 48 requires that the Company recognize, in its financial
statements, the impact of a tax position if that position is more likely than
not of being sustained on an audit, based on the technical merits of the
position. In addition, FIN 48 specifically excludes income taxes from the scope
of Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies”. FIN 48 applies to all tax positions related to income taxes that
are subject to SFAS 109, including tax positions considered to be routine.
As a
result of the implementation, no adjustment was required to the amount of the
unrecognized tax benefits.
The
Company recognizes interest and penalties related to uncertain tax positions
in
interest expense. As at December 31, 2007, the Company made no provisions for
interest or penalties related to uncertain tax positions.
The
Company and its subsidiaries file income tax returns in Canadian and U.S.
federal jurisdictions, and various provincial jurisdictions. The Company’s
federal income tax returns are generally subject to examination for a period
of
three years after filing of the respective return in the U.S. and four years
in
Canada.
In
addition, upon inclusion of the Canadian operating losses and Experimental
Development unclaimed expenses carryforward tax benefits, from prior tax years,
in future tax returns, the related tax benefit for the period in which the
benefit arose may be subject to examination.
|
b)
|
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
|
|
|
c)
|
Recent
Accounting Pronouncements Not Yet
Adopted
|
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.
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.
Off-Balance
Sheet Arrangements
None