UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
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x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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FOR
THE FISCAL YEAR ENDED
JUNE
30, 2008
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OR
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¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the transition period from to
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COMMISSION
FILE NUMBER 000-33199
AVENSYS
CORPORATION
(Exact
name of registrant as specified in its charter)
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NEVADA
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88-0467845
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(State
of other jurisdiction of incorporation or organization)
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(IRS
Employer Identification Number)
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400
Montpellier Blvd.
Montreal,
Quebec
Canada
H4N 2G7
(Address
of principal executive offices)
(514)
904-6030
(Registrant's
telephone number, including area code)
Copies
to:
Darrin
Ocasio, Esq.
Sichenzia
Ross Friedman Ference LLP
1065
Avenue of the Americas, 21
st
Floor
New
York,
N.Y. 10018
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Title
of each class
Common
Stock - $0.00001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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Accelerated
filer
¨
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Non-accelerated
filer
¨
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Smaller
reporting company
x
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(Do
not check if a smaller reporting company)
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Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
¨
No
x
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The
aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the registrant’s common stock as
reported on the OTC Bulletin Board on Ocotber 1,2008 was
$6,437,350.
As
of
October 17, 2008, there were outstanding
99,036,152
shares
of common stock.
Documents
Incorporated By Reference
None
TABLE
OF
CONTENTS
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FORM
10-K
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1
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PART
I
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2
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ITEM 1.
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DESCRIPTION
OF BUSINESS
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3
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ITEM 2.
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RISK
FACTORS
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9
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ITEM 3.
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DESCRIPTION
OF PROPERTIES
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18
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ITEM 4.
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LEGAL
PROCEEDINGS
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19
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ITEM 5.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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20
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PART
II
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21
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ITEM 6.
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
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21
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ITEM 7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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26
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ITEM 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
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52
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ITEM 9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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53
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ITEM 9A.
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CONTROLS
AND PROCEDURES
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54
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ITEM 9B.
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OTHER
INFORMATION
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56
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PART
III
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57
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ITEM 10.
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DIRECTORS,
OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(a)
OF
THE EXCHANGE ACT
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57
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ITEM 11.
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EXECUTIVE
COMPENSATION
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61
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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65
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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66
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ITEM 14.
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EXHIBITS
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67
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ITEM 15.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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69
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PART
I
We
make
forward-looking statements in this document. Our forward-looking statements
are
subject to risks and uncertainties. You should note that many factors, some
of
which are described in this Part I or discussed elsewhere in this document,
could affect our company in the future and could cause our results to differ
materially from those expressed in our forward-looking statements, including
those matters discussed under the heading “Risk Factors” below. Forward-looking
statements include those regarding our goals, beliefs, plans or current
expectations and other statements regarding matters that are not historical
facts. For example, we use the words “believe,” “expect,” “anticipate” or
similar expressions to make forward-looking statements.
Important
factors that could cause our actual results to differ materially from those
expressed or implied by such forward-looking statements include:
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Our
ability to grow our revenue and expand acceptance of our products
in our
principal markets.
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The
continued availability of capital to finance our activities in the
event
that we do not achieve
profitability.
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Our
ability to successfully integrate technologies or companies that
we
acquire.
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Our
ability to obtain and enforce in a timely manner patent and other
intellectual property protection for our technology and
products.
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Our
ability to avoid, either by product design, licensing arrangement
or
otherwise, infringement of third parties’ intellectual
property.
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Our
ability to complete and maintain corporate alliances relating to
the
development and commercialization of our technology and
products.
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The
competitive environment and impact of technological
change.
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Other
factors we discuss under the heading “Risk
Factors.”
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We
are
not required to publicly release the results of any revisions to these
forward-looking statements we make to reflect future events or circumstances,
except as may be required under applicable securities laws.
ITEM
1.
DESCRIPTION
OF BUSINESS
Overview
Avensys
Corporation operates two divisions, through its wholly owned subsidiary Avensys
Inc.:
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Avensys
Technologies designs, manufactures, distributes, and markets high
reliability optical components and modules as well as FBGs for the
telecom
market and high power devices and sub-assemblies for the industrial
market.
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·
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Avensys
Solutions, the other division of Avensys, is an industry leader in
providing instrumentation and integrated solutions for the monitoring
of
industrial processes and environmental surveillance applications
for air,
water and soil in the Canadian marketplace.
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Corporate
History
Avensys
Corporation (sometimes referred to as “we,” “our,” “us,” or the “Company”), was
incorporated in the State of Nevada on June 26, 2000 as
Keystone
Mines Limited
and
maintains its principal executive offices at 400 Montpellier Blvd., Montreal,
Quebec, Canada, H4N 2G7.
In
June
2000, the Company purchased four mineral claims, situated in the Greenwood
Mining Division in the Province of British Columbia, Canada. At that time,
our
principal business plan was to acquire, explore and develop mineral properties
and to ultimately seek earnings by exploiting the mineral claims.
In
December 2002, we were advised that the mineral properties held were not
economically viable. Our board of directors approved the termination of our
exploration activity.
In
March
2003, we changed our company name to
C-Chip
Technologies Corporation
in order
to better reflect our new business activities, and began trading on the OTC
Bulletin Board (OTC-BB) under the symbol "CCHI."
In
July
2005, Shareholders approved a name change for the Company to
Manaris Corporation
to
reflect C-Chip Technologies expanded scope of business. As a result, the new
trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."
In
December 2007, we changed our company name to
Avensys
Corporation
,
to
accurately reflect the Company’s decision to focus its strategic efforts on
furthering the advancement of its flagship subsidiary, Avensys Inc. As a result,
the new trading symbol on the OTC Bulletin Board (OTC-BB) became
"AVNY."
Recent
Developments
Acquisition
of the Assets of Willer Engineering Limited:
On
March
31, 2008, Avensys Corporation and its wholly owned subsidiary, Avensys Inc.,
entered into an Asset Purchase Agreement (the "Purchase Agreement") to acquire
substantially all of the operating assets of Willer Engineering Limited
(“Willer”). The total purchase price paid, including contingent consideration,
for the operating assets pursuant to the Purchase Agreement is CAD $705,000,
subject to adjustments based namely on performance targets. The acquisition
expands Avensys Solutions’ service offerings, establishing the Company as a
strong presence with the ability to expand product lines beyond its current
capabilities, especially in the Canadian markets, where there is strong demand.
Willer’s services include professional instrumentation solutions as well as
products and services to the industrial industry in the Eastern region of
Canada.
Departure
of CFO and Corporate Secretary of Avensys Corporation’s Board of
Directors:
On
April
17, 2008, Mr. Tony Giuliano left the employment of the Company and resigned
as
its Chief Financial Officer and Corporate Secretary, effective as of the same
date. Mr. Giuliano had served as Chief Financial Officer of the Company since
October 20, 2006.
Appointment
of CFO and Corporate Secretary of Avensys Corporation:
On
April
17, 2008, Mr. André Maréchal, Vice-President of Finance and Administration of
Avensys Inc., a wholly owned subsidiary of the Company, was appointed Chief
Financial Officer of the Company. On May 8, 2008, he was also appointed as
the
Company’s Corporate Secretary.
Departure
of Director of Avensys Corporation:
On
June
10, 2008, John Simons retired as Chairman and a director of the Board of
Directors of Avensys Corporation. There was no disagreement or dispute between
Mr. Simons and the Company which led to his retirement. The Board of Directors
accepted his retirement and appointed Jos Wintermans, a director of the Company
since November 2005 and Chair of the Compensation Committee, to replace Mr.
Simons as Chairman of the Board.
Appointment
of Director of Avensys Corporation:
On
June
27, 2008, the Board of Directors appointed Mr. Jean-Marc Fortier as
non-executive Director of the Board of Directors to fill the vacancy created
by
Mr. John Simons’ resignation. On July 3, 2008, Mr. Fortier accepted the terms of
his appointment.
Termination
of License Agreement between C-Chip Technologies North America and iMetrik
On
February 6, 2008, the Technology License Agreement between our subsidiary C-Chip
Technologies (North America) and its business partner iMetrik Inc. was
terminated. Subsequent to December 31, 2007, no further royalties are payable
to
C-Chip and the outstanding balance of the C-Chip loan from iMetrik was forgiven
as of the same date. As a result, we have recognized a gain of $351,059 during
the third quarter, on the forgiveness of the loan. This amount represented
the
outstanding balance of the loan at December 31, 2007. 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. In terminating the Technology License Agreement, the
Company ceased to operate C-Chip, and ceased to derive any cash flows from
the
prior C-Chip activities which, starting in the third quarter of fiscal 2008,
were classified as discontinued operations.
Amendment
of ITF Preferred Shareholder Agreement
As
part
of the acquisition of ITF Optical Technologies Inc. (Note 13 of consolidated
financial statements), the Company entered into a shareholder agreement which
stipulated that, between April 1, 2009 and October 1, 2009, each ITF Preferred
Shareholder shall have an option to (i) sell their shares in ITF Labs’ ownership
to AVI for its proportionate share of CAD $2,000,000 to be paid in cash, or
(ii)
exchange their shares in ITF Labs’ ownership for 3,826,531 freely tradable
shares of Company common shares at a reference per share price of $0.342; the
equivalent of CAD $1,500,000 (the “put option”).
On
September 11, 2008, the Company and the ITF Preferred Shareholders amended
the
agreement described above as follows:
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The
date permitting the exercise of the put option by the ITF Preferred
Shareholders is postponed by 18 months from April 1, 2009 to October
1,
2010. The date at which the put option expires has also been postponed
from October 1, 2009 to December 31,
2010.
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•
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AVI
will pay interest at 10% annually from April 1, 2009 until the date
of
exercise of the put option on each ITF Preferred Shareholder’s
proportional share of the consideration, should they choose to exercise
their option.
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•
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Avensys
Inc. will also raise the total amount of the share consideration
from CAD
$1,500,000 to CAD $2,000,000 and will reduce the reference price
from
$0.342 to $0.11, should the Preferred Holders choose to exercise
the put
option for their proportionate amount of common shares of the
Company.
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Technologies
and Solutions
Our
Avensys Inc. subsidiary offers the following technologies and solutions: Optical
Components and Modules, Environment Monitoring.
Optical
Components & Modules
Optical
components and modules, provided by the Avensys Technologies’ division of our
Avensys subsidiary, represent the most significant source of growth within
Avensys and generated about 60% of Avensys Inc. revenues in fiscal year
2008.
The
optical components that we manufacture are based on two main
technologies:
Avensys
Tech is licensed by ITF Labs, its partly owned R&D facility, as well as by
external organizations such as the CRC (Communication Research Center of Canada)
and UTC (United Technologies Corporation) to produce optical components and
modules. In addition to our own intellectual property, Avensys benefits from
over 29 inventions for which ITF Labs holds patents, and will benefit from
another 9 inventions for which patents are pending.
The
products that we have developed are targeted towards three main
markets:
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Telecommunications.
The majority of our optical components are destined to the
telecommunications market. After a few difficult years, this market
sustained healthy growth in fiscal year
2008.
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Fiber
Laser. Fiber laser is a relatively new market that is rapidly growing.
Over the next few years, we believe that a significant portion of
conventional lasers will be replaced by fiber lasers. This technology
is
mainly geared towards industrial, aerospace and military
sectors.
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Optical
Sensors. Although the optical sensing market has existed for over
ten
years, it is still in its early stages of growth. This technology
is
mainly geared towards the aerospace sector, oil and gas industries,
and
industrial, medical and civil
engineering.
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Our
distribution for optical components follows both a direct distribution model
and
partnerships with local distributors in certain areas of the world, notably
Asia
and Europe. Our revenue streams are split almost evenly between North America,
Europe, and Asia.
Environmental
and Industrial Process Monitoring
Avensys
Solutions
,
the
other
division of Avensys Inc.
,
is
an
industry leader in providing instrumentation and integrated solutions for the
monitoring of industrial processes and environmental surveillance applications
for air, water and soil in the Canadian marketplace. It has sales offices in
Dartmouth, Montreal, Toronto, Sarnia, Calgary, and Vancouver. Our Montreal
and
Toronto offices also include integration engineers and technicians involved
in
initial installations, customer training and ongoing maintenance and calibration
contracts. We also have service partners allowing us to efficiently service
other areas.
Avensys
Solutions addresses the needs of specific markets and applications including
those of:
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Waste
water treatment plants in both municipal and industrial
markets
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Industrial
plants and processes
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Ambient
air monitoring for both government organizations and
industries
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Water
quality monitoring
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Natural
resources management
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Universities
and laboratories research programs
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Industrial
health and safety applications
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With
a
well established base of over 1000 accounts, a solid reputation and more than
30
years of experience as a distributor of leading manufacturers from around the
world, this division has evolved significantly over the last 3 years and has
become successful at providing value-added services including engineering,
commissioning, and maintenance & calibration services. It has developed a
distinctive expertise in providing turn-key solutions aimed at monitoring
environmental contaminants in air, water and soil, and in achieving growth
rates
beyond industry average while addressing the needs of both governments and
Canadian industries.
With
the
recent acquisition of Willer Engineering in the third fiscal quarter, Avensys
Solutions has expanded its scope, further increasing its presence by moving
into
the monitoring of the processes leading to the need for environmental
monitoring. The combination of Willer Engineering's know-how in the industrial
process industry, a more comprehensive product portfolio and the strength of
Avensys' environmental monitoring solutions results in a stronger organization,
one which can "wrap up" all instrumentation technologies into a complete,
integrated solution.
We
believe that our society's growing concern for the environment and the increased
attention it is getting from our governments, combined with our industries’ need
to fine-tune processes to achieve sustainable growth, will create significant
growth opportunities. Our focus on integrated monitoring solutions which can
address both process optimization and environmental compliance positions Avensys
Solutions at the forefront of this trend.
Warranties
Avensys’
warranty policy for manufactured products varies between three (3) months and
five (5) years, depending on the product and the customer.
Insurance
Avensys
currently maintains an insurance coverage of USD$5,000,000 for its Directors
and
Officers. Avensys maintains an insurance coverage of CAD$2,469,000 for its
inventory, CAD$43,938,000 for its fixed assets, and CAD$5,000,000 for general
liability.
Government
Regulation
Manufactured
products are subject to various industry and government certifications, all
of
which need to be obtained before commercial launch.
Employees
As
of
October 17, 2008, we have one hundred and ninety three (193) employees; 193
(Avensys including ITF Labs), 0 (Avensys Corporation) employees. Of the 193
employees at Avensys and ITF Labs, 160 are Avensys employees, and 33 are ITF
Labs employees. Our employees are not unionized. We believe relationships with
our employees and consultants are good.
ITEM
2.
RISK
FACTORS
The
risks
and uncertainties described below are not the only ones our Company faces.
Additional risks not presently known or currently considered insignificant
may
also impair our business operations in the future. Our business, financial
condition and plan of operations could be materially adversely affected by
any
of the following risks. Furthermore, the trading price of our common shares
could decline due to any of these risks.
RISKS
ASSOCIATED WITH OUR BUSINESS:
There
exists doubt about our ability to continue as a going
concern
Our
financial statements for the year ended June 30, 2008 disclose that there exists
substantial doubt that the company will be able to continue as a going concern.
The inclusion of this note in the financial statements underscores the fact
that
the company needs to either raise additional financing or become profitable
in
the short-term in order to continue operations. As further discussed below,
if
the company is not able to achieve its objectives or raise additional capital,
it may be forced to suspend or cease operations.
We
have experienced a history of losses
Our
losses have resulted principally from costs incurred in research and development
activities related to our efforts to develop our technologies, and from
associated marketing and administrative costs. On June 30, 2008 we had a working
capital surplus of $700,504 and an accumulated deficit of $32,406,073.
Included
in current liabilities is an amount of $40,000 due to a related party that
carries no interest or fixed terms of repayment. Funds on hand, together with
an
operating loss, will not sustain operations for the next year. As a result,
we
will need to raise additional capital to sustain our operations. In order to
become profitable, we will need to generate significant additional revenues
to
offset our cost of revenues, sales and marketing, research and development
and
general and administrative expenses. We may not achieve or sustain our revenue
or profit objectives and our losses may continue or increase in the future
in
which case you might lose your investment. If we are not able to fund our
operations through product sales and investments by third parties, we will
have
to cease operations.
We
may not be able to obtain additional financing when needed or on acceptable
terms.
We
may
need to raise additional capital to sustain our operations or to pursue our
acquisition strategy. We cannot assure you that any required additional
financing will be available or, if it is, whether it will be on acceptable
terms. Our inability to obtain any needed financing, or the terms on which
it
may be available, could have a material adverse effect on our business. As
a
result, we could have to suspend or cease our operations and you could lose
your
entire investment.
We
have incurred substantial debt which could affect our ability to obtain
additional funds and may increase our vulnerability to economic and/or business
downturns.
On
February 16, 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which we agreed to
issue units consisting of an aggregate of $4,675,000 of our Company's 9.0%
Senior Secured Convertible Notes, Series A (the "Series A Notes"), which are
convertible into shares of our common stock at a conversion price of $0.35
per
share. Under the terms of the 9.0% Senior Secured Convertible Note, Series
A,
the Principal on the Note was to be paid to the Holder in twenty (20) equal
monthly installments, with each payment equal to 5% of the principal amount,
commencing on June 16, 2005 and continuing on the same day of each month
thereafter on the tenth date immediately preceding the principal payment date.
All payments of principal were to be made at our option in cash or, with ten
(10) business day prior notice, in our common stock valued at 85% of the average
closing bid price of our stock in the most recent five trading days prior to
a
valuation date. As of January 2007, the outstanding debt on the principal
payment of the 9.0% Senior Secured Convertible Note, Series A was fully repaid.
On
August
11, 2006, we entered into a Note and Warrant Purchase Agreement (the “Purchase
Agreement”) providing for the sale by the Company of Series B Subordinated
Secured Convertible Notes (the "Series B Notes") in an aggregate principal
amount of approximately $3.6 million and Original Issue Discount Subordinated
Secured Convertible Notes equal to fifteen percent (15%) of the aggregate
principal amount of Series B Notes (the "OID Notes") (collectively, the "Notes")
to certain institutional and accredited investors (the "Investors"). Pursuant
to
the Purchase Agreement, the Company also 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") (collectively, the "Warrants").
During
the first quarter of fiscal 2008, the Company redeemed the Notes, originally
due
on February 11, 2009. 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 remain with the holders of the Notes will have its
exercise prices reduced to and fixed at $0.11 per share, with no further ratchet
or anti-dilution provisions. In connection with the redemption of the Notes,
the
Company received a $3.4 million secured loan facility from Imperium Master
Fund,
LTD (the “Investor”). The terms of the loan facility state that interest will be
paid by the Company on the unpaid principal amount at an annual rate equal
to
8.5%. It was the intention of the Company and the Investor to replace the
secured loan facility with a comprehensive refinancing to facilitate a capital
restructuring that will provide the Company with additional working capital
and
credit facilities. On September 24, 2007, the Company entered into a Securities
Purchase and Loan Agreement (“SPL Agreement”) with the Investor for the sale of
a 6% Original Issue Discount Senior Secured Convertible Note (the “Convertible
Note”) in the amount of $4,708,900. The principal value and the gross proceeds
of the Convertible Note is $4,000,000. The gross proceeds will be used to repay
the secured loan facility, with the balance of funds to be used for working
capital purposes. The Convertible Note matures on September 24, 2012 and the
original principal amount is convertible into common shares of the Company
at a
conversion price of $0.11. The principal value will accrete to the value of
the
Convertible Note over a two year period and will subsequently accrue interest
at
6%. Monthly installments of principal and interest will be payable commencing
after the second year up to the maturity date. The SPL Agreement also provides
the holder of the Convertible Note with a Warrant to purchase up to 20,276,190
shares of the Company’s outstanding common stock on a fully diluted basis. On
August 22, 2007, the Company issued to the holder of the Convertible Note a
warrant to purchase up to five percent (5%) of the Company’s outstanding common
stock on a fully diluted basis. In addition, the SPL Agreement provides the
Company with a $2,500,000 Working Capital Facility
As
a
result, we are subject to the risks associated with substantial indebtedness,
including:
|
-
|
we
are required to dedicate a portion of our cash flows from operations
to
pay debt service costs;
|
|
-
|
it
may be more difficult and expensive to obtain additional funds through
financing, if available at all;
|
|
-
|
we
are more vulnerable to economic downturns and fluctuations in interest
rates, less able to withstand competitive pressures and less flexible
in
reacting to changes in our industry and general economic conditions;
and
|
|
-
|
if
we default under any of our existing indebtedness or if our creditors
demand payment of a portion or all of our indebtedness, we may not
have
sufficient funds to make such payments.
|
If
we default under our financing agreements, we may have to forfeit our rights
to
our assets.
We
have
pledged all of our assets, including the assets of our subsidiaries, as security
to holders of our convertible debentures. A default under the financing
agreement concluded with holders of our convertible debentures, if not waived
or
cured, would permit the holders of the convertible debentures to foreclose
on
the collateral and we could lose all our rights in the collateral, which would
have a materially adverse effect on our business. As a result, we could have
to
suspend or cease our operations and you could lose your entire investment.
We
may seek to make acquisitions that prove unsuccessful or strain or divert our
resources.
We
may
seek to grow our business through acquisitions of similar businesses. Such
acquisitions present risks that could materially adversely affect our business
and financial performance, including:
|
-
|
the
diversion of our management's attention from our everyday business
activities;
|
|
-
|
the
assimilation of the operations and personnel of the acquired business;
|
|
-
|
the
contingent and latent risks associated with the past operations of,
and
other unanticipated problem arising in, the acquired business; and
|
|
-
|
the
need to expand management, administration, and operational
systems.
|
If
we
make such acquisitions we cannot predict whether:
|
-
|
we
will be able to successfully integrate the operations of any new
businesses into our business;
|
|
-
|
we
will realize any anticipated benefits of completed acquisitions;
or
|
|
-
|
there
will be substantial unanticipated costs associated with acquisitions.
|
In
addition, future acquisitions by us may result in:
|
-
|
potentially
dilutive issuances of our equity securities;
|
|
-
|
the
incurrence of additional debt; and
|
|
-
|
the
recognition of significant charges for depreciation and amortization
related to goodwill and other intangible assets.
|
Although
we have no present plans or intentions, we continuously evaluate potential
acquisitions of similar businesses. However, we have not reached any agreement
or arrangement with respect to any particular acquisition and we may not be
able
to complete any acquisitions on favorable terms or at all.
There
may be undisclosed liabilities associated with our
acquisitions.
In
connection with any acquisition made by us, there may be liabilities that we
fail to discover or are unable to discover including liabilities arising from
non-compliance with laws and regulations by prior owners and for which we,
as
successor owners, may be responsible. Similarly, we may incur expenses to
investigate the merits of future acquisitions that may never materialize,
resulting in a potential charge.
We
may not be able to develop or manage our internal growth.
Our
growing existing businesses may strain our management, human resources and
information systems. To manage our growth successfully, we will have to add
managers and employees and update our operating, financial and other systems,
procedures and controls. In addition, issues relating to new acquisitions may
divert current management's attention from existing operations.
We
are highly dependent on our executive management and other key employees.
We
rely
heavily on our executive management and key employees for providing services
and
for continued business development. We have employment agreements which contain
non-competition and non-solicitation provisions with most of our executive
managers and other key employees. Our business could be materially adversely
affected if a number of our executive managers and other key employees were
to
leave us and if we were unable to enforce the non-competition and
non-solicitation agreements or to attract and retain qualified replacements.
Some
of our products and services are in the development stage, and may not be
effective at a level sufficient to support a profitable business venture.
If
our
products or services are not effective at a level sufficient to support a
profitable venture, we will be unable to create other marketable products and
services, and we will have to cease some of our operations. About 60% of Avensys
Inc.’s revenues depend on volume production of products sold by the Avensys
Technologies division to a few large customers. These products are subject
to
competitive pressures and continuous improvement challenges. Variations in
demand volume and specifications may lead to losses in economies of scale and/or
decreased yields. ITF Labs revenues, which account for less than $2 million,
are
directly associated with prototypes and R&D products and are therefore
subject to low yields and risky, potentially low market demand.
We
can
offer you no assurance that all of our products and services will be effective
at a level sufficient to support a profitable business venture. If they are
not,
we will be unable to create marketable products, we will not generate sufficient
revenues from our key operations, and we will have to reduce, suspend or cease
key operations and you could lose your entire investment.
If
we cannot deliver the features and functionality our customers demand, we will
be unable to attract customers, and that will result in a loss of income and
eventually a termination of our operations.
As
a
provider of fiber components and modules, our future success depends largely
upon our ability to determine the features, and functionality our customers
demand and to design and implement products that meet their needs in a cost
efficient manner. Although we have often been a leader in introducing new
products and technologies, maintaining that leadership while responding to
downward pressures on price is an ongoing challenge. We cannot assure that
we
will be able to successfully determine customer requirements or that our current
or future products and services will adequately satisfy customer demands. If
we
cannot meet our customers' demands, we will not generate revenues from this
business and we may have to cease or suspend key operations.
Our
business depends on the protection of its intellectual property and proprietary
information.
We
rely
on a combination of trade secret and trademark laws, confidentiality procedures,
contractual provisions and patent and copyright laws to protect our proprietary
rights in our products and technology. These measures may not be adequate to
protect our trade secrets and proprietary technology. As a result, unauthorized
third parties may copy or otherwise obtain and use our products or technology.
To enforce and defend our intellectual property rights and our proprietary
rights, we may have to engage in litigation, either domestically or in other
countries, and we could face substantial costs and diversion of resources,
including management’s attention, regardless of the outcome of that litigation.
Our attempts to enforce our intellectual property rights may not be successful,
may result in royalties that are less than the cost of such enforcement efforts
or may result in the loss of the intellectual property altogether. Furthermore,
we may not have adequate funds available to prosecute actions to protect or
defend our proprietary rights, in which case those using our proprietary rights
may continue to do so in the future. Even if we succeeded in protecting our
intellectual property, others may independently develop similar technologies
or
products that do not infringe on our intellectual property.
Our
registered trademarks may not provide us with adequate protection.
Third
parties may appropriate our trademarks, and that may reduce our competitive
edge
and cause our revenues to decrease. Even though we have trademarks, there is
no
assurance that third parties may not infringe on our trademarks. In order to
protect our trademark rights, we may have to file lawsuits and obtain
injunctions, which would likely be expensive and divert our resources. If we
do
that, we will have to spend large sums of money for legal fees in order to
obtain the injunctions. Even if we obtain the injunctions, there is no assurance
that those infringing on our trademarks will comply with the injunctions.
Furthermore, we may not have adequate funds available to prosecute actions
to
protect or to defend our trademarks, in which case those infringing on our
trademarks could continue to do so in the future.
Third
parties may claim that our current or future products or services infringe
their
proprietary rights or assert other claims against us.
Any
claims filed against us alleging that we infringe third-party proprietary rights
could result in significant expenses or restrictions on our ability to provide
our products and services. As the number of entrants into our market increases,
the possibility of an intellectual property or other claim against us grows.
Any
intellectual property or other claim, with or without merit, would be
time-consuming and expensive to litigate or settle and could divert management’s
attention from focusing on our core business. As a result of such a dispute,
we
may have to pay damages, incur substantial legal fees, develop costly
non-infringing technology, if possible, or enter into license agreements, which
may not be available on terms acceptable to us, if at all. As a result, our
business and operating results could be materially adversely affected. No such
claims have been filed against us at this time.
Competitive
conditions could materially adversely affect our businesses.
The
markets in which we do, and intend to do business are highly competitive. Our
ability to execute our business strategy depends, in part, upon our ability
to
develop and commercialize efficient and effective products based on our
technologies. We compete against established companies as well as numerous
independently owned small businesses. Many of our competitors are capable of
developing products based on similar technology, have developed and are capable
of continuing to develop products based on other technologies, which are or
may
be competitive with our products and technologies. In all market segments in
which we operate, there are many competitors, some of which are significantly
larger, and some of which have access to much more important resources or
capital than us, or have better reputations among potential customers in the
delivery of particular services or products. Our competitors may succeed in
developing competing products and technologies that are more effective than
our
products and technologies, which may render our existing and new products or
technology uncompetitive, uneconomical or obsolete.
We
may be exposed to liability claims if products based on our technologies are
marketed and sold.
We
have
general liability insurance coverage for CAD$5,000,000. However, if a judgment
is rendered against us in excess of the amount of our coverage, we may have
to
cease operations. If we are sued for any reason, we will have to rely on our
liability insurance to pay any judgment rendered against us. Although we
maintain a general liability insurance of CAD$5,000,000, we cannot provide
any
assurance that:
-
our
insurance will provide adequate coverage against potential liabilities if a
product or a service that we provide causes harm or fails to perform as
promised;
-
adequate liability insurance will continue to be available in the future; or
-
our
insurance can be maintained on acceptable terms.
The
obligation to pay any liability claim in excess of whatever insurance we are
able to obtain would increase our expenses and could greatly reduce our assets
or cause us to cease operations. If a judgment is rendered against us for any
amount over our coverage of CAD$5,000,000, we may have to cease operations.
Fluctuations
in the value of foreign currencies could result in increased product costs
and
operating expenses.
We
have
suppliers that are located outside Canada and the U.S. The functional currency
of our operating subsidiary is the Canadian dollar and we report our results
in
U.S. dollars. Fluctuations in the value of Canadian and U.S. dollars are
difficult to predict and can cause us to incur currency exchange costs.
Although, we cannot predict the effect of exchange rate fluctuations on our
future operating results any material changes could cause our operating results
to be materially adversely affected.
RISKS
ASSOCIATED WITH OUR COMMON STOCK:
The
market of our common stock is limited.
The
market for our common stock being limited, you may not be able to resell your
shares of common stock. There is currently only a limited trading market for
our
common stock. Our common stock trades on the Bulletin Board operated by the
National Association of Securities Dealers, Inc. under the symbol "AVNY."
Trading volume of OTC Bulletin Board stocks has been historically lower and
more
volatile than stocks traded on an exchange. As a result, you may not be able
to
resell your securities in open market transactions.
Sales
of substantial amounts of our common stock could cause our stock price to fall.
As
of
October 17, 2008, 99,086,152 shares of our common stock were outstanding,
91,864,886 of which were freely tradable and 7,221,266 of which were restricted
as a result of securities laws. Sales of a substantial number of shares of
our
common stock could cause the price of our securities to fall and could impair
our ability to raise capital by selling additional securities. The terms on
which we could obtain additional capital during the life of the options and
warrants may be adversely affected, and it should be expected that the holders
of the options and warrants would exercise or convert them at a time when we
would be able to obtain equity capital on terms more favorable than those
provided for by such convertible securities. As a result, any issuance of
additional shares of common stock may cause our current shareholders to suffer
significant dilution which may adversely affect the market price of our common
stock.
Our
common stock being subject to penny stock rules, the liquidity of your
investment may be restricted.
Our
common stock is now and may continue to be in the future subject to the penny
stock rules under the Securities Exchange Act of 1934, as amended. These rules
regulate broker/dealer practices for transactions in "penny stocks." Penny
stocks are generally equity securities with a price of less than $5.00. The
penny stock rules require broker/dealers to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations and the broker/dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction, the broker and/or dealer must make a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser's written agreement to the transaction.
These additional penny stock disclosure requirements are burdensome and may
reduce the trading activity in the market for our common stock. As long as
the
common stock is subject to the penny stock rules, holders of our common stock
may find it more difficult to sell their securities.
There
are a large number of outstanding warrants issued that if exercised may be
available for future sale and the sale of these shares may depress the market
price of our common stock.
As
of
October 17, 2008 we had 99,086,152
shares
of
common stock issued and outstanding. There exist warrants to purchase 44,125,399
shares of common stock at an exercise price ranging between $0.00001 and $0.70.
The sale of these shares may adversely affect the market price of our common
stock.
Our
operating results in future periods may vary from quarter to quarter, and as
a
result, we may fail to meet the expectations of our investors and analysts,
which may cause our stock price to fluctuate or decline.
As
a
manufacturer of fiber-optic components and modules, our contract flow is
sometimes unpredictable, and to the extent that we do not generate new business
upon completion of existing contracts, our revenue will decline. Also, our
facilities may become under utilized, thus increasing our overhead cost burden.
Due to these factors, our revenue and operating results may fluctuate from
quarter to quarter. Due to these risks, you should not rely on period-to-period
comparisons of our results of operations as an indication of future
performance.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and operating results and stockholders could lose confidence in our
financial reporting.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. If we cannot provide reliable financial reports
or
prevent fraud, our operating results could be harmed. We are required to
document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased
control over financial reporting requirements, including annual management
assessments of the effectiveness of such internal controls and we will be
required to provide a report by our independent certified public accounting
firm
addressing these assessments. Failure to achieve and maintain an effective
internal control environment, regardless of whether we are required to maintain
such controls, could also cause investors to lose confidence in our reported
financial information, which could have a material adverse effect on our stock
price.
ITEM
3.
DESCRIPTION
OF PROPERTIES
The
main
office of Avensys Corporation and our wholly owned subsidiary, Avensys Inc.,
is
located at 400 Montpellier, Montreal, Quebec, Canada. The base monthly rent
for the current premises is approximately CAD $27,368. This lease expires on
January 31, 2010 with an option to renew for an additional 5 years until January
31, 2015. Avensys Inc. also maintains warehousing facilities located at 247
Boulevard Thibeau, Cap-de-la-Madeleine, Quebec, Canada. They currently lease
approximately 6,500 square feet and the base rent for the current premises
is
approximately CAD $3,346 per month inclusive of taxes, and is subject to annual
increases equivalent to the increase in the CPI.
Avensys
Solutions also has four field offices in Canada. They currently lease
approximately 3,615 square feet at 422 Consumers Road Toronto, Ontario, Canada.
The office is used for sales personnel, service technicians, and administrative
staff as well as warehousing and shipping. The base rent for the current
premises is approximately CAD $3,809 per month and is subject to annual
increases equivalent to the increase in the Consumer Price Index ("CPI"). This
lease expires on December 31, 2009. They also currently lease approximately
400
square feet for a sales office at 5810-2nd Street S.W., Calgary, Alberta,
Canada. The base rent for the current premises is approximately CAD $1,232
per
month inclusive of taxes, and is subject to annual increases equivalent to
the
increase in the CPI. This lease expires on March 31, 2011. Avensys Solutions
rents two additional small field offices. They currently lease 900 square feet
in Sarnia, Ontario, Canada for a base monthly rent of approximately CAD $993.
They also lease 522 square feet in Dartmouth, Nova Scotia, Canada for a base
monthly rent of CAD $688. The Dartmouth, Nova Scotia field office lease expires
on September 30, 2011.
ITEM
4.
LEGAL
PROCEEDINGS
In
the
course of normal business, the Company may be subject to the threat of
litigation, claims and assessments. Management believes that unfavorable
decisions in any pending procedures or threat of procedures or any amount it
might be required to pay might have a material adverse impact on our financial
condition.
1.
Labor Law Litigation
On
February 7, 2007, a lawsuit was filed by a former employee under Quebec Law
in
the Superior Court of Quebec for a total amount of $268,027 (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. Furthermore, a court date for the hearing has been
scheduled.
Avensys
is not a party to any other pending legal proceeding, nor is its property the
subject of a pending legal proceeding, that is not in the ordinary course of
business or otherwise material to the financial condition of Avensys’
business.
ITEM
5.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART
II
ITEM
6.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our
common shares are traded on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc. under the symbol "AVNY." Our shares
began trading on July 2, 2001. The following table sets forth the closing high
and low prices of the common stock. The quotations reflect inter-dealer prices
and do not represent retail mark-ups, markdowns, commissions, and may not
reflect actual transactions.
|
Fiscal Quarter
|
|
Highest
Closing Price
|
|
Lowest
ClosingPrice
|
|
|
2009
|
|
|
|
|
|
|
|
|
7-01-08
– 9-30-08*
|
|
|
0.08
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
04-01-08
- 06-30-08
|
|
|
0.09
|
|
|
0.07
|
|
|
01-01-08
- 03-31-08
|
|
|
0.09
|
|
|
0.07
|
|
|
10-01-07
- 12-31-07
|
|
|
0.10
|
|
|
0.07
|
|
|
07-01-07
- 09-30-07
|
|
|
0.12
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
04-01-07
- 06-30-07
|
|
|
0.10
|
|
|
0.06
|
|
|
01-01-07
- 03-31-07
|
|
|
0.22
|
|
|
0.11
|
|
|
10-01-06
- 12-31-06
|
|
|
0.26
|
|
|
0.19
|
|
|
07-01-06
- 09-30-06
|
|
|
0.35
|
|
|
0.23
|
|
*
through
September 30, 2008
The
market price of our common shares may be the object of significant fluctuations
related to a number of events and reasons, such as variations in our operating
results, publication of technological developments or new products or services
by us or our competitors, recommendations of securities analysts on us or our
competitors, the operating and stock performance of other companies that the
market may view as related to our business, and news reports relating to trends
in our activities.
In
addition, the stock market in recent years has experienced significant price
and
volume fluctuations that have particularly affected the market prices of many
high technology companies that often may have been unrelated or inconsistent
to
the operating performance of those companies. These fluctuations, as well as
general political, economic and market conditions and other factors, may
adversely affect the market price for our common stock.
Dividend
Policy
We
have
never paid cash dividends on our common shares and at present we do not intend
to pay any cash dividends in the foreseeable future. Our plan is to retain
earnings, if any, to fund our future growth.
On
January 3, 2003, we declared a stock dividend of nineteen (19) shares of common
stock for each share outstanding. The record date for the stock dividend was
January 20, 2003 and our common shares began trading on a post-dividend basis
on
January 23, 2003.
Issuance
and Cancellation of Common Shares
At
June
30, 2008, the Company had authority to issue 500,000,000 shares of common stock.
The Company had 99,036,152 and 93,437,654 of common shares outstanding at June
30, 2008 and 2007, respectively.
For
the
year ended June 30, 2008:
|
a)
|
In
February 2008, the Company issued 462,035 common shares upon the
resolution of a contingency in connection with the acquisition of
the
manufacturing assets of ITF Optical Technologies Inc. in April
2006.
|
On
April
18, 2006, Avensys Corporation, AVI and Avensys Laboratories Inc (“ALI”), entered
into an Asset Purchase Agreement (the “ITF 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.
|
b)
|
In
February 2008, the Company issued 1,477,273 registered common shares,
representing $162,500 in placement agent fees, in connection with
the
Senior Secured Original Issue Discount Convertible Debenture described
in
Note 15(b)
|
|
c)
|
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.
|
|
d)
|
In
August 2007, pursuant to the cashless exercise of warrants described
in
Note 13(b) and other warrants exercised on a cashless basis, the
Company
issued 2,759,235 common shares.
|
|
e)
|
In
August 2007, the Company issued 250,000 registered common shares
as
compensation for legal services.
|
For
the
fiscal year ended June 30, 2007:
|
a)
|
In
April, May and June 2007, the Company issued 10,191,394 common shares
representing scheduled principal payments on the Series B Notes and
the
OID Notes.
|
|
b)
|
In
April 2007, pursuant to the conversion of the unsecured convertible
debentures, the Company issued 1,654,394 common
shares.
|
|
c)
|
In
February and March 2007, the Company issued 2,258,959 common shares
representing scheduled principal payments on the Series B Notes and
the
OID Notes.
|
|
d)
|
In
February 2007, the Company issued 40,000 restricted common shares
as
compensation for legal services.
|
|
e)
|
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 interest
paid. During the first quarter, 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 $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. In September 2006, pursuant
to the
ITF transaction and in connection with the Company’s failure to file the
required registration statement within the time period required by
the
Asset Purchase Agreement, the Company issued 255,079 restricted common
stock shares to the ITF preferred shareholders. The fair value of
the
shares at the issue date that was expensed in the financial statements
was
$73,463. In August 2006, the Company issued 82,934 common shares
to settle
outstanding payables in the amount of
$25,709.
|
Section
15(g) of the Securities Exchange Act of 1934
Our
Company's shares are covered by Section 15(g) of the Securities Exchange Act
of
1934, as amended, that imposes additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouses). For
transactions covered by the Rule, the broker/dealer must make a special
suitability determination for the purchase and have received the purchaser's
written agreement to the transaction prior to the sale. Consequently, the Rule
may affect the ability of broker/dealers to sell our securities and also may
affect your ability to sell your shares in the secondary market.
Section
15(g) also imposes additional sales practice requirements on broker/dealers
who
sell penny securities. These rules require a one-page summary of certain
essential items. The items include the risk of investing in penny stocks in
both
public offerings and secondary marketing; terms important in understanding
the
function of the penny stock market, such as "bid" and "offer" quotes, a dealers
"spread" and broker/dealer compensation; the broker/dealer compensation, the
broker/dealers duties to its customers, including the disclosures required
by
any other penny stock disclosure rules; the customers rights and remedies in
causes of fraud in penny stock transactions; and, the NASD's toll free telephone
number and the central number of the North American Administrators Association,
for information on the disciplinary history of broker/dealers and their
associated persons.
Securities
authorized for issuance under equity compensation plans
We
have
four equity compensation plans: our 2003 Nonqualified Stock Option Plan, our
2004 Nonqualified Stock Option Plan, our Amended and Restated 2006 Nonqualified
Stock Option Plan, and our 2007 Employee Compensation Plan (the "Plans"). The
Plans provide for the issuance of stock options and common stock for services
rendered. The Board of Directors is vested with the power to determine the
terms
and conditions of the stock options and common stock rewards. The Plans include
20,000,000 stock options included in the Stock Option Plans and 4,000,000 common
shares included in the 2007 Employee Compensation Plan. The 2006 Non Qualified
Stock Option Plan was amended and restated to augment the Plan by 5,000,000
stock options on September 5, 2007. The 2007 Employee Compensation Plan came
into effect on August 21, 2007.
As
of
October 17, 2008, stock options to purchase 18,953,489 shares had been granted
of which 5,973,686 options had been exercised, 2,590,530 had been forfeited
and
10,286,773 are outstanding. As at October 17, 2008, we have 3,739,541 stock
options available for issuance.
|
Plan category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) (c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
-
|
|
$
|
0.00
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by securities holders
|
|
|
10,286,773
|
|
$
|
0.35
|
|
|
3,739,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,286,773
|
|
$
|
0.35
|
|
|
3,739,541
|
|
ITEM
7.
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 years ended June
30, 2008 and 2007 as included in this Form 10-K.
With
respect to forward-looking statements made in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations see Part I initial
paragraph concerning “
forward-looking
statements
”.
CORPORATE
OVERVIEW
Avensys
Corporation operates two divisions, through its wholly owned subsidiary Avensys
Inc.:
Avensys
Technologies designs, manufactures, distributes, and markets high reliability
optical components and modules as well as FBGs for the telecom market and high
power devices and sub-assemblies for the industrial market.
Avensys
Solutions, the other division of Avensys, is an industry leader in providing
instrumentation and integrated solutions for the monitoring of industrial
processes and environmental surveillance applications for air, water and soil
in
the Canadian marketplace.
For
the
twelve month period ended June 30, 2008, Avensys revenues were a record $21.6
million, compared to $16.6 million for the same period in the previous year
– an
increase of 30.3% year on year. The loss from operations for the twelve month
period ended June 30, 2008 was $2.8 million compared to $2.4 million for the
previous year.
Our
gross
margin for the year ended June 30, 2008 of 36.6% remained substantially the
same
as it was for the previous 12 month period – 36.8%.
Net
cash
used in operating activities during the year totaled $635,000, as compared
with
net cash used of $2.5 million in the previous year.
Net
loss
for the year ended June 30, 2008 was $3.1 million compared with $2.4 million
for
last year. The increase in net loss can be primarily attributed to the cost
of
severance paid to departed executives and by the very high cost of compliance
with Sarbanes Oxley during the year. Compliance with SOX 404 in particular
cost
the Company dearly, both in terms of external consulting fees and in terms
of
the amount of staff time required, and time not spent on operations.
The
Avensys Technologies division generated revenues of $14.5 million for the twelve
months, an increase of 32.4% over the same period a year ago. The main drivers
of growth were our undersea telecom products, our DPSK demodulators, Fiber
Bragg
Gratings and fiber laser combiners. Gross margins were steady year on year
showing 36.2% in fiscal 2008 and 36.3% in fiscal 2007.
Revenues
at Avensys Solutions division of $7.1 million showed a growth of 26.3% for
the
twelve month period. Of the $7.1 million in revenues, $1.4 million was generated
in the fourth quarter by Willer Engineering, whose assets we purchased at the
end of March 2008. Gross margins in fiscal 2008 were 37.3% and in fiscal 2007
37.8%.
For
the
three month period ended June 30, 2008, Avensys’ revenues increased to $6.9
million, as compared to $5.4 million for the same period last year, an increase
of 28.9%. Avensys’ operating loss for the three month period was $$774,339,
compared to an operating loss of $561,203 for the three month period ended
June
30, 2007.
The
gross
margin of $2.6 million for the three month period ended June 30, 2008 was 37.2%
of our consolidated revenues compared to $2.3 million and 43.3%, respectively,
for the same period the previous year. The reduction in the gross margin over
the previous year occurred because of substantial increases in sales of lower
margin products at the Avensys Tech division.
Net
cash
generated by operating activities during the three month period ended June
30,
2008 totaled $528,000, as compared with net cash generated of approximately
$243,000 for the same period last year.
Net
loss
for the three month period ended June 30, 2008 has decreased to approximately
$285,000 compared with $712,000 for the same period last year.
On
March
31, 2008, Avensys entered into an Asset Purchase Agreement (the "Purchase
Agreement") to acquire the operating assets of Willer Engineering Limited
(“Willer”). The purchase price to be paid for the operating assets pursuant to
the Purchase Agreement is CAD $705,000, subject to adjustments. The purchase
price includes two CAD $200,000 payments to be made in 2009 and 2010 which
are
subject to adjustment contingent upon the performance of the Company.
Accordingly, the Company did not record these contingent payments until their
values will be established after the release of the fiscal year 2009 and 2010
financial results. The acquisition expands Avensys Solutions’ service offerings,
establishing the division as a strong presence with the ability to expand
product lines beyond its current capabilities, especially in the Canadian
markets, where there is strong demand. Willer’s services include professional
instrumentation solutions as well as products and services to the industrial
industry in the Eastern region of Canada. Revenues and results for Willer are
included in the Avensys Solutions results effective April 1, 2008.
On
February 6, 2008, the Technology License Agreement between our subsidiary C-Chip
Technologies (North America) and its business partner iMetrik Inc. was
terminated. Subsequent to December 31, 2007, no further royalties are payable
to
C-Chip and the outstanding balance of the C-Chip loan from iMetrik was forgiven
as of the same date. As a result, we recognized a gain of $351,059 during the
third quarter, on the forgiveness of the loan. This amount represented the
outstanding balance of the loan at December 31, 2007. 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. In terminating the Technology License Agreement, the
Company ceased to operate C-Chip, and ceased to derive any cash flows from
C-Chip activities which, starting in the third quarter of fiscal 2008, were
classified as discontinued operations.
For
fiscal year 2009, our primary objective is to continue to grow revenues, and
to
generate positive cash flow. We will be seeking complementary product lines,
which will provide us with access to new markets and/or economies of scales.
We
are also continuously seeking to improve our manufacturing process, decrease
costs and improve our margins.
OVERVIEW
OF AVENSYS SUBSIDIARY
Avensys
Corporation acquired Avensys Inc. in February 2005. Avensys Inc. operates two
divisions, Avensys Tech and Avensys Solutions. Avensys Tech produces optical
components and modules for the telecom, fiber laser and optical sensor markets.
Avensys Solutions distributes and integrates environmental monitoring solutions
and instrumentation in the Canadian marketplace.
Our
Avensys Inc. revenues for the three months ended June 30, 2008 were $6.9
million, as compared to $5.4 million for the same period last year. Revenues
for
the three month period were 28.8% ahead of the same period last year. Our
Avensys Inc. revenues for the year ended June 30, 2008 were $21.6 million,
as
compared to $16.6 million in the previous year. Revenues for the year were
30.3%
ahead of the previous year.
Avensys
Tech Division of Avensys
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, the growing fiber laser market, and, the fiber sensor
market.
The
acquisition of the assets of ITF Optical Technologies 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 Tech 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 continues 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. On this note, Avensys Tech has surpassed the mark of 42,614 Fiber Bragg
Gratings (FBG) units shipped during the first quarter of fiscal 2009. This
milestone was achieved through a steady growth in the monthly production of
FBG’s and represents an increase of 199% compared to 14,268 units shipped during
the same period last year.
Our
DPSK
product is now adopted by the telecom industry. Consequently, we expect
substantial volume growth in the next years but also a pressure on cost
reduction. To face this challenge ITF Labs, our R&D partner, undertook a
major R&D project two years ago to design the new generation of our
demodulators, the micro-DPSK. On February 20, 2008, ITF Labs announced the
R&D completion of its micro-DPSK. This device is designed small enough to be
incorporated into the industry standard 300-pin Multi-Source Agreement (MSA)
compliant transponder package, and will be available with bitrates for 40Gb/s
DPSK and DQPSK with free-spectral-range from 20 GHz to 70GHz. The device has
the
lowest loss and highest extinction ratio on the market with an almost
insignificant polarization dependency of less than 1% of free-spectral range.
All dimensions of the device have been reduced, making this the thinnest,
fastest tuning, lowest power consumption product available on the market which
enables the integration of either DPSK or DQPSK formats into the MSA package.
Many
Tier
1 and Tier 2 companies are currently developing their own platforms. So far,
we
have distributed demonstration micro-DPSKs and the reception is encouraging.
We
recently received a purchase order for 40 units for some beta productions.
The
majority of our customers are targeting to start their production in January
2009. Most of them expect to buy between 100 and 300 units in 2009. However,
three of them are planning to buy more than 500 units in 2009.
Finally,
the micro-DPSK design allows significant cost reduction and high manufacturing
yield. ITF Labs anticipates transferring the production of its micro-DPSK to
Avensys Tech in the second quarter of 2009.
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. Recently, our partner, ITF labs have won military contracts from
different countries to build leading edge high power fiber laser components
and
systems.
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
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 Solutions Division of Avensys Inc.
Avensys
Solutions competes in the Canadian marketplace 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. It also addresses the monitoring needs
of
industrial processes for the purpose of surveillance and optimization.
The
market for these solutions 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
continue to be firm believers in this exciting business segment that has allowed
us, through its stability, to be a more solid organization.
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. Consistent with our intentions to
be
active in the consolidation movement, on March 28, 2008, we completed the
acquisition of the assets of Willer Engineering Limited (“Willer”) a privately
held company which provided professional instrumentation solutions, products
and
service to the industrial, process and scientific markets in Eastern Canada
for
over 45 years. The Willer assets have being integrated into Avensys Solutions,
pooling resources and complementary product lines and doubling our sales force.
We have secured existing distribution agreements with most of the major Willer
suppliers and we were successful in retaining key employees. We intend to
maintain the additional office locations gained from this acquisition, in Sarnia
and Atlantic Canada.
In
March,
we transferred our Western Office from White Rock, British Columbia to Calgary,
Alberta where most of the growth is expected to come, and where local support
will be more critical as we increase the percentage of our revenues coming
from
integrated solutions and maintenance contracts and as we increase our
penetration into the industrial process market.
The
portion of our revenues stemming from our traditional environmental business
FY2008 have remained relatively stable despite the downward pressure on market
prices resulting from the strength of the Canadian dollar. Overall, Avensys
Solutions revenues have grown by 26.3% over FY2007, a significant portion of
this growth being attributable to the acquisition of Willer Engineering’s
assets.
Results
of Operations for the three and twelve month periods ended June 30, 2008
compared to the three and twelve month periods ended June 30, 2007
The
results of operations include the accounts of the Company and its
subsidiaries.
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Revenue
|
|
|
6,943,859
|
|
|
5,389,262
|
|
|
1,554,597
|
|
|
28.8
|
%
|
|
Cost
of Revenue
|
|
|
4,361,799
|
|
|
3,056,974
|
|
|
1,304,825
|
|
|
42.7
|
%
|
|
Gross
margin
|
|
|
2,582,060
|
|
|
2,332,288
|
|
|
249,772
|
|
|
10.7
|
%
|
|
Gross
Margin as % of Revenue
|
|
|
37.2
|
%
|
|
43.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
257,790
|
|
|
301,981
|
|
|
(44,191
|
)
|
|
-14.6
|
%
|
|
Selling,
general and administration
|
|
|
2,427,500
|
|
|
2,166,435
|
|
|
261,065
|
|
|
12.1
|
%
|
|
Research
and development
|
|
|
671,109
|
|
|
425,075
|
|
|
246,034
|
|
|
57.9
|
%
|
|
Total
Operating expenses
|
|
|
3,356,399
|
|
|
2,893,491
|
|
|
462,908
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(774,339
|
)
|
|
(561,203
|
)
|
|
(213,136
|
)
|
|
38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
258,254
|
|
|
(532,823
|
)
|
|
791,077
|
|
|
-148.5
|
%
|
|
Income
tax benefits - refundable tax credits
|
|
|
255,474
|
|
|
360,677
|
|
|
(105,203
|
)
|
|
-29.2
|
%
|
|
Non-Controlling
interest
|
|
|
419
|
|
|
3,877
|
|
|
(3,458
|
)
|
|
-89.2
|
%
|
|
Results
of discontinued operations
|
|
|
(24,876
|
)
|
|
17,220
|
|
|
(42,096
|
)
|
|
-244.5
|
%
|
|
Net
loss for the period
|
|
|
(285,068
|
)
|
|
(712,252
|
)
|
|
427,184
|
|
|
-60.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(26,267
|
)
|
|
416,000
|
|
|
(442,267
|
)
|
|
-106.3
|
%
|
|
Comprehensive
(loss) income
|
|
|
(311,335
|
)
|
|
(296,252
|
)
|
|
(15,083
|
)
|
|
5.1
|
%
|
|
|
|
Fiscal
Year Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Revenue
|
|
|
21,603,082
|
|
|
16,576,124
|
|
|
5,026,958
|
|
|
30.3
|
%
|
|
Cost
of Revenue
|
|
|
13,697,851
|
|
|
10,473,196
|
|
|
3,224,655
|
|
|
30.8
|
%
|
|
Gross
margin
|
|
|
7,905,231
|
|
|
6,102,928
|
|
|
1,802,303
|
|
|
29.5
|
%
|
|
Gross
Margin as % of Revenue
|
|
|
36.6
|
%
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
970,107
|
|
|
851,318
|
|
|
118,789
|
|
|
14.0
|
%
|
|
Selling,
general and administration
|
|
|
7,213,485
|
|
|
6,041,371
|
|
|
1,172,114
|
|
|
19.4
|
%
|
|
Research
and development
|
|
|
2,476,823
|
|
|
1,571,572
|
|
|
905,251
|
|
|
57.6
|
%
|
|
Total
Operating expenses
|
|
|
10,660,415
|
|
|
8,464,261
|
|
|
2,196,154
|
|
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,755,184
|
)
|
|
(2,361,333
|
)
|
|
(393,851
|
)
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
(2,096,738
|
)
|
|
(1,285,217
|
)
|
|
(811,521
|
)
|
|
63.1
|
%
|
|
Income
tax benefits - refundable tax credits
|
|
|
1,124,819
|
|
|
1,217,948
|
|
|
(93,129
|
)
|
|
-7.6
|
%
|
|
Non-Controlling
interest
|
|
|
206
|
|
|
1,890
|
|
|
(1,684
|
)
|
|
-89.1
|
%
|
|
Results
of discontinued operations
|
|
|
606,374
|
|
|
55,958
|
|
|
550,416
|
|
|
983.6
|
%
|
|
Net
loss for the period
|
|
|
(3,120,523
|
)
|
|
(2,370,754
|
)
|
|
(749,769
|
)
|
|
-31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
548,384
|
|
|
592,730
|
|
|
(44,346
|
)
|
|
-7.5
|
%
|
|
Comprehensive
loss
|
|
|
(2,572,139
|
)
|
|
(1,778,024
|
)
|
|
(794,115
|
)
|
|
-44.7
|
%
|
Revenue
Sales
from the Avensys Tech and Avensys Solutions divisions of Avensys Inc., for
the
three and twelve month periods ended June 30, 2008, account for 100% of our
net
revenues. Avensys products were sold directly to customers throughout the world.
Our
revenues were composed of the following:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
2008
|
|
Revenue
|
|
2007
|
|
Revenue
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
%
|
|
|
Avensys
Tech
|
|
|
3,949,552
|
|
|
57
|
%
|
|
3,777,318
|
|
|
70
|
%
|
|
172,234
|
|
|
4.6
|
%
|
|
Avensys
Solutions
|
|
|
2,994,307
|
|
|
43
|
%
|
|
1,611,944
|
|
|
30
|
%
|
|
1,382,363
|
|
|
85.8
|
%
|
|
Revenue
|
|
|
6,943,859
|
|
|
|
|
|
5,389,262
|
|
|
|
|
|
1,554,597
|
|
|
28.8
|
%
|
|
|
|
Fiscal
Year Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
%
of
Revenue
|
|
2007
|
|
%
of
Revenue
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
%
|
|
|
Avensys
Tech
|
|
|
14,533,370
|
|
|
67
|
%
|
|
10,977,252
|
|
|
66
|
%
|
|
3,556,118
|
|
|
32.4
|
%
|
|
Avensys
Solutions
|
|
|
7,069,712
|
|
|
33
|
%
|
|
5,598,872
|
|
|
34
|
%
|
|
1,470,840
|
|
|
26.3
|
%
|
|
Revenue
|
|
|
21,603,082
|
|
|
|
|
|
16,576,124
|
|
|
|
|
|
5,026,958
|
|
|
30.3
|
%
|
Our
revenues for the three and twelve month periods ended June 30, 2008 increased
by
28.8% and 30.3%, respectively, over the same periods in the previous year.
The
twelve month increase is primarily due to the Willer acquisition and our Avensys
Tech operating division, whose sales increased for the twelve month period
ended
June 30, 2008 by 32.4%. Avensys Tech maintained its strong internal growth
by
the continued expansion and diversification of its product lines, and the
addition of new customers.
The
85.8%
and 26.3% growth in revenues at Avensys Solutions for the three and twelve
month
periods, respectively, is primarily due to the Willer transaction. The Willer
transaction is responsible for approximately $1,355,000 in revenues for Avensys
Solutions during the three and twelve month periods ended June 30, 2008.
Excluding the effects of the Willer transaction, Avensys Solutions recorded
a
1.7% and 2.1% growth in revenues for the three and twelve month periods ended
June 30, 2008.
Cost
of revenue and gross margin
Cost
of
goods sold as a percentage of revenue was 62.8% and 63.4% for the three and
twelve month periods ended June 30, 2008 compared with 56.7% and 63.2% for
the
same periods in the previous year. Gross margin, relative to revenues, for
the
three month period ended June 30, 2008 decreased as a result of decreasing
margins at Avensys Tech.
Gross
margins for the Avensys Tech division were 38.3% and 36.2%, respectively, for
the three and twelve month periods ended June 30, 2008 compared with 44.5%
and
36.3%, respectively, for the same periods in the previous year. Gross margins
for the Avensys Solutions division were 35.8% and 37.3%, respectively, for
the
three and twelve month periods ended June 30, 2008 compared with 40.4% and
37.8%, respectively, for the same periods in the previous year.
Avensys
Tech saw increases in the costs of production, for three months ended June
30,
2008, due to significantly increased sales of lower margin products, the
training of additional production staff, and the negative effects of a weaker
U.S. dollar, as compared to the Canadian dollar. The average rate of the U.S.
Dollar for the three and twelve month periods ended June 30, 2008 was $0.9901
and $0.9898, respectively, compared to $0.9104 and $0.8828, respectively, for
the three and twelve month periods ended June 30, 2007.
Avensys
Solutions gross margins for the year ended June 30, 2008 were unchanged
primarily due to the beneficial effects of a weaker U.S. dollar. Avensys
Solutions sales are primarily denominated in the Canadian dollar, while supplier
purchases are denominated in the U.S. dollar.
Division
Direct Contribution
Division
direct contribution consists of division revenues less division direct costs.
Direct costs include specific costs of net revenues, sales and marketing
expenses, and general and administrative expenses over which division managers
have direct discretionary control, such as sales programs, customer support
expenses, bank charges and bad debt write-offs. Changes in direct contribution
for the Avensys Tech and Avensys Solutions divisions are outlined, as
follows:
|
|
|
Avensys
Tech
|
|
|
|
|
Year
Ended June 30,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Net
revenues from external customers
|
|
|
14,533,370
|
|
|
10,977,252
|
|
|
3,556,118
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
9,265,185
|
|
|
6,988,429
|
|
|
2,276,756
|
|
|
32.6
|
%
|
|
Marketing
and sales expense
|
|
|
727,953
|
|
|
519,266
|
|
|
208,687
|
|
|
40.2
|
%
|
|
General
and administrative expense
|
|
|
1,118,049
|
|
|
831,867
|
|
|
286,182
|
|
|
34.4
|
%
|
|
Research
and development expense
|
|
|
2,476,823
|
|
|
1,571,572
|
|
|
905,251
|
|
|
57.6
|
%
|
|
Depreciation
and amortization expense
|
|
|
351,025
|
|
|
282,769
|
|
|
68,256
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
13,939,035
|
|
|
10,193,904
|
|
|
3,745,132
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
594,335
|
|
|
783,349
|
|
|
(189,014
|
)
|
|
-24.1
|
%
|
Direct
costs for the Avensys Tech division increased 36.7% for the year ended June
30,
2008, over the same period in the previous year, primarily due to increased
marketing and sales and research and development expenses. Marketing and sales
expenses saw a 40.2% increase during fiscal 2008 as a result of efforts to
expand the geographic distribution of sales. Research and development programs
have been increased 57.6% as a result of the expanded roster of research
projects at ITF Labs related to the development of fiber laser components and
micro-DPSKs.
|
|
|
Avensys
Solutions
|
|
|
|
|
|
|
Year
Ended June 30,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Net
revenues from external customers
|
|
|
7,069,712
|
|
|
5,598,872
|
|
|
1,470,840
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
4,432,666
|
|
|
3,484,767
|
|
|
947,900
|
|
|
27.2
|
%
|
|
Marketing
and sales expense
|
|
|
1,937,278
|
|
|
1,606,842
|
|
|
330,436
|
|
|
20.6
|
%
|
|
General
and administrative expense
|
|
|
948,749
|
|
|
455,479
|
|
|
493,270
|
|
|
108.3
|
%
|
|
Research
and development expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.0
|
%
|
|
Depreciation
and amortization expense
|
|
|
57,527
|
|
|
22,440
|
|
|
35,087
|
|
|
156.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
7,376,220
|
|
|
5,569,527
|
|
|
1,806,693
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
(306,508
|
)
|
|
29,344
|
|
|
(335,852
|
)
|
|
-1144.5
|
%
|
Direct
costs for the Avensys Solutions division increased 32.4% for the year ended
June
30, 2008, over the same period in the previous year. The growth in direct costs
is highlighted by an increase in general and administrative expenses associated
with the administrative salaries from the Willer acquisition, increased training
and recruiting costs, and increased rental expenses.
Operating
Expenses
Depreciation
and amortization
Depreciation
and amortization expenses for the three and twelve month periods ended June
30,
2008 decreased by $44,191 and increased by $118,789, respectively, over the
same
periods in the previous year. 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 twelve
month periods ended June 30, 2008 increased by $261,065 and $1,172,114
respectively, compared to the same periods in the previous year. SG&A are
composed of the following:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
General
and administrative
|
|
|
447,514
|
|
|
272,679
|
|
|
174,835
|
|
|
64.1
|
%
|
|
Marketing
and Sales
|
|
|
185,232
|
|
|
168,544
|
|
|
16,688
|
|
|
9.9
|
%
|
|
Payroll
and related expenses
|
|
|
1,413,928
|
|
|
1,282,263
|
|
|
131,665
|
|
|
10.3
|
%
|
|
Professional
fees
|
|
|
312,670
|
|
|
174,404
|
|
|
138,266
|
|
|
79.3
|
%
|
|
Stock
based compensation
|
|
|
46,645
|
|
|
187,122
|
|
|
(140,477
|
)
|
|
-75.1
|
%
|
|
Travel
|
|
|
19,905
|
|
|
27,035
|
|
|
(7,130
|
)
|
|
-26.4
|
%
|
|
Other
|
|
|
1,607
|
|
|
54,388
|
|
|
(52,781
|
)
|
|
-97.0
|
%
|
|
Selling,
General and Administrative Expenses
|
|
$
|
2,427,501
|
|
$
|
2,166,435
|
|
$
|
261,066
|
|
|
12.1
|
%
|
|
|
|
Fiscal
Year Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
General
and administrative
|
|
|
989,218
|
|
|
676,821
|
|
|
312,397
|
|
|
46.2
|
%
|
|
Marketing
and Sales
|
|
|
729,269
|
|
|
599,900
|
|
|
129,369
|
|
|
21.6
|
%
|
|
Payroll
and related expenses
|
|
|
4,139,955
|
|
|
3,387,393
|
|
|
752,562
|
|
|
22.2
|
%
|
|
Professional
fees
|
|
|
991,123
|
|
|
560,304
|
|
|
430,819
|
|
|
76.9
|
%
|
|
Stock
based compensation
|
|
|
249,479
|
|
|
453,206
|
|
|
(203,727
|
)
|
|
-45.0
|
%
|
|
Travel
|
|
|
95,891
|
|
|
84,544
|
|
|
11,347
|
|
|
13.4
|
%
|
|
Other
|
|
|
18,550
|
|
|
279,203
|
|
|
(260,653
|
)
|
|
-93.4
|
%
|
|
Selling,
General and Administrative Expenses
|
|
$
|
7,213,485
|
|
$
|
6,041,371
|
|
$
|
1,172,114
|
|
|
19.4
|
%
|
General
and administrative expenses for the three and twelve month periods ended June
30, 2008 increased compared with the same periods in the previous year primarily
due to the cost of severance paid to departed executives and the cost of
compliance with the Sarbanes Oxley Act during the year.
Marketing
and sales expenses for the three and twelve month periods ended June 30, 2008
increased compared to the same periods in the previous year. The increases
for
the three and twelve month periods are primarily due to the growth in the
Company’s operations, because of increased sales.
Payroll
expenses for the three and twelve month periods ended June 30, 2008 increased
compared with the same periods in the previous year due to the growth in the
operations of Avensys Inc, because of increased sales.
Professional
fees for the three and twelve month periods ended June 30, 2008 increased by
79.3% and 76.9%, respectively, compared with the same periods in the previous
years. The increases for the three and twelve month periods are primarily
attributable to legal fees in connection with the Senior Secured Original Issue
Discount financing and the Willer transaction, as well as added consulting
fees.
Research
and Development
For
the
three and twelve months ended June 30, 2008, 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 twelve month periods ended June
30,
2008, increased by $246,034 and $905,251 compared with the same periods in
the
previous year. The three and twelve 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 twelve month periods ended June 30,
2008, was $46,645 and $249,479, respectively, compared to $187,122 and $453,206,
respectively, for the same periods in the previous year. Stock based
compensation for the twelve month period ended June 30, 2008 includes the
severance amount for the former President of Avensys Inc of $64,684. The
decreases in stock based compensation expenses are primarily attributed to
the
decrease in calculated fair values of employee stock options issued during
the
year ended June 30, 2008. The fair value of the employee stock options is
determined using the Black-Scholes Model.
Intangible
asset impairment
There
is
no intangible assets impairment charge recorded for the year ended June 30,
2008.
Goodwill
impairment
During
the fourth quarter of Fiscal 2008, the Company completed its annual goodwill
impairment test. In evaluating whether there was an impairment of goodwill,
management compared the fair value of the Avensys Tech and Avensys Solutions
reporting units against their carrying amounts, including the goodwill.
Measurement of the fair value was based on the reporting units’ present value of
expected future cash flows. As the estimated fair value exceeded the carrying
amount, Management determined that there was no adjustment necessary to the
reporting units’ underlying assets and liabilities and the goodwill
recorded.
Other
Income (Expenses)
Other
income (expenses) consists of the following:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Other
income (expenses), net
|
|
|
(76
|
)
|
|
41,661
|
|
|
(41,737
|
)
|
|
-100.2
|
%
|
|
Loss
on redemption of convertible debentures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Interest
expense, net
|
|
|
(150,180
|
)
|
|
(234,750
|
)
|
|
84,570
|
|
|
-36.0
|
%
|
|
Debentures
and preferred shares accretion
|
|
|
(286,031
|
)
|
|
(438,888
|
)
|
|
152,857
|
|
|
-34.8
|
%
|
|
Change
in fair value of derivative financial instruments
|
|
|
694,541
|
|
|
99,154
|
|
|
595,387
|
|
|
600.5
|
%
|
|
Other
income (expenses)
|
|
$
|
258,254
|
|
$
|
(532,823
|
)
|
$
|
791,077
|
|
|
-148.5
|
%
|
|
|
|
Twelve Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Other
income (expenses), net
|
|
|
57,288
|
|
|
172,269
|
|
|
(114,981
|
)
|
|
-66.7
|
%
|
|
Loss
on redemption of convertible debentures
|
|
|
(1,422,577
|
)
|
|
-
|
|
|
(1,422,577
|
)
|
|
N/A
|
|
|
Interest
expense, net
|
|
|
(702,338
|
)
|
|
(798,856
|
)
|
|
96,518
|
|
|
-12.1
|
%
|
|
Debentures
and preferred shares accretion
|
|
|
(965,429
|
)
|
|
(2,420,791
|
)
|
|
1,455,362
|
|
|
-60.1
|
%
|
|
Change
in fair value of derivative financial instruments
|
|
|
936,318
|
|
|
1,762,161
|
|
|
(825,843
|
)
|
|
-46.9
|
%
|
|
Other
income (expenses)
|
|
$
|
(2,096,738
|
)
|
$
|
(1,285,217
|
)
|
$
|
(811,521
|
)
|
|
63.1
|
%
|
Other
expenses for the three and twelve month periods are heavily affected by changes
in the fair value of derivative financial instruments and the loss on redemption
of convertible debentures. Also, there was a significant reduction in debenture
and preferred shares accretion for the twelve month period of $1,455,362:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Series
A Notes accretion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.0
|
%
|
|
Series
B Notes & Series B OID Notes accretion
|
|
|
167,367
|
|
|
358,082
|
|
|
(190,715
|
)
|
|
-53.3
|
%
|
|
Preferred
shares accretion
|
|
|
118,664
|
|
|
80,806
|
|
|
37,858
|
|
|
46.9
|
%
|
|
Debentures
and preferred shares accretion
|
|
$
|
286,031
|
|
$
|
438,888
|
|
$
|
(152,857
|
)
|
|
-34.8
|
%
|
|
|
|
Twelve
Months Ended June 30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Series
A Notes accretion
|
|
|
-
|
|
|
1,025,613
|
|
|
(1,025,613
|
)
|
|
-100.0
|
%
|
|
Series
B Notes & Series B OID Notes accretion
|
|
|
583,066
|
|
|
1,135,302
|
|
|
(552,236
|
)
|
|
-48.6
|
%
|
|
Preferred
shares accretion
|
|
|
382,363
|
|
|
259,876
|
|
|
122,487
|
|
|
47.1
|
%
|
|
Debentures
and preferred shares accretion
|
|
$
|
965,429
|
|
$
|
2,420,791
|
|
$
|
(1,455,362
|
)
|
|
-60.1
|
%
|
Refundable
Tax Credits
Refundable
tax credits for the three and twelve month periods ended June 30, 2008,
decreased by $105,203 and $93,129, respectively, compared with the same periods
in 2007. 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 twelve month periods ended June
30, 2008 includes only such tax credits, arising from research and development
activities. The Company’s investment tax credit recovery for the years ended
June 30, 2008 and 2007 were positively affected as a result of revisions to
amounts previously estimated and recorded for credits related to the fiscal
year
ended June 30, 2006. As a result of these revisions, which relate to new
information obtained following the taxation authorities’ reviews, the investment
tax credit recoveries of the years ended June 30, 2008 and 2007 were increased
by $103,872 and $475,193, respectively. 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 year
ended June 30, 2008 includes only such tax credits, arising from research and
development activities.
Net
Loss
Our
net
loss for the three month period ended June 30, 2008 of $285,068 represents
a
decrease in net loss of $427,184 compared to the net loss of $712,252 for the
same period in 2007. Our net loss for the twelve month period ended June 30,
2008 of $3,120,523, represents an increase in net loss of $749,769 compared
to
the net loss of $2,370,754 for the same period in the previous year. 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.
Financial
Condition, Liquidity and Capital Resources
As
discussed in Note 1 to the financial statements the Company’s operating
subsidiary, Avensys Inc., maintains a line of credit from a financial
institution, and the covenants pertaining to such were not respected as at
June
30, 2008. This constitutes an event of default and could result in the financial
institution requiring repayment of a loan. The failed covenants with the
financial institution triggered cross-default clauses affecting the Company’s
Working Capital Facility and Senior Secured Convertible Debenture. Subsequent
to
year-end, the Company has obtained waivers with respect to such cross-default
clauses for the Working Capital Facility and Senior Secured Convertible
Debenture. Avensys Inc. is seeking to renegotiate the credit agreement with
the
financial institution and is also seeking to obtain additional conventional
bank
credit-line financing to that which it already has, to support its growing
operations. The material uncertainties resulting from the above events and
conditions are such that there exists substantial doubt that the Company
would
be able to continue as a going concern at June 30, 2008. The Company’s
continuation as a going concern is dependent upon the continued support of
shareholders, lenders and suppliers and its ability to obtain additional
cash to
allow for the satisfaction of its obligations on a timely basis.
During
the first quarter of fiscal 2009, as described in Note 22 to the financial
statements, the Company amended an agreement with the former shareholders
of ITF
Optical Technologies. The amendment postponed, by 18 months, the exercise
date
of a put option that could have required the cash outlay of CAD $2,000,000
between April and October 2009.
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.
As
at
June 30, 2008, net working capital increased to $700,503, compared to net
working capital of $596,800 at June 30, 2007. Included in these figures for
net
working capital:
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
Cash,
cash equivalents, and short term investments
|
|
|
369,396
|
|
|
481,023
|
|
|
(111,627
|
)
|
|
-23
|
%
|
|
Receivables
|
|
|
7,045,825
|
|
|
4,906,536
|
|
|
2,139,289
|
|
|
44
|
%
|
|
Inventory
|
|
|
2,178,686
|
|
|
1,478,835
|
|
|
699,851
|
|
|
47
|
%
|
|
Other
current assets
|
|
|
243,409
|
|
|
480,328
|
|
|
(236,919
|
)
|
|
-49
|
%
|
|
Current
assets
|
|
|
9,837,316
|
|
|
7,346,722
|
|
|
2,490,594
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
6,361,379
|
|
|
3,938,188
|
|
|
2,423,191
|
|
|
62
|
%
|
|
Loans
payable
|
|
|
2,554,371
|
|
|
440,310
|
|
|
2,114,061
|
|
|
480
|
%
|
|
Other
current liabilities
|
|
|
221,063
|
|
|
2,371,423
|
|
|
(2,150,360
|
)
|
|
-91
|
%
|
|
Current
Liabilities
|
|
|
9,136,813
|
|
|
6,749,921
|
|
|
2,386,892
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
working capital
|
|
|
700,503
|
|
|
596,801
|
|
|
103,702
|
|
|
17
|
%
|
During
the three month period ended June 30, 2008, the Company, having produced
a net
loss of $285,068, generated $470,428 of cash to fund Operating Activities
from
continuing operations. Excluding working capital items, the Company used
$93,672
of cash to fund Operating Activities from continuing operations. During the
three month period ended June 30, 2007, the Company, having produced a net
loss
of $712,252, generated $593,030 of cash to fund Operating Activities from
continuing operations. Excluding working capital items, the Company generated
$39,750 of cash to fund Operating Activities from continuing
operations.
An
analysis of the three month periods is as follows:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Net
(loss) income
|
|
|
(285,068
|
)
|
|
(712,252
|
)
|
|
427,184
|
|
|
Net
adjustments to reconcile net profit (loss) to cash generated
by (used in)
operating activities
|
|
|
191,396
|
|
|
752,002
|
|
|
(560,606
|
)
|
|
|
|
|
(93,672
|
)
|
|
39,750
|
|
|
(133,422
|
)
|
|
Change
in accounts receivable and other receivables
|
|
|
(556,493
|
)
|
|
(395,051
|
)
|
|
(161,442
|
)
|
|
Change
in accounts payable and accrued liabilities
|
|
|
1,176,799
|
|
|
823,669
|
|
|
353,130
|
|
|
Change
in other current assets and current liabilities
|
|
|
(56,206
|
)
|
|
124,662
|
|
|
(180,868
|
)
|
|
Net
cash generated by (used in) operating activities from continuing
operations
|
|
$
|
470,428
|
|
$
|
593,030
|
|
|
(122,602
|
)
|
During
the twelve month period ended June 30, 2008, the Company, having produced a
net
loss of $3,120,523 used $1,026.474 of cash to fund Operating Activities from
continuing operations. Excluding working capital items, the Company used
$402,244, of cash to fund Operating Activities from continuing operations.
During the twelve month period ended June 30, 2007, the Company, having produced
a net loss of $2,370,754 used $2,271,031 of cash to fund Operating Activities
from continuing operations. Excluding working capital items, the Company
generated $68,725 of cash to fund Operating Activities from continuing
operations.
An
analysis of the twelve month periods is as follows:
|
|
|
Twelve Months Ended June 30,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Net
loss
|
|
|
(3,120,523
|
)
|
|
(2,370,754
|
)
|
|
(749,769
|
)
|
|
Net
adjustments to reconcile net profit (loss) to cash generated by
(used in)
operating activities
|
|
|
2,718,279
|
|
|
2,439,479
|
|
|
278,800
|
|
|
|
|
|
(402,244
|
)
|
|
68,725
|
|
|
(470,969
|
)
|
|
Change
in accounts receivable and other receivables
|
|
|
(1,268,813
|
)
|
|
(1,717,764
|
)
|
|
448,951
|
|
|
Change
in accounts payable and accrued liabilities
|
|
|
1,087,289
|
|
|
(599,436
|
)
|
|
1,686,725
|
|
|
Change
in other current assets and current liabilities
|
|
|
(442,706
|
)
|
|
(22,556
|
)
|
|
(420,150
|
)
|
|
Net
cash generated by (used in) operating activities from continuing
operations
|
|
$
|
(1,026,474
|
)
|
$
|
(2,271,031
|
)
|
|
1,244,557
|
|
During
the three and twelve month periods ended June 30, 2008, we mainly financed
our
operations through the Senior Secured OID Convertible Debenture financing,
the
Senior Secured Working Capital Note and the cash flows generated by Avensys
through the sales of products and services.
Selected
Balance Sheet information:
|
|
|
As
of June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Total
Assets
|
|
|
21,340,474
|
|
|
18,193,489
|
|
|
Current
Liabilities
|
|
|
9,136,813
|
|
|
6,749,921
|
|
|
Long-Term
Liabilities
|
|
|
4,560,670
|
|
|
2,708,476
|
|
|
Non-Controlling
Interest
|
|
|
7,677
|
|
|
23,193
|
|
|
Total
Stockholder's Equity
|
|
|
7,635,314
|
|
|
8,711,899
|
|
The
increase in total assets is attributable to increases in accounts receivable
of
$1,381,763, from $3,739,295 to $5,121,058, increases in inventories of $699,851,
from $1,478,835 to $2,178,686, increases in net property and equipment of $
210,242, from $2,279,973 to $2,490,215, and increases in goodwill of $527,992,
from $4,116,872 to $4,644,864. The increase in current liabilities is mainly
attributable to an increase in trade accounts payable of $2,423,191, from
$3,938,188 to $6,361,379, and an increase in bank and other loans payable of
$2,085,955, from $345,993 to $2,431,948, offset by a decrease in the current
portion of convertible debentures of $1,568,519, from $1,568,519 to zero, and
a
decrease in the current liabilities of discontinued operations of $674,659,
from
$762,904 to $88,245. The increase in long-term liabilities is attributable
to an
increase in the balance of purchase price payable of $512,267, from $1,194,096
to $1,706,363, and an increase in derivative financial instruments of
$1,299,033, from $64,510 to $1,363,543 due to the addition of the Convertible
Note.
The
changes in current assets, fixed assets, goodwill, and current liabilities
are
partly attributed to the acquisition of the assets of Willer Engineering
Limited, which impacted the balance sheet of the Company as
follows:
|
|
|
$
|
|
|
Accounts
receivable
|
|
|
791,075
|
|
|
Inventories
|
|
|
258,051
|
|
|
Prepaid
expenses and deposits
|
|
|
41,516
|
|
|
Property
and equipment
|
|
|
96,610
|
|
|
Customer
Relationships
|
|
|
203,982
|
|
|
Trade
Names
|
|
|
112,778
|
|
|
Goodwill
|
|
|
343,485
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,381,436
|
)
|
|
|
|
|
466,061
|
|
As
of
June 30, 2008, the Company had 99,036,152 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,
the
issuance of 2,759,235 common shares in connection with the cashless exercise
of
warrants, and the issuance of 1,477,273 common shares for placement agent fees
in connection with the Senior Secured OID Convertible Debenture.
Stock
options outstanding at June 30, 2008 totaled 10,036,773 at a weighted average
exercise price of $0.35 and have a weighted average remaining contractual life
of 4.05 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 Debenture
During
the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated
Secured Convertible Promissory Notes and its Original Issue Discount Series
B
Subordinated Secured Convertible Promissory Notes, both originally due February
11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the
holders of the Notes, the Company also redeemed half of the associated Series
Y
and Series Z Warrants (collectively the “Warrants”) previously issued in August
2006 and November 2006 relating to the redeemed Notes. The total purchase price
for the redemption of the Notes and half of the Warrants was $3.4 million.
The
remaining half of the Warrants that are retained by the holders of the Notes
will have their exercise prices reduced to and fixed at $0.11 per share, with
no
further ratchet or anti-dilution provisions.
In
connection with the redemption of the Notes, the Company 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 15(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 favor 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. At June 30, 2008, certain failed covenants with a financial
institution triggered a cross-default clause within the Convertible Note.
However, subsequent to year-end, the Company has obtained waivers with respect
to the cross-default clause for the Working Senior Secured Convertible
Debenture.
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 2008 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-K
for the fiscal year ended June 30, 2008, except as noted below for stock-based
compensation.
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
or
modified 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.
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 U.S. operating losses, as at June
30,
2008, of approximately $23.9 million from its inception which are available
and
which expire starting in 2022. The Company has incurred Canadian operating
losses, as at June 30, 2008, of approximately $3.3 million from its inception
which are available and which expire starting in 2015. For Canadian income
tax
purposes, the Company also has, as at June 30, 2008, approximately $3.7 million
of Scientific Research and Experimental Development unclaimed expenses available
indefinitely to reduce taxable income in future years. 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. At July 1, 2007, the Company had $168,230 in unrecognized
tax
benefits which would favorably impact the Company’s effective tax rate if
subsequently recognized. The amount of unrecognized tax benefits was $290,859
at
June 30, 2008.
The
Company and its subsidiaries file income tax returns in Canadian and U.S.
federal jurisdictions, and various provincial jurisdictions. The Company is
subject to Canadian and provincial income tax examination for fiscal years
2003
through 2007. The Company is subject to U.S. federal income tax examination
by
U.S. tax authorities for all taxation years since its inception.
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
May
2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces
APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes
in Interim Financial Statements, changes the requirements for the accounting
for
and reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS 154 provides guidance
on
the accounting for and reporting of accounting changes and error corrections.
It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
It
also provides guidance for determining whether retrospective application of
a
change in accounting principle is impracticable and for reporting a change
when
retrospective application is impracticable. The correction of an error in
previously issued financial statements is not an accounting change. However,
the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retrospectively. Therefore, the reporting of a correction
of
an error by restating previously issued financial statements is also addressed
by this Statement. The provisions of SFAS 154 apply for accounting changes
and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after May 2005. SFAS 154 does not change the
transition provisions of any existing accounting pronouncements. This FASB
Statement was implemented by the Company commencing July 1, 2006 and such did
not have a material effect on the Company's results of operations or financial
position.
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 was initially effective for fiscal years beginning
after November 15, 2007. FASB Staff Position FAS 157-2 (FSP 157-2), deferred
the
effective date for non-financial assets of SFAS 157 to fiscal years beginning
after November 15, 2008. 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,
2008, the Company does not have any arrangements that would be subject to the
scope of EITF 07-3.
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.
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.
In
March
2008, FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires disclosure
of the fair values of derivative instruments and their gains and losses in
a
tabular format. It also requires disclosure of additional information about
an
entity’s liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within footnotes
to
enable financial statement users to locate important information about
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. Earlier
adoption is permitted. The Company is currently evaluating the impact of the
adoption of the provisions of SFAS 161 on its consolidated financial
statements.
In
April
2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
FAS 142-3, “Determination of the Useful Life of Intangible Assets,” to provide
guidance for determining the useful life of recognized intangible assets and
to
improve consistency between the period of expected cash flows used to measure
the fair value of a recognized intangible asset and the useful life of the
intangible asset as determined under Statement 142. The FSP requires that an
entity consider its own historical experience in renewing or extending similar
arrangements. However, the entity must adjust that experience based on
entity-specific factors under FASB Statement 142, Goodwill and Other Intangible
Assets. FSP FAS 142-3 is effective for fiscal years and interim periods that
begin after November 15, 2008. The Company intends to adopt FSP FAS 142-3
effective July 1, 2009 and to apply its provisions prospectively to recognized
intangible assets acquired after that date.
In
May
2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement),” to require issuers of
convertible debt to account separately for the liability and equity components
of these instruments if they have stated terms permitting cash settlement upon
conversion. This practice marks a significant change from the current accounting
practice for convertible debt instruments in the scope of the FSP. Current
practice does not require separation of the liability and equity components
of
such instruments. Separately accounting for these instruments’ liability and
equity components results in the recording of more interest cost over the life
of the convertible debt instrument, because of an initial debt discount. FSP
APB
14-1 is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years. The Company intends to adopt FSP APB 14-1
effective July 1, 2009 and apply its provisions retrospectively to all periods
presented in its financial statements. The Company has issued convertible debt
instruments and is in the process of evaluating the impact that the adoption
of
FSP APB 14-1 will have on its financial statements.
In
June
2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)
EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities,” to clarify that all outstanding
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents, whether paid or unpaid, are participating
securities. An entity must include participating securities in its calculation
of basic and diluted earnings per share (EPS) pursuant to the two-class method,
as described in FASB Statement 128, Earnings per Share. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. The Company intends to adopt FSP EITF 03-6-1
effective July 1, 2009 and apply its provisions retrospectively to all
prior-period EPS data presented in its financial statements. The Company does
not issue share-based payment awards that contain nonforfeitable rights to
dividends and, as a result, does not believe that the adoption of FSP EITF
03-6-1 will have a significant effect on its financial
statements.
In
June
2008, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 08-4, “Transition
Guidance for Conforming Changes to Issue No. 98-5,” to provide transition
guidance for conforming changes made to the abstract for EITF Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,” relating to EITF Issue 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments,” and FASB
Statement 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. The Company intends to adopt EITF Issue 08-4
effective June 30, 2009 and apply its provisions retrospectively to all periods
presented in its financial statements. The Company is in the process of
evaluating the impact that the adoption of the EITF Issue will have on its
financial statements.
In
June
2008, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock,” to provide guidance for determining whether an
equity-linked financial instrument or embedded feature is considered indexed
to
an entity’s own stock. The consensus establishes a two-step approach as a
framework for determining whether an instrument or embedded feature is indexed
to an entity’s own stock. The approach includes evaluating (1) the instrument’s
contingent exercise provisions, if any, and (2) the instrument’s settlement
provisions. EITF Issue 07-5 applies to (i) any freestanding financial instrument
or embedded feature that has all the characteristics of a derivative in
paragraphs 6-9 of FASB Statement 133, Accounting for Derivative Instruments
and
Hedging Activities, for purposes of evaluating whether the financial instrument
or embedded feature qualifies for the first part of the scope exception in
paragraph 11(a) of Statement 133, and (ii) any freestanding financial
instruments that are potentially settled in an entity’s own stock, regardless of
whether they have all the characteristics of a derivative in paragraphs 6-9
of
Statement 133, for the purpose of determining whether those instruments are
within the scope of EITF Issue 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”.
Entities that issue financial instruments such as warrants or options on their
own shares, convertible debt, convertible preferred stock, forward contracts
on
their own shares, or market-based employee stock option valuation instruments
will be affected by EITF Issue 07-5. The Company intends to adopt EITF Issue
07-5 effective January 1, 2009 and apply its provisions to its outstanding
instruments as of that date. The cumulative effect of the change in accounting
principle, if any, will be recognized as an adjustment to the opening balance
of
retained earnings for that fiscal year. The Company has periodically issued
financial instruments indexed to its own stock, in particular convertible debt
and convertible preferred stock. The Company is in the process of evaluating
the
impact that the adoption of EITF Issue 07-5 will have on its financial
statements.
Off-Balance
Sheet Arrangements
None.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
|
Index
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated
Balance Sheets
|
F-2
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss
|
F-3
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-4
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
[LETTERHEAD
OF RAYMOND CHABOT GRANT THORNTON LLP]
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders of Avensys Corporation
We
have
audited the accompanying consolidated balance sheets of Avensys Corporation
(formerly Manaris Corporation) and its subsidiaries as of June 30, 2008 and
2007
and the related consolidated statements of operations and comprehensive loss,
cash flows and stockholders’ equity for the years ended June 30, 2008 and 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Avensys Corporation and
its
subsidiaries as of June 30, 2008 and 2007 and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant losses since inception and
has
relied on non-operational sources of financing to fund operations, which raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Raymond Chabot Grant Thornton LLP
Chartered
Accountants
Montreal,
Canada
October
15, 2008
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Balance Sheets
(Expressed
in U.S. Dollars)
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
369,396
|
|
|
481,023
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $50,053 and
$54,128,
respectively
|
|
|
5,121,058
|
|
|
3,739,295
|
|
|
Other
receivables (Note 9)
|
|
|
1,924,767
|
|
|
1,167,241
|
|
|
Inventories
(Note 9)
|
|
|
2,178,686
|
|
|
1,478,835
|
|
|
Prepaid
expenses and deposits
|
|
|
149,213
|
|
|
208,914
|
|
|
Restricted
held-to-maturity security
|
|
|
-
|
|
|
93,861
|
|
|
Current
assets of discontinued operations (Note 4)
|
|
|
94,196
|
|
|
177,553
|
|
|
Total
Current Assets
|
|
|
9,837,316
|
|
|
7,346,722
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net (Note 6)
|
|
|
2,490,215
|
|
|
2,279,973
|
|
|
Intangible
assets (Note 7)
|
|
|
3,879,086
|
|
|
3,967,213
|
|
|
Goodwill
(Note 8)
|
|
|
4,644,864
|
|
|
4,116,872
|
|
|
Deferred
financing costs
|
|
|
404,630
|
|
|
376,794
|
|
|
Deposits
|
|
|
84,363
|
|
|
105,915
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
21,340,474
|
|
|
18,193,489
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 9)
|
|
|
6,361,379
|
|
|
3,938,188
|
|
|
Bank
and other loans payable (Note 12)
|
|
|
2,431,948
|
|
|
345,993
|
|
|
Current
portion of long-term debt (Note 14)
|
|
|
122,423
|
|
|
94,317
|
|
|
Current
portion of convertible debentures (Note 15)
|
|
|
-
|
|
|
1,568,519
|
|
|
Due
to related parties (Note 11)
|
|
|
40,000
|
|
|
40,000
|
|
|
Current
portion of balance of purchase price (Note 5)
|
|
|
92,818
|
|
|
-
|
|
|
Current
liabilities of discontinued operations (Note 4)
|
|
|
88,245
|
|
|
762,904
|
|
|
Total
Current Liabilities
|
|
|
9,136,813
|
|
|
6,749,921
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion (Note 14)
|
|
|
191,352
|
|
|
174,412
|
|
|
Convertible
debentures (Note 15)
|
|
|
1,299,412
|
|
|
1,275,458
|
|
|
Balance
of purchase price payable (Note 5 and 13)
|
|
|
1,706,363
|
|
|
1,194,096
|
|
|
Derivative
financial instruments (Notes 13 and 15)
|
|
|
1,363,543
|
|
|
64,510
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
13,697,483
|
|
|
9,458,397
|
|
|
Non-controlling
Interest
|
|
|
7,677
|
|
|
23,193
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, 500,000,000 shares authorized with a par value of $0.00001;
99,036,152 and 93,437,654 issued and outstanding,
respectively
|
|
|
990
|
|
|
934
|
|
|
Additional
Paid-in Capital
|
|
|
38,223,391
|
|
|
36,727,893
|
|
|
Accumulated
other comprehensive income
|
|
|
1,817,006
|
|
|
1,268,622
|
|
|
Deficit
|
|
|
(32,406,073
|
)
|
|
(29,285,550
|
)
|
|
Total
Stockholders’ Equity
|
|
|
7,635,314
|
|
|
8,711,899
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
21,340,474
|
|
|
18,193,489
|
|
Going
Concern (Note 1)
Contingencies
(Note 18)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Statements of Operations and Comprehensive Loss
(Expressed
in U.S. Dollars)
|
|
|
For the Year Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenue
(Note 4)
|
|
|
21,603,082
|
|
|
16,576,124
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
13,697,851
|
|
|
10,473,196
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
7,905,231
|
|
|
6,102,928
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
970,107
|
|
|
851,318
|
|
|
Selling,
general and administration
|
|
|
7,213,485
|
|
|
6,041,371
|
|
|
Research
and development
|
|
|
2,476,823
|
|
|
1,571,572
|
|
|
Total
Operating Expenses
|
|
|
10,660,415
|
|
|
8,464,261
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(2,755,184
|
)
|
|
(2,361,333
|
)
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses), net
|
|
|
57,288
|
|
|
172,269
|
|
|
Loss
on redemption of convertible debentures (Note 15(a))
|
|
|
(1,422,577
|
)
|
|
-
|
|
|
Interest
expense, net
|
|
|
(702,338
|
)
|
|
(798,856
|
)
|
|
Debentures
and balance of purchase price accretion (Notes 13 and 15)
|
|
|
(965,429
|
)
|
|
(2,420,791
|
)
|
|
Change
in fair value of derivative financial instruments (Notes 13 and 15)
|
|
|
936,318
|
|
|
1,762,161
|
|
|
Total
Other Income (Expenses)
|
|
|
(2,096,738
|
)
|
|
(1,285,217
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Before Income Tax Benefit
|
|
|
(4,851,922
|
)
|
|
(3,646,550
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Benefit - Refundable tax credits (Note 19)
|
|
|
1,124,819
|
|
|
1,217,948
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss before Non-Controlling Interest
|
|
|
(3,727,103
|
)
|
|
(2,428,602
|
)
|
|
|
|
|
|
|
|
|
|
|
Non-Controlling
Interest
|
|
|
206
|
|
|
1,890
|
|
|
Net
Loss from Continuing Operations
|
|
|
(3,726,897
|
)
|
|
(2,426,712
|
)
|
|
|
|
|
|
|
|
|
|
|
Results
of Discontinued Operations (Note 4)
|
|
|
606,374
|
|
|
55,958
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(3,120,523
|
)
|
|
(2,370,754
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
From
continuuing operations
|
|
|
(0.04
|
)
|
|
(0.03
|
)
|
|
From
discontinued operations
|
|
|
0.01
|
|
|
-
|
|
|
Net
loss
|
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
Weighted
Average Common Shares Outstanding
|
|
|
97,408,832
|
|
|
82,513,000
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
(3,120,523
|
)
|
|
(2,370,754
|
)
|
|
Foreign
currency translation adjustments
|
|
|
548,384
|
|
|
592,730
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
|
(2,572,139
|
)
|
|
(1,778,024
|
)
|
Going
Concern (Note 1)
Contingencies
(Note 18)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Statements of Cash Flows
(Expressed
in U.S. Dollars)
|
|
|
For
the Year Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(3,120,523
|
)
|
|
(2,370,754
|
)
|
|
Results
of discontinued operations
|
|
|
(606,374
|
)
|
|
(55,958
|
)
|
|
Adjustments
to reconcile net loss to cash generated by (used in) operating activities
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
249,479
|
|
|
453,206
|
|
|
Expenses
settled with issuance of common shares
|
|
|
17,500
|
|
|
77,102
|
|
|
Depreciation
and amortization
|
|
|
1,223,362
|
|
|
1,076,845
|
|
|
Non-cash
financial and other expenses
|
|
|
300,513
|
|
|
120,971
|
|
|
Gain
on disposal of property and equipment
|
|
|
(39,718
|
)
|
|
(308,676
|
)
|
|
Non-controlling
interest
|
|
|
(206
|
)
|
|
(1,890
|
)
|
|
Loss
on redemption of convertible debentures (Note 15 (a))
|
|
|
1,422,577
|
|
|
129,922
|
|
|
Debentures
and balance of purchase price accretion
|
|
|
965,429
|
|
|
2,420,791
|
|
|
Change
in fair value of derivative financial instruments
|
|
|
(936,318
|
)
|
|
(1,762,161
|
)
|
|
Amortization
of deferred financing costs
|
|
|
122,035
|
|
|
289,327
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Increase
in accounts receivables
|
|
|
(545,739
|
)
|
|
(989,810
|
)
|
|
(Increase)
decrease in inventories
|
|
|
(574,234
|
)
|
|
26,995
|
|
|
Increase
in other receivables
|
|
|
(723,074
|
)
|
|
(727,954
|
)
|
|
(Increase)
decrease in prepaid expenses and other assets
|
|
|
131,528
|
|
|
(49,551
|
)
|
|
Increase
(decrease) in accounts payable and accrued liabilities
|
|
|
1,087,289
|
|
|
(599,436
|
)
|
|
Net
Cash Generated by (Used In) Operating Activities from Continuing
Operations
|
|
|
(1,026,474
|
)
|
|
(2,271,031
|
)
|
|
Net
Cash Generated by (Used In) Operating Activities from Discontinued
Operations
|
|
|
391,533
|
|
|
(282,541
|
)
|
|
Net
Cash (Used In) Operating Activities
|
|
|
(634,941
|
)
|
|
(2,553,572
|
)
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Acquisition
of a business, including transaction costs
|
|
|
(293,151
|
)
|
|
-
|
|
|
Purchase
of property and equipment
|
|
|
(761,479
|
)
|
|
(154,500
|
)
|
|
Disposal
of property and equipment
|
|
|
52,277
|
|
|
835,041
|
|
|
Deposits
in trust
|
|
|
-
|
|
|
79,304
|
|
|
Purchase
of a minority interest
|
|
|
(16,982
|
)
|
|
|
|
|
Proceeds
from the restricted held-to-maturity security
|
|
|
93,861
|
|
|
-
|
|
|
Net
Cash Generated by (Used in) Investing Activities from Continuing
Operations
|
|
|
(925,474
|
)
|
|
759,845
|
|
|
Net
Cash Generated by (Used in) Investing Activities from Discontinued
Operations
|
|
|
-
|
|
|
(2,553
|
)
|
|
Net
Cash Generated by (Used in) Investing Activities
|
|
|
(925,474
|
)
|
|
757,292
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
(repayment) of bank and working capital credit line
|
|
|
1,593,658
|
|
|
(715,708
|
)
|
|
Repayment
of senior convertible debt
|
|
|
-
|
|
|
(774,073
|
)
|
|
Repayment
of convertible debentures
|
|
|
(533,304
|
)
|
|
-
|
|
|
Proceeds
from issue of senior secured convertible debentures (Note 15 (b))
|
|
|
3,726,621
|
|
|
3,179,849
|
|
|
Redemption
of secured convertible debentures (Note 15 (a))
|
|
|
(3,440,421
|
)
|
|
-
|
|
|
Long
term debt proceeds
|
|
|
30,015
|
|
|
-
|
|
|
Long
term debt repayments
|
|
|
(45,798
|
)
|
|
(74,156
|
)
|
|
Proceeds
from investment tax credit financing
|
|
|
570,071
|
|
|
397,099
|
|
|
Repayments
of investment tax credit financing
|
|
|
(94,509
|
)
|
|
(311,983
|
)
|
|
Proceeds
from capital leases
|
|
|
75,311
|
|
|
38,770
|
|
|
Repayments
of capital leases
|
|
|
(24,688
|
)
|
|
(29,990
|
)
|
|
Repayment
of other loans payable
|
|
|
-
|
|
|
(42,139
|
)
|
|
Deferred
financing costs
|
|
|
(73,678
|
)
|
|
-
|
|
|
Net
Cash Generated by Financing Activities from Continuing Operations
|
|
|
1,783,278
|
|
|
1,667,669
|
|
|
Net
Cash Generated by (Used in) Financing Activities from Discontinued
Operations
|
|
|
(352,511
|
)
|
|
-
|
|
|
Net
Cash Generated by Financing Activities
|
|
|
1,430,767
|
|
|
1,667,669
|
|
|
Effect
of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
18,021
|
|
|
200,398
|
|
|
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
(111,627
|
)
|
|
71,787
|
|
|
Cash
and Cash Equivalents – Beginning of period
|
|
|
481,023
|
|
|
409,236
|
|
|
Cash
and Cash Equivalents – End of period
|
|
|
369,396
|
|
|
481,023
|
|
Going
Concern (Note 1)
Contingencies
(Note 18)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Statements of Cash Flows (continued)
(Expressed
in U.S. Dollars)
|
|
|
For the Year Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Non-Cash
Financing and Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for services
|
|
|
-
|
|
|
3,640
|
|
|
Issuance
of common shares for late filing of registration statement
|
|
|
-
|
|
|
73,462
|
|
|
Issuance
of common shares for interest payments
|
|
|
-
|
|
|
58,410
|
|
|
Issuance
of common shares for repayment of senior convertible notes, Series
A
|
|
|
-
|
|
|
341,458
|
|
|
Issuance
of common shares for conversion of senior convertible notes, Series
A
|
|
|
-
|
|
|
-
|
|
|
Issuance
of common shares for repayment of secured convertible notes, Series
B
|
|
|
52,186
|
|
|
1,034,545
|
|
|
Issuance
of stock options to settle outstanding legal claims
|
|
|
-
|
|
|
-
|
|
|
Issuance
of common shares for repayment of senior convertible debentures
|
|
|
-
|
|
|
527,752
|
|
|
Issuance
of common shares pursuant to cashless exercise of warrants (Note
17(b))
|
|
|
28
|
|
|
-
|
|
|
Issuance
of stock options for debt settlement
|
|
|
-
|
|
|
-
|
|
|
Issuance
of common shares to settle outstanding payables
|
|
|
17,497
|
|
|
25,709
|
|
|
Issuance
of common stock to settle placement agent fees on issuance of Senior
Secured Convertible OID Note (Note 15(b))
|
|
|
15
|
|
|
-
|
|
|
Issuance
of common stock to settle a pricing adjustment shortfall in connection
with the acquisition of the manufacturing assets of ITF Optical
Technologies (Note 16 (a))
|
|
|
4
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(paid) collected from continuing operations
|
|
|
74,663
|
|
|
(164,870
|
)
|
|
Income
tax benefits received
|
|
|
378,831
|
|
|
358,437
|
|
Going
Concern (Note 1)
Contingencies
(Note 18)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Avensys
Corporation (formerly Manaris Corporation)
Consolidated
Statement of Stockholders’ Equity
(Expressed
in U.S. Dollars)
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Total
|
|
|
|
|
Common Shares
|
|
Paid-In
|
|
Comprehensive
|
|
|
|
Stockholders’
|
|
|
|
|
Number of
|
|
Amount
|
|
Capital
|
|
Income
|
|
Deficit
|
|
Equity
|
|
|
|
|
Shares
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2006
|
|
|
77,671,281
|
|
|
777
|
|
|
34,169,867
|
|
|
(316,566
|
)
|
|
(26,648,091
|
)
|
|
7,205,987
|
|
|
Correction
of error (Note 3)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
992,458
|
|
|
(266,705
|
)
|
|
725,753
|
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
453,206
|
|
|
-
|
|
|
-
|
|
|
453,206
|
|
|
Common
stock issued to settle outstanding payables
|
|
|
122,934
|
|
|
2
|
|
|
29,347
|
|
|
-
|
|
|
-
|
|
|
29,349
|
|
|
Common
stock issued pursuant to interest payments on Senior Secured Convertible
Notes Series A
|
|
|
182,609
|
|
|
2
|
|
|
58,408
|
|
|
-
|
|
|
-
|
|
|
58,410
|
|
|
Common
stock issued pursuant to repayments of Senior Secured Convertible
Notes
Series A
|
|
|
1,101,004
|
|
|
11
|
|
|
381,447
|
|
|
-
|
|
|
-
|
|
|
381,458
|
|
|
Common
stock issued pursuant to repayments of Secured Convertible Notes
Series
B
|
|
|
12,450,353
|
|
|
124
|
|
|
1,034,421
|
|
|
-
|
|
|
-
|
|
|
1,034,545
|
|
|
Common
stock issued upon conversion of Unsecured Convertible
Debentures
|
|
|
1,654,394
|
|
|
16
|
|
|
527,736
|
|
|
-
|
|
|
-
|
|
|
527,752
|
|
|
Common
stock issued for late filing of registration statement
|
|
|
255,079
|
|
|
2
|
|
|
73,461
|
|
|
-
|
|
|
-
|
|
|
73,463
|
|
|
Translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
592,730
|
|
|
|
|
|
592,730
|
|
|
Net
loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,370,754
|
)
|
|
(2,370,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
93,437,654
|
|
|
934
|
|
|
36,727,893
|
|
|
1,268,622
|
|
|
(29,285,550
|
)
|
|
8,711,899
|
|
|
Balance,
June 30, 2007
|
|
|
93,437,654
|
|
|
934
|
|
|
36,727,893
|
|
|
1,268,622
|
|
|
(29,285,550
|
)
|
|
8,711,899
|
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
249,479
|
|
|
-
|
|
|
-
|
|
|
249,479
|
|
|
Common
stock issued to settle outstanding payables
|
|
|
250,000
|
|
|
3
|
|
|
17,497
|
|
|
-
|
|
|
-
|
|
|
17,500
|
|
|
Issuance
of Senior Secured Convertible OID Note (Note 15(b))
|
|
|
-
|
|
|
-
|
|
|
1,176,383
|
|
|
-
|
|
|
-
|
|
|
1,176,383
|
|
|
Common
stock issued pursuant to repayments of Secured Convertible Notes
Series
B
|
|
|
649,955
|
|
|
6
|
|
|
52,186
|
|
|
-
|
|
|
-
|
|
|
52,192
|
|
|
Common
stock issued pursuant to cashless exercise of warrants (Note
17(b))
|
|
|
2,759,235
|
|
|
28
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Common
stock issued to settle placement agent fees on issuance of Senior
Secured
Convertible OID Note (Note 15(b))
|
|
|
1,477,273
|
|
|
15
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Common
stock issued to settle a pricing adjustment shortfall in connection
with
the acquisition of the manufacturing assets of ITF Optical Technologies
Inc. (Note 16 (a))
|
|
|
462,035
|
|
|
4
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
548,384
|
|
|
|
|
|
548,384
|
|
|
Net
loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,120,523
|
)
|
|
(3,120,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2008
|
|
|
99,036,152
|
|
|
990
|
|
|
38,223,391
|
|
|
1,817,006
|
|
|
(32,406,073
|
)
|
|
7,635,314
|
|
Going
Concern (Note 1)
Contingencies
(Note 18)
(The
Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
The
accompanying financial statements have been prepared using generally accepted
accounting principles applicable to a going concern, which assumes Avensys
Corporation (the “Company”) will be able to realize the carrying value of its
assets and discharge its liabilities in the normal course of operations. The
Company has incurred significant losses since inception and has relied on
non-operational sources of financing to fund operations. Furthermore, the
Company’s operating subsidiary, Avensys Inc. (“AVI”), maintains a line of credit
from a financial institution, and the covenants pertaining to such were not
respected as at June 30, 2008. This constitutes an event of default and could
result in the financial institution requiring repayment of a loan. The failed
covenants with the financial institution triggered cross-default clauses
affecting the Company’s Working Capital Facility (note 12(c)) and Senior Secured
Convertible Debenture (note 15(b)). Subsequent to year-end, the Company has
obtained waivers with respect to such cross-default clauses for the Working
Capital Facility and Senior Secured Convertible Debenture. AVI is seeking to
renegotiate the credit agreement with the financial institution and is also
seeking to obtain additional conventional bank credit-line financing to that
which it already has, to support its growing operations. The material
uncertainties resulting from the above events and conditions are such that
there
exists substantial doubt that the Company would be able to continue as a going
concern at June 30, 2008. The Company’s continuation as a going concern is
dependent upon the continued support of shareholders, lenders and suppliers
and
its ability to obtain additional cash to allow for the satisfaction of its
obligations on a timely basis.
Management
has taken steps to revise the Company’s operating and financial requirements.
During the first quarter of fiscal 2009, as described in Note 22, the Company
amended an agreement with the former shareholders of ITF Optical Technologies.
The amendment postponed, by 18 months, the exercise date of a put option that
could have required the cash outlay of CAD $2,000,000 or the issuance of CAD
$1,500,000 in Company shares at a reference share price of $0.342 between April
and October 2009. The amended agreement stipulates:
|
|
·
|
The
date permitting the exercise of the put option by the ITF Preferred
Shareholders is postponed by 18 months from April 1, 2009 to October
1,
2010. The date at which the put option expires has also been postponed
from October 1, 2009 to December 31,
2010.
|
|
|
·
|
AVI
will pay interest at 10% annually from April 1, 2009 until the date
of
exercise of the put option on each ITF Preferred Shareholder’s
proportional share of the consideration, should they choose to exercise
their option.
|
|
|
·
|
AVI
will also raise the total amount of the share consideration from
CAD
$1,500,000 to CAD $2,000,000 and will reduce the reference price
from
$0.342 to $0.11, should the Preferred Holders choose to exercise
the put
option for their proportionate amount of common shares of the
Company.
|
While
management believes the use of the going concern assumption is appropriate,
there is no assurance the above actions will be successful. These financial
statements do not include any adjustments or disclosures that may be necessary
should the Company not be able to continue as a going concern. If the use of
the
going concern assumption is not appropriate for these financial statements,
then
adjustments may be necessary to the carrying value and classification of assets
and liabilities and reported results of operations and such adjustments could
be
material.
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 June 30, 2008 are located across Canada.
The Company currently derives all of its revenues from its subsidiary. As
discussed in Note 20, the Company operates two reporting segments, Fiber
Technologies and Solutions, corresponding to the Avensys Technologies and
Avensys Solutions divisions of AVI, as follows:
|
|
·
|
Avensys
Tech manufactures and distributes fiber optical components and sensors
worldwide to the telecommunications, industrial laser and sensor
markets.
|
|
|
·
|
Avensys
Solutions distributes and integrates environmental monitoring solutions
in
both the public and private sectors of the Canadian
marketplace.
|
Since
February 6, 2008, the Company ceased to operate C-Chip Technologies Corporation
(North America) Inc., and the former operation was classified as a discontinued
operation (Note 4(a)).
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
3.
|
Basis
of Presentation and Significant Accounting
Policies
|
Basis
of
Presentation
These
consolidated financial statements are prepared in conformity with accounting
principles generally accepted (“GAAP”) in the United States of America (“US”)
and are presented in US dollars, the reporting currency.
Basis
of
Consolidation
These
consolidated financial statements include the accounts of the Company and its
subsidiaries. Consolidated companies include AVI and its subsidiaries, Fizians
Inc., of which AVI owns 90% of its outstanding shares, and ITF Laboratories
Inc.
(“ITF Labs”), which has been determined to be a variable interest entity and for
which AVI is the primary beneficiary; and the two discontinued operations of
the
C-Chip and CSA subsidiaries (see note 4). 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.
The Company mitigates the credit risk related to cash and cash equivalents
by
dealing with major Canadian financial institutions that have low or minimal
credit risk.
Accounts
Receivable
Accounts
receivable are stated net of an allowance for doubtful accounts. The Company
establishes an allowance for doubtful accounts based on a detailed assessment
of
the credit risk and collectability of specific customer accounts, as well as
historical trends and other information. The Company sells the majority of
its
products and services in North America. The Company generally does not require
collateral. Credit losses have not been historically significant.
Fair
Value of Financial Instruments
The
fair
value of cash and cash equivalents, accounts receivable, other receivable,
restricted held-to-maturity securities, due to related parties and accounts
payable and accrued liabilities approximate their carrying value given their
short-term maturity. The derivative financial instruments are carried at fair
value. The Company has estimated the fair value of its bank loan and other
loans
payable, long-term debt, capital leases, convertible debentures and balance
of
purchase price payable by discounting future cash flows using interest rates
which the Company could obtain for loans with similar terms conditions and
maturity dates. The fair value and carrying value of all such debt instruments,
as at June 30, 2008, amounted to $6,934,611 (June 30, 2007 - $5,462,000 and
$5,426,000, respectively).
Advertising
The
Company’s advertising costs, which amounted to $102,699 for the year ended June
30, 2008 and $139,975 for the year ended June 30, 2007 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 (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Foreign
Currency
The
functional currency of the Company is the U.S. dollar. The functional currency
of the Company’s Canadian subsidiary, AVI, is the Canadian dollar. Accordingly,
the financial statements of AVI are converted into the reporting currency (the
US dollar) using the current rate method 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 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.
Transactions
concluded in foreign currencies are converted into 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, annual measurement of the fair values of derivative financial
instruments, 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.
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 fiber-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.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
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.
Property
and Equipment
The
Company's property and equipment are recorded at cost. The Company provides
for
depreciation and amortization using the following methods and applying rates
estimated to amortize the cost over the useful life of the assets:
|
Computer
equipment
|
|
Declining
balance
|
|
30%-331/3%
|
|
Furniture
and fixture
|
|
Declining
balance
|
|
20%
|
|
Leasehold
improvements
|
|
Straight-line over the lease terms
|
|
5
to 8 years
|
|
Laboratory
equipment
|
|
Declining
balance
|
|
20%
|
|
Automotive
equipment and software
|
|
Declining
balance
|
|
30%
|
|
Machinery
and office equipment
|
|
Declining
balance
|
|
20%
|
|
Capital
leases
|
|
Straight-line and declining balance over the lease terms
|
|
3
years
|
Capital
Leases
The
Company enters into leases relating to computer equipment in which substantially
all the benefits and risks of ownership are transferred to the Company and
are
recorded as capital leases and classified as property and equipment and long
term borrowings. All other leases are classified as operating leases under
which
leasing costs are expensed in the period in which they are
incurred.
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 for the Avensys Solutions division of AVI is determined
on
an average cost basis, while the cost of materials inventory for the Avensys
Tech division of AVI is calculated on a first in first out (FIFO) 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.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Basis
of
Presentation and Significant Accounting Policies (continued)
Deferred
Financing Fees
Costs
incurred in connection with financing activities are deferred and amortized
using the straight-line basis over the expected life of the related agreements
ranging from one to five years. Amortization of these costs is charged to
interest expense in the accompanying consolidated statements of operations
and
comprehensive loss. During the year ended June 30, 2008 the Company wrote off
approximately $371,000 of deferred financing costs associated with the Series
B
Subordinated Secured Convertible Debentures (Note 15(a)), which are included
in
loss on redemption of convertible debentures in the consolidated statement
of
operations and comprehensive loss.
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
|
|
5-7
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 income tax assets and liabilities are determined based on
the
differences between the carrying value and the tax bases of assets and
liabilities.
A
valuation allowance is recognized to the extent that, in the opinion of
Management, it is more likely than not that the deferred income tax assets
will
not be realized. The Company has incurred U.S. operating losses, as at June
30,
2008, of approximately $23.9 million from its inception which are available
and
which expire starting in 2022. The Company has incurred Canadian operating
losses, as at June 30, 2008, of approximately $3.3 million from its inception
which are available and which expire starting in 2015. For Canadian income
tax
purposes, the Company also has, as at June 30, 2008, approximately $3.7 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 (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
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 Accounting Standards
Board (“FASB”) 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. At July 1, 2007, the Company had $168,230 in unrecognized
tax
benefits which would favorably impact the Company’s effective tax rate if
subsequently recognized. The amount of unrecognized tax benefits was $290,859
at
June 30, 2008.
The
Company and its subsidiaries file income tax returns in Canadian and U.S.
federal jurisdictions, and various provincial jurisdictions. The Company is
subject to Canadian and provincial income tax examination for fiscal years
2003
through 2007. The company is subject to U.S. federal income tax examination
by
U.S. tax authorities for all taxation years since its inception.
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
May
2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections -
a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces
APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes
in Interim Financial Statements, changes the requirements for the accounting
for
and reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS 154 provides guidance
on
the accounting for and reporting of accounting changes and error corrections.
It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
It
also provides guidance for determining whether retrospective application of
a
change in accounting principle is impracticable and for reporting a change
when
retrospective application is impracticable. The correction of an error in
previously issued financial statements is not an accounting change. However,
the
reporting of an error correction involves adjustments to previously issued
financial statements similar to those generally applicable to reporting an
accounting change retrospectively. Therefore, the reporting of a correction
of
an error by restating previously issued financial statements is also addressed
by this Statement. The provisions of SFAS 154 apply for accounting changes
and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after May 2005. SFAS 154 does not change the
transition provisions of any existing accounting pronouncements. This FASB
Statement was implemented by the Company commencing July 1, 2006 and such did
not have a material effect on the Company's results of operations or financial
position.
In
September 2006, the Securities and Exchange Commission (“SEC”) 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.
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
Recent
Accounting Pronouncements Adopted During Fiscal Year 2007
(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 was initially effective for fiscal years beginning
after November 15, 2007. FASB Staff Position FAS 157-2 (FSP 157-2), deferred
the
effective date for non-financial assets of SFAS 157 to fiscal years beginning
after November 15, 2008. Earlier adoption is permitted, provided the Company
has
not yet issued financial statements, including for interim periods, for that
fiscal year. The Company plans to adopt the provisions of SFAS 157 beginning
on
July 1, 2009 and is currently 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 plans to
adopt the provisions of SFAS 159 beginning on July 1, 2008 and does not expect
the adoption of this standard will have a significant impact 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,
2008, the Company does not have any arrangements that would be subject to the
scope of EITF 07-3.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
Recent
Accounting Pronouncements Not Yet Adopted (continued)
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. SFAS 141R may have a material
impact on the reporting of future acquisitions in the Company’s financial
statements.
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.
In
March
2008, FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires disclosure
of the fair values of derivative instruments and their gains and losses in
a
tabular format. It also requires disclosure of additional information about
an
entity’s liquidity by requiring disclosure of derivative features that are
credit risk–related. Finally, it requires cross-referencing within footnotes to
enable financial statement users to locate important information about
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. Earlier
adoption is permitted. The Company is currently evaluating the impact of the
adoption of the provisions of SFAS 161 on its consolidated financial
statements.
In
April
2008, FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets,” to provide guidance for determining the
useful life of recognized intangible assets and to improve consistency between
the period of expected cash flows used to measure the fair value of a recognized
intangible asset and the useful life of the intangible asset as determined
under
Statement 142. The FSP requires that an entity consider its own historical
experience in renewing or
extending
similar arrangements. However, the entity must adjust that experience based
on
entity-specific factors under FASB Statement 142, Goodwill and Other Intangible
Assets.
FSP
FAS
142-3 is effective for fiscal years and interim periods that begin after
November 15, 2008. The Company intends to adopt FSP FAS 142-3 effective July
1,
2009 and to apply its provisions prospectively to recognized intangible assets
acquired after that date.
In
May
2008, FASB issued FASB Staff
Position
(FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement),” to require issuers
of convertible debt to account separately for the liability and equity
components of these instruments if they have stated terms permitting cash
settlement upon conversion. This practice marks a significant change from the
current accounting practice for convertible debt instruments in the scope of
the
FSP. Current practice does not require separation of the liability and equity
components of such instruments. Separately accounting for these instruments’
liability and equity components results in the recording of more interest cost
over the life of the convertible debt instrument, because of an initial debt
discount. FSP APB 14-1 is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years. The Company intends
to
adopt FSP APB 14-1 effective July 1, 2009 and apply its provisions
retrospectively to all periods presented in its financial statements. The
Company has issued convertible debt instruments and is in the process of
evaluating the impact that the adoption of FSP APB 14-1 will have on its
financial statements.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Basis
of
Presentation and Significant Accounting Policies (continued)
Recent
Accounting Pronouncements (continued)
Recent
Accounting Pronouncements Not Yet Adopted (continued)
In
June
2008, FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” to clarify that all outstanding unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents, whether
paid or unpaid, are participating securities. An entity must include
participating securities in its calculation of basic and diluted earnings per
share (EPS) pursuant to the two-class method, as described in FASB Statement
128, Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The
Company intends to adopt FSP EITF 03-6-1 effective July 1, 2009 and apply its
provisions retrospectively to all prior-period EPS data presented in its
financial statements.
The
Company does not issue share-based payment awards that contain nonforfeitable
rights to dividends and, as a result, does not believe that the adoption of
FSP
EITF 03-6-1 will have a significant effect on its financial
statements.
In
June
2008, FASB ratified a consensus opinion reached by the Emerging Issues Task
Force (EITF) on EITF Issue 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5,” to provide transition guidance for conforming changes made to
the abstract for EITF Issue 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,”
relating to EITF Issue 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” and FASB Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
The
Company intends to adopt EITF Issue 08-4 effective June 30, 2009 and apply
its
provisions retrospectively to all periods presented in its financial statements.
The Company is in the process of evaluating the impact that the adoption of
the
EITF Issue will have on its financial statements.
In
June
2008, FASB ratified a consensus opinion reached by the Emerging Issues Task
Force (EITF) on EITF Issue 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock,” to provide guidance for
determining whether an equity-linked financial instrument or embedded feature
is
considered indexed to an entity’s own stock. The consensus establishes a
two-step approach as a framework for determining whether an instrument or
embedded feature is indexed to an entity’s own stock. The approach includes
evaluating (1) the instrument’s contingent exercise provisions, if any, and (2)
the instrument’s settlement provisions. EITF Issue 07-5 applies to (i) any
freestanding financial instrument or embedded feature that has all the
characteristics of a derivative in paragraphs 6-9 of FASB Statement 133,
Accounting for Derivative Instruments and Hedging Activities, for purposes
of
evaluating whether the financial instrument or embedded feature qualifies for
the first part of the scope exception in paragraph 11(a) of Statement 133,
and
(ii) any freestanding financial instruments that are potentially settled in
an
entity’s own stock, regardless of whether they have all the characteristics of a
derivative in paragraphs 6-9 of Statement 133, for the purpose of determining
whether those instruments are within the scope of EITF Issue 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock”. Entities that issue financial instruments such as warrants
or options on their own shares, convertible debt, convertible preferred stock,
forward contracts on their own shares, or market-based employee stock option
valuation instruments will be affected by EITF Issue 07-5. The Company intends
to adopt EITF Issue 07-5 effective July 1, 2009 and apply its provisions to
its
outstanding instruments as of that date. The cumulative effect of the change
in
accounting principle, if any, will be recognized as an adjustment to the opening
balance of retained earnings for that fiscal year.
The
Company has periodically issued financial instruments indexed to its own stock,
in particular convertible debt and convertible preferred stock. The Company
is
in the process of evaluating the impact that the adoption of EITF Issue 07-5
will have on its financial statements.
Comparative
Financial Statements
The
comparative Consolidated Financial Statements have been reclassified from
statements previously presented to conform to the presentation adopted in the
current year. The reclassifications are attributed to reporting for discontinued
operations.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
4.
|
Discontinued
Operations
|
|
|
a)
|
C-Chip
Technologies Corporation (North
America)
|
On
December 22, 2006, with an effective date of December 1, 2006, C-Chip
Technologies Corporation (North America), a subsidiary of the Company
(“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. 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 a loan from the supplier to C-Chip was reduced
by $200,000. The associated gain was recorded in the second quarter of fiscal
2007. 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.
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 which at
the
time of the Agreement had a balance outstanding of $1,143,321. In 2005, the
former supplier of C-Chip extended a credit facility with an original maximum
amount of $1,000,000 (principal and interest) bearing interest at a rate of
10%
per annum (June 30, 2007 - 10%). The supplier subsequently permitted C-Chip
to
exceed the maximum amount of the credit facility. The principal and interest
on
this credit facility had a balance outstanding at June 30, 2007 of $708,245
(CAD
$754,564).
On
February 6, 2008, the Agreement was terminated. The termination arrangement
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.
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 a
result, the Company recognized a gain of $351,059 (CAD $352,639), during the
third quarter, on the forgiveness of the loan, which represented the outstanding
balance of the loan at December 31, 2007. As part of the termination of the
Agreement, the former supplier agreed to 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. In terminating the Agreement, the Company
ceased to operate C-Chip, and ceased to derive any cash flows from the prior
C-Chip activities which, starting in the third quarter of fiscal 2008, were
classified as discontinued operations.
|
|
b)
|
Canadian
Security Agency (2004) Inc.
|
On
September 22, 2005, Canadian Security Agency (2004) Inc. (“CSA”), a wholly-owned
subsidiary of the Company, entered into an agreement to sell its customer list.
The Company has since wound up all activities of CSA and resolved all
outstanding liabilities and commitments during the three month period ended
June
30, 2006, and the remaining activities and balances of CSA have since been
classified as discontinued operations.
The
carrying values of the major classes of assets and liabilities of discontinued
operations, included under the ‘Current assets of discontinued operations’ and
‘Current liabilities of discontinued operations’ captions in the consolidated
balance sheet, are as follows:
|
|
|
June
30, 2008
|
|
June
30, 2007
|
|
|
|
|
C-Chip
|
|
CSA
|
|
Total
|
|
C-Chip
|
|
CSA
|
|
Total
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Cash
and cash equivalents
|
|
|
31,560
|
|
|
589
|
|
|
32,149
|
|
|
78,233
|
|
|
696
|
|
|
78,929
|
|
|
Accounts
receivable
|
|
|
54,958
|
|
|
-
|
|
|
54,958
|
|
|
98,624
|
|
|
-
|
|
|
98,624
|
|
|
Prepaid
Expenses
|
|
|
7,089
|
|
|
-
|
|
|
7,089
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Current
assets of discontinued operations
|
|
|
93,607
|
|
|
589
|
|
|
94,196
|
|
|
176,857
|
|
|
696
|
|
|
177,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and accrued liabilities
|
|
|
88,245
|
|
|
-
|
|
|
88,245
|
|
|
54,659
|
|
|
-
|
|
|
54,659
|
|
|
Other
loans payable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
708,245
|
|
|
-
|
|
|
708,245
|
|
|
Current
liabilities of discontinued operations
|
|
|
88,245
|
|
|
-
|
|
|
88,245
|
|
|
762,904
|
|
|
-
|
|
|
762,904
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Discontinued
Operations (continued)
Summary
results of discontinued operations for the years ended June 30, 2008 and 2007
are as follows:
|
|
|
Total
|
|
C-Chip
|
|
CSA
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Revenues
from discontinued operations
|
|
|
398,100
|
|
|
2,164,437
|
|
|
398,100
|
|
|
2,164,437
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings (loss) from Discontinued Operations
|
|
|
255,315
|
|
|
(144,042
|
)
|
|
255,315
|
|
|
(144,042
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
tax earnings (loss) from Discontinued Operations
|
|
|
255,315
|
|
|
(144,042
|
)
|
|
255,315
|
|
|
(144,042
|
)
|
|
-
|
|
|
-
|
|
|
Gain
on extinguishment of loan
|
|
|
351,059
|
|
|
200,000
|
|
|
351,059
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of discontinued operations
|
|
|
606,374
|
|
|
55,958
|
|
|
606,374
|
|
|
55,958
|
|
|
-
|
|
|
-
|
|
On
March
28, 2008, the Company’s subsidiary, AVI completed the remaining conditions of an
Asset Purchase Agreement (“Willer Agreement”) to acquire the operating assets of
Willer Engineering Limited, a provider of industrial process measurement and
continuous emission monitoring instrumentation solutions to the Canadian
industrial marketplace. The transaction represents the acquisition of a
business, and will be integrated into the Environmental Solutions reporting
segment. The acquired operating assets provide complementary products and
services, and provide access to new customer and supplier bases to the
Environmental Solutions reporting segment. The Company reports the revenues
and
results of operations from the acquired business since April 1,
2008.
The
initial purchase price incurred for the operating assets acquired pursuant
to
the Willer Agreement was $275,881 (CAD $281,316), comprising $102,971 (CAD
$105,000) in cash paid at the time of the transaction, $90,561 representing
the
present value, discounted using a discount rate of 10% of a committed amount
of
CAD $100,000 payable in cash on January 30, 2009, and $82,349 representing
the
present value, discounted using a discount rate of 10% of a committed amount
of
CAD $100,000 payable in cash on January 29, 2010. Transaction costs of $190,180
were also incurred for the acquisition. The Willer Agreement also provides
for
the payment of an additional base line amount of CAD $200,000 in contingent
consideration subject to the Avensys Solutions reporting segment achieving
specified revenue targets for the fiscal year ending June 30, 2009, and an
additional base line amount of CAD $200,000 in contingent consideration subject
to the Avensys Solutions reporting segment achieving specified revenue targets
for the fiscal year ending June 30, 2010. The contingent consideration will
only
be determinable at the end of each of the two fiscal years ending June 30,
2009
and 2010 and is therefore not recorded as of the date of acquisition. The
contingent consideration may be settled in cash or common stock shares of the
Company, at the option of the seller, using reference common stock share prices
of $0.15 for the fiscal year ending June 30, 2009, and $0.20 for the fiscal
year
ending June 30, 2010. The number of shares issuable, at the option of the
seller, will be determinable when the contingency is resolved, at the end of
each of the two fiscal years ending June 30, 2009 and 2010. The contingent
consideration will be accounted for as an increase in goodwill when it will
become determinable.
As
a
result of the above agreement, the purchase price of the acquired business
was
calculated as follows:
|
|
|
$
|
|
|
Cash
amount paid
|
|
|
102,971
|
|
|
Minimum
balance of purchase price payable
|
|
|
172,910
|
|
|
|
|
|
275,881
|
|
|
|
|
|
|
|
|
Transaction
Costs
|
|
|
190,180
|
|
|
|
|
|
466,061
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Business
Combination (continued)
The
goodwill arising from the acquisition consists largely of the synergies and
economies of scale expected from combining the operations of Willer with the
Avensys Solutions division of AVI. All the goodwill was assigned to the
Solutions reporting segment. After the completion of an evaluation of the excess
of cost over the fair value of acquired net assets, and the identification
and
valuation of intangible assets, the purchase price was allocated to the
following assets and liabilities:
|
|
|
$
|
|
|
Accounts
receivable
|
|
|
791,075
|
|
|
Inventories
|
|
|
258,051
|
|
|
Prepaid
expenses and deposits
|
|
|
41,516
|
|
|
Property
and equipment
|
|
|
96,610
|
|
|
Customer
Relationships (+)
|
|
|
203,982
|
|
|
Trade
Names (+)
|
|
|
112,778
|
|
|
Goodwill
(*)
|
|
|
343,485
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,381,436
|
)
|
|
|
|
|
466,061
|
|
(*)
deductible for tax purposes
(+)
amortized on a straight-line basis over five years
|
6.
|
Property
and Equipment
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
equipment
|
|
|
35,806
|
|
|
9,390
|
|
|
26,417
|
|
|
Computer
equipment
|
|
|
545,634
|
|
|
485,823
|
|
|
59,811
|
|
|
Furniture
and fixtures
|
|
|
373,323
|
|
|
348,475
|
|
|
24,847
|
|
|
Laboratory
equipment
|
|
|
3,331,122
|
|
|
1,348,813
|
|
|
1,982,310
|
|
|
Leasehold
improvements
|
|
|
517,599
|
|
|
300,809
|
|
|
216,790
|
|
|
Machinery
and office equipment
|
|
|
67,271
|
|
|
58,988
|
|
|
8,283
|
|
|
Software
|
|
|
189,036
|
|
|
114,789
|
|
|
74,247
|
|
|
Capital
leases - computer equipment
|
|
|
171,295
|
|
|
73,785
|
|
|
97,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
5,231,086
|
|
|
2,740,871
|
|
|
2,490,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
during the year
|
|
|
|
|
|
|
|
|
632,602
|
|
|
|
|
June
30, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net
Book
|
|
|
|
|
Cost
|
|
Amortization
|
|
Value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
equipment
|
|
|
41,951
|
|
|
31,035
|
|
|
10,916
|
|
|
Computer
equipment
|
|
|
484,675
|
|
|
436,862
|
|
|
47,813
|
|
|
Furniture
and fixtures
|
|
|
343,047
|
|
|
328,307
|
|
|
14,741
|
|
|
Laboratory
equipment
|
|
|
2,711,664
|
|
|
873,160
|
|
|
1,838,504
|
|
|
Leasehold
improvements
|
|
|
437,836
|
|
|
179,548
|
|
|
258,288
|
|
|
Machinery
and office equipment
|
|
|
60,355
|
|
|
54,766
|
|
|
5,590
|
|
|
Software
|
|
|
148,750
|
|
|
87,615
|
|
|
61,135
|
|
|
Capital
leases - computer equipment
|
|
|
96,617
|
|
|
53,630
|
|
|
42,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
4,324,896
|
|
|
2,044,923
|
|
|
2,279,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
during the year
|
|
|
|
|
|
|
|
|
532,064
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
The
following table presents details of the Company’s purchased intangible assets
with definite lives:
|
|
|
June
30, 2008
|
|
|
|
|
Weighted
Average Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
2.80
|
|
|
235,520
|
|
|
103,628
|
|
|
131,892
|
|
|
Customer
relationships
|
|
|
6.56
|
|
|
5,245,536
|
|
|
1,690,717
|
|
|
3,554,819
|
|
|
Trade
name
|
|
|
4.75
|
|
|
238,389
|
|
|
46,014
|
|
|
192,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
6.34
|
|
|
5,719,445
|
|
|
1,840,359
|
|
|
3,879,086
|
|
|
|
|
June
30, 2007
|
|
|
|
|
Weighted
Average Life in Years
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
3.75
|
|
|
225,418
|
|
|
56,354
|
|
|
169,064
|
|
|
Customer
relationships
|
|
|
7.67
|
|
|
4,825,298
|
|
|
1,125,903
|
|
|
3,699,395
|
|
|
Trade
name
|
|
|
5.75
|
|
|
120,222
|
|
|
21,468
|
|
|
98,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
7.46
|
|
|
5,170,938
|
|
|
1,203,725
|
|
|
3,967,213
|
|
The
estimated future amortization expense of acquired intangible assets with
definite lives for the next five fiscal years is as follows:
|
|
|
$
|
|
|
2009
|
|
|
632,556
|
|
|
2010
|
|
|
632,556
|
|
|
2011
|
|
|
623,135
|
|
|
2012
|
|
|
585,452
|
|
|
2013
|
|
|
565,128
|
|
|
Thereafter
|
|
|
840,259
|
|
|
|
|
|
|
|
|
|
|
|
3,879,086
|
|
The
changes in the carrying amount of intangible assets during the years ended
June
30, 2007, and 2008 is as follows:
|
|
|
$
|
|
|
|
|
|
|
|
Balance
as of June 30, 2006
|
|
|
3,757,272
|
|
|
Adjustment
following correction of an error (Note 3)
|
|
|
554,017
|
|
|
Impact
of foreign exchange
|
|
|
168,693
|
|
|
Amortization
during year
|
|
|
(512,769
|
)
|
|
|
|
|
|
|
|
Balance
as of June 30, 2007
|
|
|
3,967,213
|
|
|
Acquisition
of intangible assets
|
|
|
316,760
|
|
|
Impact
of foreign exchange
|
|
|
185,873
|
|
|
Amortization
during year
|
|
|
(590,760
|
)
|
|
|
|
|
|
|
|
Balance
as of June 30, 2008
|
|
|
3,879,086
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
The
changes in the carrying amount of goodwill during the years ended June 30,
2007
and 2008 is as follows:
|
|
|
$
|
|
|
|
|
|
|
|
Balance
as of June 30, 2006
|
|
|
3,762,000
|
|
|
|
|
|
|
|
|
Adjustment
following correction of an error (Note 3)
|
|
|
171,736
|
|
|
Impact
of foreign exchange
|
|
|
183,136
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2007
|
|
|
4,116,872
|
|
|
|
|
|
|
|
|
Acquisition
of goodwill
|
|
|
343,485
|
|
|
Impact
of foreign exchange
|
|
|
184,507
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2008
|
|
|
4,644,864
|
|
During
the fourth quarter of Fiscal 2008, the Company completed its annual goodwill
impairment test. In evaluating whether there was an impairment of goodwill,
management compared the fair value of the Avensys Tech and Avensys Solutions
reporting units against their carrying amounts, including the goodwill.
Measurement of the fair value was based on the reporting units’ present values
of expected future cash flows. As the estimated fair value exceeded the carrying
amount, Management determined that no adjustments were necessary to the
reporting units’ underlying assets and liabilities and the goodwill
recorded.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Other
Receivables
|
|
|
|
|
|
|
|
|
Investment
tax credits receivable
|
|
|
1,854,095
|
|
|
1,081,787
|
|
|
Sales
tax receivable
|
|
|
65,416
|
|
|
39,825
|
|
|
Grants
receivable
|
|
|
-
|
|
|
9,877
|
|
|
Other
|
|
|
5,256
|
|
|
35,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,924,767
|
|
|
1,167,241
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
905,988
|
|
|
726,484
|
|
|
Work
in process
|
|
|
314,105
|
|
|
179,659
|
|
|
Finished
goods
|
|
|
958,593
|
|
|
572,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,178,686
|
|
|
1,478,835
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
4,045,102
|
|
|
2,056,896
|
|
|
Payroll
and benefits
|
|
|
1,801,437
|
|
|
1,447,935
|
|
|
Income
taxes payable
|
|
|
1,614
|
|
|
4,189
|
|
|
Rent
payable
|
|
|
36,200
|
|
|
34,648
|
|
|
Deferred
revenue
|
|
|
138,338
|
|
|
173,517
|
|
|
Lease
termination
|
|
|
24,408
|
|
|
33,457
|
|
|
Provision
for Warranty
|
|
|
282,234
|
|
|
150,703
|
|
|
Other
|
|
|
32,046
|
|
|
36,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,361,379
|
|
|
3,938,188
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
10.
|
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 AVI
Laboratories Inc. (“ALI”). AVI 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. AVI sold intellectual property related to research
& development projects to ALI for tax planning purposes in return for
500,000 preferred shares redeemable for $429,037 (CAD$500,000). ALI provided
research & development for 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 ITF Optical Technologies' R&D
assets as part of a business combination. As a result of the ITF Optical
Technologies 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 the Company following the ITF Optical Technologies
transaction. Following this transaction, ALI changed its name to ITF
Laboratories Inc.
ITF
Laboratories Inc. (“ITF Labs”) provides research & development to AVI and
other parties. As a result, ITF Laboratories Inc. continues to be included
in
the consolidated financial statements of the Company for the year ended June
30,
2008, since AVI is the primary beneficiary. The impact of including the accounts
of ITF Laboratories Inc. in the consolidated balance sheet as at June 30, 2008
consists of additions to current assets of $2,785,075 (June 30, 2007 -
$1,862,614), net property and equipment of $916,421 (June 30, 2007 - $903,564),
intangible assets of $237,834 (June 30, 2007 - $344,892) and current liabilities
of $1,370,102 (June 30, 2007 - $867,218). The impact on the consolidated
statement of operations for years ended June 30, 2008 and 2007 was an increase
in revenue of $2,063,254 and $1,595,618, respectively, an increase in expenses
of $4,152,636 and $760,553, respectively, and an increase in the income tax
benefit from refundable investment tax credits of $1,124,819 and $1,217,148,
respectively. The increase in expenses includes an amount for research and
development expenses of $2,507,858 and $746,111, respectively.
|
11.
|
Related
Party Transactions and Balances
|
The
total
amount due to a shareholder of the Company at June 30, 2008 is $40,000 (June
30,
2007 - $40,000). The amount due is non-interest bearing, unsecured and has
no
fixed terms of repayment.
|
12.
|
Bank
and Other Loans Payable
|
The
details of bank and other loans payable is as follows:
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Senior
Secured Working Capital Note of the Company, bearing interest at
8.5%,
maturing October 1, 2008 ($500,000) and November 2, 2008 ($500,000),
repayable on demand (Note 12(c))
|
|
|
1,000,000
|
|
|
-
|
|
|
Secured
bank line of credit of AVI, bearing interest at Canadian bank prime
rate
plus 1.5% (Note 12(a))
|
|
|
843,540
|
|
|
253,125
|
|
|
Investment
tax credit financing of AVI, bearing interest at 18%, repayable on
demand
(Note 12(b))
|
|
|
588,408
|
|
|
92,868
|
|
|
|
|
|
2,431,948
|
|
|
345,993
|
|
|
|
a)
|
AVI
maintains a line of credit from a financial institution for an authorized
amount of $1,333,726 (CAD$1,360,000), which bears interest at the
Canadian
bank prime rate plus 1.5%. The outstanding balance under the line
of
credit as at June 30, 2008 amounted to $843,540 (CAD $860,157) (June
30,
2007 $253,125 - CAD$269,679). AVI’s accounts receivable totaling
$4,676,473 (CAD $4,768,600) and inventories totaling $1,706,735 (CAD
$1,740,358) serve as guarantees for the line of credit. As discussed
in
Note 1, according to terms of the credit agreement, AVI is subject
to
certain financial covenants which were not respected as at June 30,
2008.
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Bank
and
Other Loans Payable (continued)
|
|
b)
|
ITF
Labs obtained investment tax credit financing during fiscal 2007
in the
form of a demand loan in the amount of $397,099 (CAD $460,000). ITF
Labs
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).
ITF
Labs 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
$588,408 (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
Labs.
|
In
connection with the issue of a Senior Secured Original Issue Discount
Convertible Debenture (Note 15 (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 Company renewed the $500,000
WC
Note on the same terms and conditions on February 2, 2008, May 2, 2008 and
August 2. 2008 and the maturity date was extended to November 2, 2008. On April
1, 2008, the Company obtained an additional $500,000 WC Note from the Facility
bearing interest at 8.5% payable at maturity, maturing on July 1, 2008, which
was extended to October 1, 2008 on the same terms and conditions. In the normal
course of operations, these notes are subject to maturity dates being extended
and the notes are therefore renewed on maturity. As discussed in Note 1,
subsequent to year-end, the Company obtained a waiver, from the holder of the
WC
Notes, for a failed condition of the Facility which resulted from the triggering
of a cross-default clause.
|
13.
|
Balance
of Purchase Price and Derivative Liability on ITF
Purchase
|
Since
the
acquisition in 2006 of the manufacturing and research and development assets
of
ITF Optical Technologies Inc., the Company has recorded a balance of purchase
price payable and derivative liability related to an embedded conversion
option.
The
Preferred Shareholder arrangement entitling the former shareholders of ITF
Optical Technologies Inc. (the “ITF Preferred Shareholders”) to a right to
receive a fixed amount of CAD$2,000,000 or a fixed number of the Company’s
common shares has been accounted for as a convertible liability consisting
of a
debt instrument with an embedded conversion option. The debt instrument has
been
originally measured at its present value using a discount rate of 30% resulting
in a net present value of $794,148 on the date of issuance. This carrying value
is accreted to the face amount of CAD$2,000,000 using the effective interest
rate method to the first date the ITF Preferred Shareholders could require
a
payment. The carrying value of the liability as at June 30, 2008 was $1,621,893
($1,194,096 as of June 30, 2007). 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 recorded in the Statement
of Operations. The fair value of this embedded conversion option was $1,122
as
of June 30, 2008 ($17,045 as of June 30, 2007). The fair value of the embedded
conversion option is determined using the Black-Scholes Model.
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan secured by AVI's intangible and movable tangible assets, June
30,
2008 - CAD $203,000 (June 30, 2007 - CAD $245,000), bearing interest
at
the lender's prime rate, June 30, 2008 - 6.75% (June 30, 2007 -
8.25%)
plus 1.75%, payable in monthly instalments of CAD$7,000 plus interest,
maturing in November 2010
|
|
|
199,079
|
|
|
229,961
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, June 30, 2008 - CAD $92,396 (June 30, 2007 -
CAD
$41,304), bearing interest between 9.07% and 16.23%, maturing between
October 2009 and April 2012
|
|
|
90,610
|
|
|
38,768
|
|
|
|
|
|
|
|
|
|
|
|
Secured
note, June 30, 2008 - CAD $24,560, bearing no interest, payable
in 48
monthly instalments of $614, maturing October 2011.
|
|
|
24,086
|
|
|
-
|
|
|
|
|
|
313,775
|
|
|
268,729
|
|
|
Less:
Current portion of long-term debt
|
|
|
122,423
|
|
|
94,317
|
|
|
Long-term
debt
|
|
|
191,352
|
|
|
174,412
|
|
Principal
payments on long-term debt and capital leases are as follows:
|
|
|
$
|
|
|
|
|
|
|
|
|
2009
|
|
|
122,423
|
|
|
2010
|
|
|
120,667
|
|
|
2011
|
|
|
60,928
|
|
|
2012
|
|
|
9,757
|
|
|
2013
|
|
|
-
|
|
|
Total
|
|
|
313,775
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
15.
|
Convertible
Debentures
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
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 15
(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
15
(b))
|
|
|
1,299,412
|
|
|
-
|
|
|
Unsecured
Convertible Debentures bearing interest at 12% maturing March 1,
2008,
original principal amount of $375,446 (CAD$400,000) (Note 15
(c))
|
|
|
-
|
|
|
373,110
|
|
|
|
|
|
1,299,412
|
|
|
2,843,977
|
|
|
Less:
Current portion of convertible debentures
|
|
|
-
|
|
|
1,568,519
|
|
|
Convertible
debentures
|
|
|
1,299,412
|
|
|
1,275,458
|
|
Principal
payments on the convertible debentures for the next five years are as
follows:
|
|
|
$
|
|
|
|
|
|
|
|
2009
|
|
|
-
|
|
|
2010
|
|
|
1,177,225
|
|
|
2011
|
|
|
1,569,633
|
|
|
2012
|
|
|
1,569,633
|
|
|
2013
|
|
|
392,409
|
|
|
|
|
|
4,708,900
|
|
|
Less:
Impact of accretion / present value
|
|
|
3,409,488
|
|
|
Total
|
|
|
1,299,412
|
|
|
|
a)
|
Series
B Subordinated Secured Convertible
Debentures
|
During
the first quarter of fiscal 2008, the Company redeemed its Series B Subordinated
Secured Convertible Promissory Notes and its Original Issue Discount Series
B
Subordinated Secured Convertible Promissory Notes, both originally due February
11, 2009 (collectively the “Notes”). Under an arrangement with a majority of the
holders of the Notes, the Company also redeemed half of the associated Series
Y
and Series Z Warrants (collectively the “Warrants”) previously issued in August
2006 and November 2006 relating to the redeemed Notes. The total purchase price
for the redemption of the Notes and 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 of fiscal 2008 which is included
as
part of Other Expenses in the Statement of Operations and Comprehensive Loss.
At
June 30, 2008, 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.
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.
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Convertible
Debentures (continued)
Series
B
Subordinated Secured Convertible Debentures (continued)
|
|
(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 (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Convertible
Debentures (continued)
Series
B
Subordinated Secured Convertible Debentures (continued)
The
following table illustrates the values of the various components of this
financing at the issue dates, and the balance sheet dates, June 30, 2007 and
June 30, 2008.
|
|
|
Expiry Date
|
|
# of Underlying
Shares
|
|
Value at Issue
Dates
|
|
Value at June
30, 2007
|
|
Value at June
30, 2008
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B Notes
|
|
|
2/11/2009
|
|
|
|
|
|
734,495
|
|
|
9,895
|
|
|
-
|
|
|
OID
Notes
|
|
|
2/11/2009
|
|
|
|
|
|
110,175
|
|
|
1,484
|
|
|
-
|
|
|
Series
Y Warrants
|
|
|
11/9/2010
|
|
|
145,005
|
|
|
20,325
|
|
|
1,048
|
|
|
2,628
|
|
|
Series
Z Warrants
|
|
|
11/9/2010
|
|
|
2,175,063
|
|
|
387,038
|
|
|
26,421
|
|
|
39,413
|
|
|
|
|
|
|
|
|
|
|
|
1,252,033
|
|
|
38,848
|
|
|
42,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value of Subordinated Secured Convertible
Debentures
|
|
|
|
|
Series
B Notes
|
|
|
2/11/2009
|
|
|
|
|
|
2,060,965
|
|
|
2,155,684
|
|
|
-
|
|
|
OID
Notes
|
|
|
2/11/2009
|
|
|
|
|
|
309,145
|
|
|
315,183
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
2,370,110
|
|
|
2,470,867
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of Series B Notes
|
|
|
|
|
3,622,143
|
|
|
2,509,715
|
|
|
42,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities (Placement Fees)
|
|
|
|
|
|
|
|
|
|
|
Series
W Warrants
|
|
|
11/9/2010
|
|
|
711,490
|
|
|
88,472
|
|
|
6,351
|
|
|
2,886
|
|
|
Series
Y Warrants
|
|
|
11/9/2010
|
|
|
17,789
|
|
|
1,672
|
|
|
86
|
|
|
322
|
|
|
Series
Z Warrants
|
|
|
11/9/2010
|
|
|
266,810
|
|
|
31,853
|
|
|
2,180
|
|
|
4,835
|
|
|
|
|
|
|
|
|
|
|
|
121,997
|
|
|
8,617
|
|
|
8,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivative Liabilities
|
|
|
|
|
1,374,030
|
|
|
47,465
|
|
|
50,084
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Convertible
Debentures (continued)
|
|
b)
|
Senior
Secured Original Issue Discount Convertible
Debenture
|
In
connection with the redemption of the Notes described in Note 15(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 15(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
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. 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 are amortized on a straight-line
basis over the term of the Convertible Debenture. At June 30, 2008, the
outstanding principal amount on the Convertible Debenture was $4,258,553.
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,
June 30, 2008.
|
|
|
Issue
Date
|
|
Maturity
/
|
|
# of underlying
|
|
Value at September
|
|
Value at June
|
|
|
|
|
|
|
Expiry
Date
|
|
Shares
|
|
24,
2007
|
|
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
P warrants
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
8,091,403
|
|
|
479,816
|
|
|
226,032
|
|
|
Beneficial
Conversion Option - Convertible debenture
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
|
|
|
1,711,199
|
|
|
1,086,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,191,015
|
|
|
1,312,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of Original Issue Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Convertible Debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture
|
|
|
9/24/2007
|
|
|
9/24/2012
|
|
|
38,714,119
|
|
|
848,725
|
|
|
1,299,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for fees (1)
|
|
|
9/24/2007
|
|
|
|
|
|
|
|
|
162,500
|
|
|
162,500
|
|
|
Warrants
issued for fees
|
|
|
9/24/2007
|
|
|
|
|
|
1,936,937
|
|
|
53,624
|
|
|
53,624
|
|
|
Series
Q warrants
|
|
|
9/24/2007
|
|
|
|
|
|
20,276,190
|
|
|
960,259
|
|
|
960,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,176,383
|
|
|
1,176,383
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
4,216,123
|
|
|
3,787,861
|
|
(1)
Common shares to the Placement Agent totaling 1,477,273 were issued in the
third
quarter of fiscal year 2008.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Convertible
Debentures (continued)
Senior
Secured Original Issue Discount Convertible Debenture (continued)
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 favor 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. At June 30, 2008, all the covenants contained within this Convertible
Debenture were respected, except as discussed in Note 1. Subsequent to year-end,
the Company obtained a waiver from its lenders for a failed condition of the
Senior Secured Convertible Debenture which resulted from the triggering of
a
cross-default clause.
|
|
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 has filed a registration statement that includes the said shares.
On
October 9, 2006, the Company’s registration statement became effective enabling
the shares to be issued The shares were issued on April 2, 2007.The share price
was calculated using the following formula: principal and interest divided
by a
17.5% discount on the 10 day weighted average price of the Company’s shares
which equaled $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 in February 2005, 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,
$346,440 (CAD$400,000) were modified to be convertible into 330,251 shares
of
the Company. At June 30, 2007, the discount related to the conversion feature
was $2,336 (June 30, 2006 - $15,635).
During
the three months ended March 31, 2008, AVI made the first of four cash payments,
as agreed by the holder of the debentures, to reimburse the 12% unsecured
convertible debentures, which matured on March 1, 2008. As of June 30, 2008,
the
balance is paid in full.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
At
June
30, 2008, the Company had authority to issue 500,000,000 shares of common stock.
The Company had 99,036,152 and 93,437,654 of common shares outstanding at June
30, 2008 and June 30, 2007, respectively.
For
the
year ended June 30, 2008:
|
|
a)
|
In
February 2008, the Company issued 462,035 common shares upon the
resolution of a contingency related to the acquisition of the
manufacturing assets of ITF Optical Technologies Inc. in April
2006.
|
On
April
18, 2006, Avensys Corporation, AVI and Avensys Laboratories Inc (“ALI”), entered
into an Asset Purchase Agreement (the “ITF 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 AVI, 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 established at
$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.
|
|
b)
|
In
February 2008, the Company issued 1,477,273 registered common shares,
representing $162,500 in placement agent fees, in connection with
the
Senior Secured Original Issue Discount Convertible Debenture described
in
Note 15(b)
|
|
|
c)
|
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.
|
|
|
d)
|
In
August 2007, pursuant to the cashless exercise of warrants described
in
Note 17(b) and other warrants exercised on a cashless basis, the
Company
issued 2,759,235 common shares.
|
|
|
e)
|
In
August 2007, the Company issued 250,000 registered common shares
as
compensation for legal services.
|
For
the
year ended June 30, 2007:
|
|
a)
|
In
the third and fourth quarters of fiscal 2007, the Company issued
12,450,353 common shares representing scheduled principal payments
on the
Series B Notes and the OID Notes.
|
|
|
b)
|
In
April 2007, pursuant to the conversion of the unsecured convertible
debentures described in Note 15(c), the Company issued 1,654,394
common
shares.
|
|
|
c)
|
In
February 2007, the Company issued 40,000 restricted common shares
as
compensation for legal services.
|
|
|
d)
|
In
November 2006, the Company issued 6,055 common shares in connection
with
the Series A Notes as an adjustment to a previous issuance for principal
payment.
|
|
|
e)
|
During
the first quarter of fiscal 2007, the Company issued 1,277,558 common
shares in connection with the Series A Notes. Of that amount, 1,094,949
common shares with a fair value of $341,458, were issued for scheduled
principal payments. Since the Company had been accreting the debt
on the
basis that the principal payments would be settled in shares, no
gain or
loss was recorded 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.
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Common
Stock (continued)
|
|
f)
|
In
September 2006, pursuant to the ITF transaction and in connection
with the
Company’s failure to file the required registration statement within the
time period required by the Asset Purchase Agreement, the Company
issued
255,079 restricted common stock shares to the ITF preferred shareholders.
The fair value of the shares at the issue date that was expensed
in the
financial statements was $73,463.
|
|
|
g)
|
In
August 2006, the Company issued 82,934 common shares to settle outstanding
payables in the amount of $25,709.
|
Common
stock reserved for issuance at June 30, 2008 was as follows:
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
10,036,773
|
|
|
8,661,070
|
|
|
Reserved
for future issuance
|
|
|
3,989,541
|
|
|
365,244
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Plan (1)
|
|
|
|
|
|
|
|
|
Reserved
for future issuance
|
|
|
3,750,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
44,125,399
|
|
|
17,752,882
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
feature of OID Senior Secured Convertible Note
|
|
|
38,714,119
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
feature of Series B Notes and OID Notes
|
|
|
-
|
|
|
48,325,000
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
feature of unsecured convertible debentures
|
|
|
-
|
|
|
330,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,615,832
|
|
|
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 for issuance under
the
Plan. In August 2007, the Company issued 250,000 common shares from
the
Plan as compensation for legal
services.
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
17.
|
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,
allowing the Company to issue options for the acquisition of up to 20,000,000
common shares.
During
the year ended June 30, 2008, 3,100,000 stock options were granted to employees
and directors with exercise prices equivalent to the market price on the
respective grant dates (4,499,069 for the year ended June 30,
2007).
During
the year ended June 30, 2008, zero stock options were granted to employees
and
directors with exercise prices below the market price on the respective grant
dates (zero for the year ended June 30, 2007).
During
the year ended June 30, 2008, zero stock options were granted to non-employees
with exercise prices equivalent the market price on the respective grant dates
(zero for year ended June 30, 2007)
During
the year ended June 30, 2008, zero stock options were granted to non-employees
with exercise prices below the market price on the respective grant dates
(64,834 for the year ended June 30, 2007).
During
the year ended June 30, 2007, a certain director resigned and is no longer
providing any services to the Company. 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:
|
|
|
June
30, 2008
|
|
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
|
|
|
3,100,000
|
|
|
0.09
|
|
|
4,563,903
|
|
|
0.22
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Forfeited
|
|
|
(1,724,297
|
)
|
|
(0.18
|
)
|
|
(389,583
|
)
|
|
(0.25
|
)
|
|
Balance
at end of year
|
|
|
10,036,773
|
|
|
0.35
|
|
|
8,661,070
|
|
|
0.42
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Stock
Options and Warrants (continued)
Stock
Options (continued)
Additional
information regarding options outstanding as at June 30, 2008 is as
follows:
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Range of
|
|
|
|
remaining
|
|
average
|
|
|
|
average
|
|
|
Exercise prices
|
|
Number of
|
|
contractual
|
|
exercise price
|
|
Number of
|
|
exercise price
|
|
|
$
|
|
shares
|
|
life (years)
|
|
$
|
|
shares
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
– 0.25
|
|
|
3,839,834
|
|
|
5.15
|
|
|
0.09
|
|
|
1,339,834
|
|
|
0.09
|
|
|
0.26
– 0.50
|
|
|
3,078,189
|
|
|
5.62
|
|
|
0.31
|
|
|
2,328,189
|
|
|
0.32
|
|
|
0.51
– 0.75
|
|
|
1,895,000
|
|
|
1.05
|
|
|
0.67
|
|
|
1,895,000
|
|
|
0.67
|
|
|
0.76
– 1.00
|
|
|
1,223,750
|
|
|
1.26
|
|
|
0.83
|
|
|
1,223,750
|
|
|
0.83
|
|
|
|
|
|
10,036,773
|
|
|
4.05
|
|
|
0.35
|
|
|
6,786,773
|
|
|
0.46
|
|
The
weighted average fair value of options granted for the years ended June 30,
2008
and 2007 was $0.06 and $0.18, respectively, as summarized below.
|
|
|
Number of options
|
|
Weighted average
exercise price
|
|
Weighted average
grant-date fair value
|
|
|
|
|
June 30
|
|
June 30
|
|
June
30
|
|
June
30
|
|
June
30
|
|
June
30
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Options
granted during the year ended June 30, 2008 and 2007, exercise prices
below market price at time of grant
|
|
|
-
|
|
|
64,834
|
|
|
-
|
|
|
0.00001
|
|
|
-
|
|
|
0.17
|
|
|
Options
granted during the year ended June 30, 2008 and 2007, exercise prices
equal to market price at time of grant
|
|
|
3,100,000
|
|
|
4,499,069
|
|
|
0.09
|
|
|
0.23
|
|
|
0.06
|
|
|
0.18
|
|
|
Options
granted during the year ended June 30, 2008 and 2007.
|
|
|
3,100,000
|
|
|
4,563,903
|
|
|
0.09
|
|
|
0.23
|
|
|
0.06
|
|
|
0.18
|
|
The
Company recognized stock-based compensation for employees and directors in
the
amount of $249,479 and $442,185 for the years ended June 30, 2008 and 2007,
respectively. The Company recorded zero and $11,021 of stock-based compensation
to non-employees for the years ended June 30, 2008 and 2007, respectively.
The
amount of stock based compensation for the year ended June 30, 2008 includes
$64,684 for the departure of the president of AVI in July 2007.
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:
|
|
|
Years
ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Risk
- free interest rate
|
|
|
2.80
|
%
|
|
4.33
|
%
|
|
Expected
volatility
|
|
|
100
|
%
|
|
100
|
%
|
|
Expected
life of stocks options (in years)
|
|
|
3.70
|
|
|
5.11
|
|
|
Assumed
dividends
|
|
|
None
|
|
|
None
|
|
As
at
June 30, 2008, the Company has $251,277 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 four
years (June 30, 2009 - $158,081, June 30, 2010 - $37,108, June 30, 2011 -
$37,108, June 30, 2012 - $18,891).
There
were no stock options exercised during the year ended June 30, 2008 and 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.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Stock
Options and Warrants (continued)
|
Warrants
outstanding as at June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Changes
in the warrants outstanding for the year ended June 30, 2008 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
|
)
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
(1,129,590
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,129,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at June 30, 2008
|
|
|
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)
|
|
|
1.63
|
|
|
1.70
|
|
|
3.91
|
|
|
1.63
|
|
|
1.95
|
|
|
-
|
|
|
1.63
|
|
|
1.63
|
|
|
1.63
|
|
|
-
|
|
|
1.15
|
|
|
3.32
|
|
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 $0.70. Therefore, as a result of the
exercise of 2,653,845 Series G warrants, 2,653,845 Series K warrants were issued
to the same holders of such warrants. There remains 1,144,131 Series G and
Series I warrants outstanding.
Certain
warrants issued by the Company contain either full ratchet or weighted average
ratchet provisions, which reduce the exercise price of the warrant and/or
increase the number of shares issuable on exercise, if common stock is issued
by
the Company below the existing exercise price of those warrants. Certain
warrants do not contain ratchet provisions and their exercise price is not
adjusted. The reconciliation of warrants, with respect to outstanding amounts
and exercise prices, reflects the effect of changes in the number of warrants
and their exercise price that have occurred as a result of the existing full
ratchet and weighted average ratchet provisions contained in the original
warrant agreements.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Stock
Options and Warrants (continued)
Warrants
(continued)
|
Warrants
outstanding as at June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Warrant exercise
prices
|
|
|
Series
E
|
|
|
1,803,333
|
|
|
0.31
|
|
|
Series
G
|
|
|
3,797,976
|
|
|
0.05
|
|
|
Series
H
|
|
|
890,593
|
|
|
0.35
|
|
|
Series
I
|
|
|
3,797,976
|
|
|
0.05
|
|
|
Series
J
|
|
|
1,781,184
|
|
|
0.50
|
|
|
Series
W
|
|
|
711,492
|
|
|
0.35
|
|
|
Series
Y
|
|
|
233,392
|
|
|
0.65
|
|
|
Series
Z
|
|
|
3,500,865
|
|
|
0.45
|
|
|
IB-01
|
|
|
7,692
|
|
|
0.00001
|
|
|
IB-02
|
|
|
248,532
|
|
|
0.48
|
|
|
IB-03
|
|
|
374,171
|
|
|
0.53
|
|
|
IB-06
|
|
|
605,676
|
|
|
0.05
|
|
|
Total
|
|
|
17,752,882
|
|
|
0.25
|
|
Changes
in the warrants outstanding for the year ended June 30, 2007 are as
follows:
|
Exercise
prices
|
|
0.00001
|
|
0.05
|
|
0.31
|
|
0.35
|
|
0.45
|
|
0.48
|
|
0.50
|
|
0.53
|
|
0.59
|
|
0.65
|
|
0.67
|
|
Total
|
|
|
Balance
at June 30, 2006
|
|
|
7,692
|
|
|
-
|
|
|
-
|
|
|
6,890,400
|
|
|
-
|
|
|
-
|
|
|
5,579,160
|
|
|
-
|
|
|
215,385
|
|
|
-
|
|
|
323,077
|
|
|
13,015,714
|
|
|
Ratchet
pricing effect
|
|
|
-
|
|
|
8,201,628
|
|
|
1,803,333
|
|
|
(5,999,807
|
)
|
|
-
|
|
|
248,532
|
|
|
(3,797,976
|
)
|
|
374,171
|
|
|
(215,385
|
)
|
|
-
|
|
|
(323,077
|
)
|
|
291,419
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
711,492
|
|
|
3,500,865
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
233,392
|
|
|
-
|
|
|
4,445,749
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at June 30, 2007
|
|
|
7,692
|
|
|
8,201,628
|
|
|
1,803,333
|
|
|
1,602,085
|
|
|
3,500,865
|
|
|
248,532
|
|
|
1,781,184
|
|
|
374,171
|
|
|
-
|
|
|
233,392
|
|
|
-
|
|
|
17,752,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weigthed
Average remaining contractual life (years)
|
|
|
2.63
|
|
|
2.78
|
|
|
2.64
|
|
|
2.99
|
|
|
3.36
|
|
|
2.63
|
|
|
2.63
|
|
|
2.63
|
|
|
-
|
|
|
3.36
|
|
|
-
|
|
|
2.83
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
|
18.
|
Commitments
and Contingencies
|
Commitments
Minimum
lease payments for the next five fiscal years are as follows:
|
|
|
$
|
|
|
2009
|
|
|
437,530
|
|
|
2010
|
|
|
279,310
|
|
|
2011
|
|
|
32,405
|
|
|
2012
|
|
|
2,044
|
|
|
2013
|
|
|
-
|
|
|
|
|
|
751,289
|
|
The
Company leases premises for its various offices located across Canada. Total
rent expense was $450,205 and $647,955 for the years ended June 30, 2008 and
2007, respectively. Total rent expense for the year ended June 30, 2007 includes
an amount recorded as a result of an abandonment of office premises in advance
of the expiration of the lease term. An expense and liability in the amount
of
$111,893 was recorded, calculated using discounted cash flows of the lease
payments remaining, reduced by estimated sublease rentals, with a
credit-adjusted risk-free rate of 6%. The amount will be amortized over the
remaining period of the lease which expires on May 31, 2010.
Litigation
and Settlement Costs
On
February 7, 2007, a lawsuit was filed by a former employee in Superior Court
of
Quebec for a total amount of $268,027 (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. Furthermore, a court date for the hearing has been
scheduled.
|
19.
|
Research
and Development Investment Tax
Credits
|
The
Company’s investment tax credit recovery for the years ended June 30, 2008 and
2007 were positively affected as a result of revisions to amounts previously
estimated and recorded for credits related to the fiscal year ended June 30,
2006. As a result of these revisions, which relate to new information obtained
following the taxation authorities’ reviews, the investment tax credit
recoveries of the years ended June 30, 2008 and 2007 were increased by $103,872
and $475,193, respectively. 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 year ended June 30, 2008
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 (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
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.
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 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
Solutions reporting segment is comprised of the operations of Avensys Solutions
and offers products and services to the environmental monitoring solutions
marketplace. The 2007 figures have been reclassified on this basis. The Company
has not disclosed revenues from each group of products or services, given that
it is impracticable to do so.
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 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.
Corporate management operating costs are primarily represented as part of ‘Other
operating expenses and indirect costs of net revenues’.
|
|
|
|
|
|
|
|
|
|
|
|
Fiber
Technologies
|
|
Solutions
|
|
Consolidated
|
|
|
Net
revenues from external customers
|
|
|
14,533,370
|
|
|
7,069,712
|
|
|
21,603,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
9,265,185
|
|
|
4,432,666
|
|
|
13,697,851
|
|
|
Marketing
and sales expense
|
|
|
727,953
|
|
|
1,937,278
|
|
|
2,665,231
|
|
|
General
and administrative expense
|
|
|
1,118,049
|
|
|
948,749
|
|
|
2,066,798
|
|
|
Research
and development expense
|
|
|
2,476,823
|
|
|
-
|
|
|
2,476,823
|
|
|
Depreciation
and amortization expense
|
|
|
351,025
|
|
|
57,527
|
|
|
408,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
13,939,035
|
|
|
7,376,220
|
|
|
21,315,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
594,335
|
|
|
(306,508
|
)
|
|
287,827
|
|
|
Other
operating expenses & indirect costs of net revenues
(+)
|
|
|
|
|
|
|
|
|
(3,043,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
(2,755,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
57,288
|
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
(1,422,577
|
)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
(702,338
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
(29,111
|
)
|
|
Income
Tax Benefit - Refundable tax credits (*)
|
|
|
|
|
|
|
|
|
1,124,819
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
(3,726,897
|
)
|
(*)
–
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
(+)
–
Includes $212,000 of salary expense related to the departure of the President
of
AVI in July 2007.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Segment
Disclosure (continued)
|
|
|
Fiber
Technologies
|
|
Solutions
|
|
Consolidated
|
|
|
Net revenues from
external customers
|
|
|
10,977,252
|
|
|
5,598,872
|
|
|
16,576,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of net revenues
|
|
|
6,988,429
|
|
|
3,484,767
|
|
|
10,473,196
|
|
|
Marketing
and sales expense
|
|
|
519,266
|
|
|
1,606,842
|
|
|
2,126,108
|
|
|
General
and administrative expense
|
|
|
831,867
|
|
|
455,479
|
|
|
1,287,346
|
|
|
Research
and development expense
|
|
|
1,571,572
|
|
|
-
|
|
|
1,571,572
|
|
|
Depreciation
and amortization expense
|
|
|
282,769
|
|
|
22,440
|
|
|
305,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
10,193,904
|
|
|
5,569,527
|
|
|
15,763,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
contribution
|
|
|
783,349
|
|
|
29,344
|
|
|
812,693
|
|
|
Other
operating expenses & indirect costs of net revenues
|
|
|
|
|
|
|
|
|
(3,174,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
|
|
|
|
|
|
(2,361,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
172,269
|
|
|
Loss
on redemption of convertible debentures
|
|
|
|
|
|
|
|
|
-
|
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
(798,856
|
)
|
|
Debenture
accretion and change in fair value of derivative financial
instruments
|
|
|
|
|
|
|
|
|
(658,630
|
)
|
|
Income
Tax Benefit - Refundable tax credits (*)
|
|
|
|
|
|
|
|
|
1,217,948
|
|
|
Non-Controlling
Interest
|
|
|
|
|
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
(2,426,712
|
)
|
(*)
–
Relates entirely to the Research & Development activities of the Fiber
Technologies segment.
Revenue
generated from two customers of the Company’s Fiber Technologies segment for the
years ended June 30, 2008 and 2007 was approximately as follows:
|
|
|
Year ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Customer
1
|
|
|
7,942,000
|
|
|
6,855,000
|
|
|
Customer
2
|
|
|
3,035,000
|
|
|
2,750,000
|
|
|
|
|
|
10,977,000
|
|
|
9,605,000
|
|
The
outstanding receivable balances for these customers at June 30, 2008 amounted
to
$1,956,182 (Customer 1 represented $1,033,310 and Customer 2 represented
$922,872).
The
Company’s assets are allocated as follows:
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Fiber
Technologies
|
|
|
9,101,193
|
|
|
7,610,346
|
|
|
Solutions
|
|
|
3,977,932
|
|
|
1,610,852
|
|
|
All
Other (*)
|
|
|
8,261,349
|
|
|
8,972,291
|
|
|
|
|
|
21,340,474
|
|
|
18,193,489
|
|
(*)
includes Avensys Corp. assets (including goodwill and intangible assets
identified in the acquisition of Avensys Inc. during February 2005) which cannot
be allocated to either of the reporting segments.
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
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 year
ended June 30, 2008 and 2007 for the Americas include approximately $9,357,000
and $7,490,000, respectively, of sales to the United States of America and
$7,341,000 and $5,612,000, respectively, of sales to Canada. The revenues for
Asia for the year ended June 30, 2008 and 2006 include sales of $3,223,000
and
$2,147,000, respectively, to China.
Geographic
Information
|
|
|
2008
|
|
2007
|
|
|
Revenues
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
16,715,125
|
|
|
13,306,970
|
|
|
Europe
|
|
|
1,307,797
|
|
|
962,176
|
|
|
Asia
|
|
|
3,580,160
|
|
|
2,306,978
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,603,082
|
|
|
16,576,124
|
|
The
Company utilizes the liability method of accounting for income taxes as set
forth in SFAS No. 109, “Accounting for Income Taxes”. Under the liability
method, deferred taxes are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates. A valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized. Pursuant to SFAS
109
the Company is required to compute tax asset benefits for net operating losses
carried forward. In assessing the recoverability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. The amount of the deferred tax asset considered realizable could
change materially in the near term based on future taxable income during the
carry forward period. The potential benefit of net operating losses has not
been
recognized in these financial statements because the Company cannot be assured
it is more likely than not it will utilize the net operating losses carried
forward in future years.
A
reconciliation of the benefit for income taxes at the combined U.S. and Canadian
tax rate compared to the Company’s effective tax rate is as
follows:
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Income
tax at Federal US statutory rate (recovery)
|
|
|
(1,649,653
|
)
|
|
(1,239,827
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation not deductible
|
|
|
88,756
|
|
|
137,775
|
|
|
Increase
in valuation allowance
|
|
|
2,585,204
|
|
|
632,423
|
|
|
Research
and development tax credits
|
|
|
(1,124,819
|
)
|
|
(1,217,948
|
)
|
|
Income
tax rate differential of foreign subsidiaries
|
|
|
(26,603
|
)
|
|
102,501
|
|
|
Change
in income tax rates
|
|
|
27,666
|
|
|
-
|
|
|
Recharacterization
of tax losses between jurisdictions
|
|
|
(1,541,623
|
)
|
|
-
|
|
|
Non-deductible
items and other elements
|
|
|
516,253
|
|
|
367,128
|
|
|
Income
tax benefit
|
|
|
(1,124,819
|
)
|
|
(1,217,948
|
)
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Income
Taxes (continued)
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
tax losses and scientific and experimental development expenses carried
forward
|
|
|
9,723,129
|
|
|
7,349,975
|
|
|
Difference
between book and tax depreciation
|
|
|
208,812
|
|
|
91,889
|
|
|
Reserves
and accruals not deductible for tax purposes
|
|
|
74,734
|
|
|
-
|
|
|
Research
and development tax credits
|
|
|
134,609
|
|
|
94,286
|
|
|
Total
deferred tax assets
|
|
|
10,141,284
|
|
|
7,536,150
|
|
|
Valuation
allowance
|
|
|
(8,801,654
|
)
|
|
(6,216,450
|
)
|
|
|
|
|
1,339,630
|
|
|
1,319,700
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Difference
between book and tax depreciation
|
|
|
(1,183,633
|
)
|
|
(1,071,869
|
)
|
|
Long-term
debt
|
|
|
-
|
|
|
(247,831
|
)
|
|
Investment
tax credits
|
|
|
(155,997
|
)
|
|
-
|
|
|
Total
deferred tax liabilities
|
|
|
(1,339,630
|
)
|
|
(1,319,700
|
)
|
|
Net
tax assets
|
|
|
-
|
|
|
-
|
|
Approximately
$1,000,000 of the valuation allowance disclosed above relates to losses incurred
by AVI prior to the date of the acquisition by the Company. Accordingly, any
reversal of this portion of the valuation allowance in future periods would
be
recorded as a reduction of goodwill and intangible assets.
For
Canadian income tax purposes, the Company has approximately $3,675,000 of
Scientific Research and Experimental Development expenses available indefinitely
to reduce taxable income in future years.
The
Company's Canadian and American operating losses expire as follows:
|
|
|
Canada
|
|
USA
|
|
|
|
|
$
|
|
$
|
|
|
2015
|
|
|
1,365,599
|
|
|
-
|
|
|
2022
|
|
|
-
|
|
|
362,828
|
|
|
2023
|
|
|
-
|
|
|
1,904,121
|
|
|
2024
|
|
|
-
|
|
|
2,067,024
|
|
|
2025
|
|
|
-
|
|
|
6,296,956
|
|
|
2026
|
|
|
1,486,575
|
|
|
6,454,856
|
|
|
2027
|
|
|
-
|
|
|
2,275,239
|
|
|
2028
|
|
|
496,423
|
|
|
2,507,002
|
|
|
|
|
|
3,348,597
|
|
|
21,868,026
|
|
Avensys
Corporation (formerly Manaris Corporation)
Notes
to
Consolidated Financial Statements
(Expressed
in U.S. Dollars)
June
30,
2008
Amendment
of ITF Preferred Shareholder Agreement
As
part
of the acquisition of ITF Optical Technologies Inc. (Note 13), the Company
entered into a shareholder agreement which stipulated that, between April 1,
2009 and October 1, 2009, each ITF Preferred Shareholder shall have an option
to
(i) sell their shares in ITF Labs’ ownership to AVI for its proportionate share
of CAD $2,000,000 to be paid in cash, or (ii) exchange their shares in ITF
Labs’
ownership for 3,826,531 freely tradable shares of Company common shares at
a
reference per share price of $0.342; the equivalent of CAD $1,500,000 (the
“put
option”).
On
September 11, 2008, the Company and the ITF Preferred Shareholders amended
the
agreement described above as follows:
|
|
·
|
The
date permitting the exercise of the put option by the ITF Preferred
Shareholders is postponed by 18 months from April 1, 2009 to October
1,
2010. The date at which the put option expires has also been
postponed from October 1, 2009 to December 31,
2010.
|
|
|
·
|
AVI
will pay interest at 10% annually from April 1, 2009 until the date
of
exercise of the put option on each ITF Preferred Shareholder’s
proportional share of the consideration, should they choose to exercise
their option.
|
|
|
·
|
Avensys
Inc. will also raise the total amount of the share consideration
from CAD
$1,500,000 to CAD $2,000,000 and will reduce the reference price
from
$0.342 to $0.11, should the Preferred Holders choose to exercise
the put
option for their proportionate amount of common shares of the
Company.
|
The
Company is in the process of analyzing the impact of this amendment on its
financial statements, and will reflect any necessary adjustment in the financial
statements for the quarter ending September 30, 2008.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We
have
no changes in or disagreements with our independent accountants regarding
accounting and financial disclosure.
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information required to
be
disclosed in the reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time period specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports filed under the Exchange Act is accumulated
and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer,
of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon and as of the date of that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under
the
Exchange Act is recorded, processed, summarized and reported as and when
required.
Disclosure
controls and procedures cannot provide absolute assurance of achieving financial
reporting objectives because of their inherent limitations. Disclosure controls
and procedures is a process that involves human diligence and compliance and
is
subject to lapses in judgment and breakdowns resulting from human failures.
Disclosure controls and procedures also can be circumvented by collusion or
improper management override. Because of such limitations, there is a risk
that
material misstatements may not be prevented or detected on a timely basis by
disclosure controls and procedures. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is possible
to
design into the process safeguards to reduce, though not eliminate, this
risk.
Management’s
Annual Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting for the first time as of June 30, 2008, using the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). A material weakness is a deficiency, or a combination of
control deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of the Company's
annual or interim financial statements will not be prevented or detected on
a
timely basis. Based on its evaluation under the framework in Internal Control
-
Integrated Framework, issued by the Committee of Sponsoring Organizations of
the
Treadway Commission (“COSO”), our management concluded that the Company's
disclosure controls and procedures were effective as of June 30,
2008.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management was not subject to attestation by the Company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits the Company to provide only management’s report in this
annual report.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
identified in connection with the Company evaluation of these controls as of
the
end of the period covered by this report that could have significantly affected
those controls, including any correction action with regard to significant
deficiencies and material weakness.
There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date
of
their evaluation, including any significant deficiencies or material weaknesses
of internal controls that would require corrective action.
ITEM
9B.
OTHER
INFORMATION
On
October 27, 2007 we filed a Registration Statement that relates to the resale
by
the selling stockholders of 80,489,033 shares of our common stock. We then
amended the Registration Statement in order to reduce the resale by the selling
stockholders from 80,489,033 shares of our common stock to
31,939,308.
On
January 14, 2008, the Registration Statement was rendered effective by the
SEC.
PART
III
ITEM
10.
DIRECTORS,
OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
OFFICERS
AND DIRECTORS
On
April
17, 2008, Mr. Tony Giuliano left the employment of the Company and resigned
as
its Chief Financial Officer and Corporate Secretary. Mr. André Maréchal,
Vice-President of Finance and Administration for Avensys Inc., a wholly owned
subsidiary of the Company, was appointed as Chief Financial Officer and
Corporate Secretary of the Company.
On
June
10, 2008, John Simons retired as Chairman and a director of the Board of
Directors of Avensys Corporation. There was no disagreement or dispute between
Mr. Simons and the Company which led to his retirement. The Board of Directors
accepted his retirement and appointed Jos Wintermans, a director of the Company
since November 2005 and Chair of the Compensation Committee, to replace Mr.
Simons as Chairman of the Board.
On
June
27, 2008, the Board of Directors appointed Mr. Jean-Marc Fortier as
non-executive Director of the Board of Directors to fill the vacancy created
by
Mr. John Simons’ resignation. On July 3, 2008, Mr. Fortier accepted the terms of
his appointment.
The
directors and officers, their ages and positions held as of June 30, 2008 are
listed below. Each director serves until our next annual meeting of the
stockholders or unless they resign earlier. The Board of Directors elects
officers and their terms of office are at the discretion of the Board of
Directors.
|
Name
|
|
Age
|
|
Position Held
|
|
John
Fraser
|
|
62
|
|
President,
Chief Executive Officer and Director
|
|
Jos
J. Wintermans
|
|
61
|
|
Director,
and Chairman of the Board
|
|
Bernard
Bougie
|
|
59
|
|
Director
|
|
Jean-Marc
Fortier
|
|
59
|
|
Director
|
|
André
Maréchal
|
|
64
|
|
Chief
Financial Officer and Corporate
Secretary
|
The
following describes the business experience during the past five years of our
directors and executive officers, including for each director, other
directorships held in reporting companies. There are no family relationships
among any of the persons listed.
Jos
J.
Wintermans
Director
and Chairman of the Board of Directors, has served as a Director since November
15, 2005, and has been Chairman of the Board since June 2008. Mr. Wintermans
has
held a number of executive positions in the telecom, financial services, retail,
manufacturing and distribution sectors. From June 2001 to December 2004, Mr.
Wintermans served as the President, Chief Executive Officer and a Director
of
Sodisco-Howden Group. From December 1999 to June 2001 served as the President,
Chief Executive Officer and a Director for Skyjack. From June 1996 to May 1997,
he was the President, Chief Executive Officer and a Director of Rogers Cable
Ltd. From 1988 to 1995, he served as Chief Executive Officer for Canadian Tire
Acceptance Ltd. In 1996, he was named Senior Vice-President, Diversified
Business for its parent company, Canadian Tire Corporation (CTC). From November
2005 to May, 2008, Mr. Wintermans was President and Chief Executive Officer,
and
the Chairman of Cygnal Technologies Corporation. On July 14, 2008, Mr.
Wintermans was appointed as Chairman of Acxsys Corporation. Mr. Wintermans
is
Chair of the Junior Achievement of Canada Foundation, a not for profit
organization running the Canadian Business Hall of Fame.
John
Fraser
Director,
President and Chief Executive Officer, has served as a Director since January
2003 and as our Secretary and Treasurer from January 2003 until September 16,
2005. On September 16, 2005, Mr. Fraser was appointed as our President and
Chief
Executive Officer for a minimum period of three months, replacing Stephane
Solis. On September 14, 2006, Mr. Fraser was appointed as permanent President
and Chief Executive Officer. He was a partner for twenty years with KPMG Canada
until January 1998. For the last four years of his career with KPMG, he was
Vice
Chairman of the firm and responsible for the Canadian management consulting
division. In January 1998, he started providing consulting services to
professional services and high technology start-up firms. In February 2004,
J G
Fraser & Associates became a partner in Catalyst Consulting, a private
Canadian consulting firm providing management consulting services to law firms
and law departments in Canada and internationally. From July 1999 to August
2002, Mr. Fraser was a director of ePhone Telecom Inc. (OTCBB: EPHO). Mr. Fraser
served as a Director for Asia Payment Systems, Inc. (OTCBB: APYM) from September
2002 to June 2006. From June 2000 to May 2003, Mr. Fraser was a director of
Walters Forensic Engineering, a public engineering firm based in Toronto,
Canada. (CDNX: YWL). He was also a director of Hincks Dellcrest, a non-profit
organization located in Toronto, Canada, until June 27, 2008.
Jean-Marc
Fortier
Director,
has served as a Director since June 2008.
Mr.
Jean-Marc Fortier has been a member of the Québec Bar Association since 1971. He
also holds an MBA from the Richard Ivey School of Business Administration and
a
Master of Laws from the McGill Institute of Air and Space Law. From 1999 until
2004, he served as senior officer of BCE Media Inc., a subsidiary of BCE Inc.
During the same period, Mr. Fortier also served as chairman and director of
certain affiliates of BCE Media, operating in the media and satellite service
sectors. He was also executive vice-president of TQS Inc., a private Québec
broadcaster. Since 2004, Mr. Fortier has been a senior legal advisor with a
Montreal law firm and, at the beginning of 2008, he joined the firm Robinson
Sheppard Shapiro where he is presently acting as senior counsel and advisor
in
corporate finance, merger and acquisitions, natural resources and aerospace
matters, both on a domestic and international level.
Bernard
Bougie
Director,
has served as a director since December 2005. A Chartered Accountant (Canada)
and an expert in financial information, Mr. Bougie was with Deloitte &
Touche from 1975 to 2004, a leading accounting and consulting firm, and became
a
partner in 1982. Mr. Bougie is on various Boards of companies and non-profit
organizations, and is a member of the Institute of Corporate Directors (Canada).
André
Maréchal
Corporate
Secretary and Chief Financial Officer, has served as a chief financial officer
since April 2008, and as corporate secretary since May, 2008. Since December
2007, he has served as Vice-President of Finance and Administration of Avensys
Inc., the Company’s wholly-owned subsidiary, and from 2002 to 2007 he was
Director of Finance and Administration of Avensys Inc.
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Section
16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
requires officers and directors of a company with securities registered pursuant
to Section 12 of the 1934 Act, and persons who own more than 10% of the
registered class of such company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the subject company with copies of all Section
16(a) forms filed. To our knowledge, the following Forms 3 and 4 required
to be filed during the fiscal year ended June 30, 2008 have not been filed
timely:
|
Form
4
|
|
Bernard
Bougie, Director, filed on January 07, 2008
|
|
|
|
|
|
Form
4
|
|
Jos
Wintermans, Director, filed on January 07, 2008
|
|
|
|
|
|
Form
3
|
|
André
Maréchal, CFO & Corporate Secretary, filed on April 28,
2008
|
AUDIT
COMMITTEE AND CHARTER
We
have
an audit committee charter, and under such charter, the committee is comprised
of our independent directors. Our audit committee is responsible for: (1)
selection and oversight of our independent accountant; (2) establishing
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls and auditing matters; (3) establishing procedures
for the confidential, anonymous submission by our employees of concerns
regarding accounting and auditing matters; (4) engaging outside advisors; and,
(5) funding for the outside auditory and any outside advisors engagement by
the
audit committee.
|
Name
|
|
Age
|
|
Position
Held
|
|
Bernard
Bougie
|
|
59
|
|
Director,
Audit Committee Chairman
|
|
Jos
J. Wintermans
|
|
61
|
|
Director,
Chairman of the Board of Directors
|
|
Jean-Marc
Fortier
|
|
59
|
|
Director
|
AUDIT
COMMITTEE FINANCIAL EXPERT
On
December 14, 2005, we appointed Mr. Bernard Bougie as Chairman of our audit
committee, and as our audit committee financial expert Mr. Bougie is independent
of our management.
COMPENSATION
COMMITTEE
The
compensation committee serves as the stock option committee for our stock option
plans, and it reviews and approves any employment agreements with management
and
changes in compensation for our executive officers.
|
Name
|
|
Age
|
|
Position
Held
|
|
Jos
J. Wintermans
|
|
61
|
|
Director,
Compensation Committee Chairman and Board
|
|
|
|
|
|
of
Directors Chairman
|
|
Bernard
Bougie
|
|
59
|
|
Director,
Audit Committee Chairman
|
|
Jean-Marc
Fortier
|
|
59
|
|
Director
|
CODE
OF ETHICS
We
have
adopted a corporate code of ethics. We believe our code of ethics is reasonably
designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports;
comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code
.
DISCLOSURE
COMMITTEE AND CHARTER
We
have a
Disclosure Committee charter. The purpose of the committee is to provide
assistance to Senior management in fulfilling their responsibilities regarding
the identification and disclosure of material information about us and the
accuracy, completeness and timeliness of our financial reports.
ITEM
11.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following tables set forth certain information regarding our Chief Executive
Officer and each of our most highly-compensated executive officers whose total
annual salary and bonus for the fiscal years ending June 30, 2008, 2007 and
2006
exceeded $100,000:
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
|
|
|
|
Annual Compensation
|
|
Compensation Awards
|
|
Payouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
|
Name and
Principal
Position [1]
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
Annual
Compen-
sation
($)
|
|
Restricted
Stock
Award(s)
($)
|
|
Securities
Underlying
Options /
SARs (#)
|
|
LTIP
Payouts
($)
|
|
All Other
Compen
-sation
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andre
Monette
|
|
|
2007
|
|
|
45,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Treasurer
and Chief
|
|
|
2006
|
|
|
160,000
|
|
|
59,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(resigned
Sept. 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Fraser
|
|
|
2008
|
|
|
315,320
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
600,000
|
|
|
0
|
|
|
0
|
|
|
President
and Chief
|
|
|
2007
|
|
|
265,000
|
|
|
133,500
|
|
|
0
|
|
|
0
|
|
|
1,500,000
|
|
|
0
|
|
|
0
|
|
|
Executive
Officer
|
|
|
2006
|
|
|
171,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
500,000
|
|
|
0
|
|
|
0
|
|
|
(appointed
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
CEO Sept 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
André
Maréchal
|
|
|
2008
|
|
|
29,151
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
450,000
|
|
|
0
|
|
|
0
|
|
|
Chief
Financial officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(appointed
Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
officer in April 2008 and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
May 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony
Giuliano
|
|
|
2008
|
|
|
181,250
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(resigned
Apr. 2008)
|
|
|
2007
|
|
|
110,500
|
|
|
33,000
|
|
|
0
|
|
|
0
|
|
|
150,000
|
|
|
0
|
|
|
0
|
|
[1]
All
compensation received by the Officers and Directors has been
disclosed.
STOCK
OPTION PLANS AND EMPLOYEE COMPENSATION PLAN
There
are
no stock option, retirement, pension, or profit sharing plans for the benefit
of
our officers and directors, other than our 2007 Employee Compensation Plan,
our
Amended and Restated 2006 Non Qualified Stock Option Plan and our 2003 and
2004
Incentive Stock Option Plans (the “Plans”). Under these Plans, the Board of
Directors is vested with discretionary authority to grant stock options and
common stock to persons furnishing services to us. There are 24,000,000 stock
options and common shares in the Plans, with 20,000,000 stock options included
in the Stock Option Plans and 4,000,000 common shares included in the 2007
Employee Compensation Plan. The 2006 Non Qualified Stock Option Plan was amended
and restated to augment the Plan by 5,000,000 stock options on September 5,
2007. The 2007 Employee Compensation Plan came into effect on August 21,
2007.
As
of
October 17, 2008, stock options to purchase 18,953,489 shares had been granted
of which 5,973,686 options had been exercised, 2,590,530 had been forfeited
and
10,286,773 are outstanding. As at October 17, 2008, we have 3,739,541 stock
options available for issuance.
STOCK
OPTION GRANTS TO OFFICERS AND DIRECTORS DURING THE FISCAL
YEAR
|
|
|
Number of
|
|
% of Total
|
|
|
|
|
|
|
|
|
Securities
|
|
Options
|
|
|
|
|
|
|
|
|
Underlying
|
|
Granted to
|
|
Exercise
|
|
|
|
|
|
|
Options/SARs
|
|
Employees in
|
|
of Base
|
|
Expiration
|
|
|
Name
|
|
Granted (#)
|
|
Fiscal Year
|
|
Price ($/Sh)
|
|
Date
|
|
|
John
Fraser
|
|
|
600,000
|
|
|
19.35
|
%
|
$
|
0.09
|
|
|
01/04/2013
|
|
|
Bernard
Bougie
|
|
|
100,000
|
|
|
3.22
|
%
|
$
|
0.08
|
|
|
12/07/2012
|
|
|
Jos
Wintermans
|
|
|
100,000
|
|
|
3.22
|
%
|
$
|
0.08
|
|
|
11/15/2012
|
|
|
André
Maréchal
|
|
|
150,000
|
|
|
4.84
|
%
|
$
|
0.07
|
|
|
06/27/2013
|
|
|
André
Maréchal
|
|
|
300,000
|
|
|
9.68
|
%
|
$
|
0.09
|
|
|
01/04/2013
|
|
Aggregated
Stock Options Exercised by Officers and Directors in Last Fiscal Year and Fiscal
Year End Stock Option Values
|
|
|
|
|
|
|
Number of Securities
|
|
Value of Securities
|
|
|
|
|
Shares
|
|
Value
|
|
Underlying Stock
|
|
Underlying Stock
|
|
|
|
|
Acquired on
|
|
Realized
|
|
Options at FY-End (#)
|
|
Options at FY-End ($)
|
|
|
Name
|
|
Exercised (#)
|
|
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
John Fraser
|
|
|
0
|
|
$
|
0
|
|
|
1,575,000
|
|
|
1,100,000
|
|
$
|
126,000
|
|
$
|
94,000
|
|
|
Jos
Wintermans
|
|
|
0
|
|
$
|
0
|
|
|
275,000
|
|
|
25,000
|
|
$
|
22,000
|
|
$
|
2,000
|
|
|
John
H. Simons
|
|
|
0
|
|
$
|
0
|
|
|
200,000
|
|
|
0
|
|
$
|
16,000
|
|
$
|
0
|
|
|
Bernard
Bougie
|
|
|
0
|
|
$
|
0
|
|
|
275,000
|
|
|
25,000
|
|
$
|
22,000
|
|
$
|
2,000
|
|
|
André
Maréchal
|
|
|
0
|
|
$
|
0
|
|
|
135,703
|
|
|
450,000
|
|
$
|
15,784
|
|
$
|
36,750
|
|
LONG-TERM
INCENTIVE PLAN AWARDS
We
do not
have any long-term incentive plans that provide compensation intended to serve
as incentive for performance to occur over a period longer than one fiscal
year,
whether such performance is measured by reference to our financial performance,
our stock price, or any other measure, other than our 2003, 2004 and 2006
Incentive/or Nonqualified Stock Option Plans, and our 2007 Employee Compensation
Plan.
COMPENSATION
OF DIRECTORS
Each
non-executive director is paid a base fee of CAD$15,000 per year. Fees are
payable quarterly. In addition non-executive Directors will receive 50,000
options to purchase shares of the Company at $0.00001 upon their appointment
to
the board, and 100,000 options per annum vested quarterly to purchase shares
of
the Company at the market price prevailing at the date of appointment. Directors
may, in addition, receive a fee for devoting special attention to the business
of Avensys which is outside the scope of ordinary duties, or where any business
journey must be undertaken. Current fees are:
|
•
|
CAD
$25,000 per annum for acting as chair of the Board of Directors
of
the Company;
|
|
•
|
CAD
$15,000 per annum for acting as a chair of the Audit Committe
e;
|
|
•
|
CAD
$5,000 per annum for acting as a chair of any other Committe
e;
|
|
•
|
CAD
$1,000 per meeting of the Board or Committee; if special circumstances
warrant board meetings of less than 90 minute duration and are conducted
by phone, this amount will be reduced to CAD
$250;
|
|
•
|
CAD
$1,000 per day for work which is outside the scope of ordinary duties
as a
board or committee member;
|
|
•
|
a
traveling allowance covering out-of-pocket expenses for travel and
accommodation while on Avensys
business;
|
INDEMNIFICATION
Pursuant
to the articles of incorporation and bylaws of the corporation, we may indemnify
an officer or director who is made a party to any proceeding, including a
lawsuit, against expenses (including attorneys’ fees), judgment, fines and
amounts paid in settlement, actually and reasonably incurred by the officer
or
director, if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and with respect to any criminal action or proceeding, if the
Corporation has no reasonable cause to believe the officer or director’s conduct
was unlawful.
With
respect to a derivative action, we may indemnify an officer or director who
was
or is a party or is threatened to be made a party to any threatened, pending
or
completed action or suit by or in the right of the Corporation to procure
judgment in the Corporation’s favor by reason of the fact that such person is or
was a Director, Trustee, Officer, employee or agent of the Corporation, or
is or
was serving at the request of the Corporation as a Director, Trustee, Officer,
employee or agent of another corporation, partnership, joint venture, trust
or
other enterprise, against expenses (including attorneys’ fees) and amount paid
in settlement, actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted
in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to the
amounts paid in settlement, the settlement of the suit or action was in the
best
interest of the Corporation; provided, however, that no indemnification shall
be
made in respect of any claim, or matter as to which such person shall have
been
adjudged to be liable for gross negligence or willful misconduct in the
performance of such person’s duty to the Corporation unless and only to the
extent that, the court in which such action or suit was brought shall determine
upon application that, despite circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses as such court shall
deem
proper.
The
indemnification is intended to be to the fullest extent permitted by the laws
of
the state of Nevada.
Regarding
indemnification for liabilities arising under the Securities Act of 1933 which
may be permitted to directors or officers pursuant to the foregoing provisions,
we are informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy, as expressed in the Act and
is,
therefore unenforceable.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of October 17, 2008, with
respect to the beneficial ownership of the outstanding common stock by (i)
any
holder of more than five (5%) percent; (ii) each of our directors and named
executive officers; and (iii) our directors and named executive officers as
a
group. Except as otherwise indicated, each of the stockholders listed below
has
sole voting and investment power over the shares beneficially owned. Except
as
otherwise indicated, the address for each person is our address at 400
Montpellier Blvd., Montreal, Quebec, Canada H4N 2G7.
|
Name of Beneficial Owner
|
|
Direct Amount
of Beneficial
Ownership
|
|
Position
|
|
Percent
of Class
[2]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Fraser
|
|
|
3,345,000
|
[1]
|
|
|
|
President
and Chief Executive Officer and a Director
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
André
Maréchal
|
|
|
|
|
|
|
|
Chief
Financial Officer, and Corporate Secretary
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jos
J. Wintermans
|
|
|
300,000
|
[3]
|
|
|
|
Director
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard
Bougie
|
|
|
300,000
|
[3]
|
|
|
|
Director,
Chairman of the Audit Committee
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jean-Marc
Fortier
|
|
|
100,000
|
[4]
|
|
|
|
Director
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
officer and Directors as a Group (5 Persons)
|
|
|
4,630,503
|
|
|
|
|
|
|
|
4.67
|
%
|
*
less
than 1%
[1]
John
Fraser was appointed President and CEO on September 14, 2006.
[2]
Based
on
99,086,152
shares
of common stock issued and outstanding as of October 17, 2008
[3]
Options
to purchase an aggregate of 150,000 shares of common stock have been granted
to
newly appointed Directors pursuant to the Company's 2006 Nonqualified Stock
Option Plan. Of this amount, 50,000 are exercisable upon appointment at an
exercise price of $0.0001 per share. The remaining 100,000 are vested quarterly
at the Market Price on the date of their respective appointments to the Board
of
Directors. The aforementioned options have ten year terms.
[4]
Options
to purchase an aggregate of 100,000 shares of common stock have been granted
on
October 2, 2008, vesting quarterly for four quarters, exercisable at $0.06
per
share. The aforementioned options have ten year terms.
Changes
in Control
To
the
knowledge of management, there are no present arrangements or pledges of our
securities that may result in a change in control of our
Company.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As
part
of interim financing by shareholders, we purchased management services from
Capex Investments Limited during fiscal year 2003. Capex is owned and controlled
by Robert Clarke, who is a former member of our Board of Directors. Capex and
related parties also paid certain operations expenses directly and advanced
funds for working capital during fiscal year 2003. The amounts due are
non-interest bearing, unsecured, and have no fixed terms of repayment. The
amount due to related parties, including Capex, as of June 30, 2008 is
$40,000.
|
ITEM
14.
|
|
EXHIBITS
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation of Avensys Corporation dated June 22, 2000 (as
incorporated by reference to Form SB-2 filed with the Securities
and
Exchange Commission on September 29, 2000).
|
|
|
|
|
|
3.2
|
|
Bylaws
of Avensys Corporation dated July 13, 2000 (as incorporated by reference
to Form SB-2 filed with the Securities and Exchange Commission on
September 29, 2000).
|
|
|
|
|
|
3.3
|
|
Avensys
Corporation Specimen Stock Certificate (as incorporated by reference
to
Form SB-2 filed with the Securities and Exchange Commission on September
29, 2000).
|
|
|
|
|
|
3.4
|
|
Amended
Articles of Incorporation (as incorporated by reference from our
Form 8-K
filed with the Securities and Exchange Commission on March 18,
2003).
|
|
|
|
|
|
3.5
|
|
Amended
Articles of Incorporation (as incorporated by reference to the Issuer's
Form SB-2 filed with the Securities and Exchange Commission on November
7,
2005).
|
|
|
|
|
|
10.1
|
|
Avensys
Debenture dated February 28, 2005 (as incorporated by reference to
the
registrant's Registration Statement on Form SB-2 filed on August
14,
2006)
|
|
|
|
|
|
10.2
|
|
Form
of Note and Warrant Purchase Agreement (as incorporated by reference
to
the Issuer's Form 8-K filed with the Securities and Exchange Commission
on
August 17, 2006).
|
|
|
|
|
|
10.3
|
|
Form
of Registration Rights Agreement (as incorporated by reference to
the
Issuer's Form 8-K filed with the Securities and Exchange Commission
on
August 17, 2006).
|
|
|
|
|
|
10.4
|
|
Form
of Pledge and Security Agreement (as incorporated by reference to
the
Issuer's Form 8-K filed with the Securities and Exchange Commission
on
August 17, 2006).
|
|
|
|
|
|
10.5
|
|
Form
of Series B Subordinated Secured Convertible Promissory Note (as
incorporated by reference to the Issuer's Form 8-K filed with the
Securities and Exchange Commission on August 17, 2006).
|
|
|
|
|
|
10.6
|
|
Form
of Original Issue Discount Series B Subordinated Secured Convertible
Promissory Note (as incorporated by reference to the Issuer's Form
8-K
filed with the Securities and Exchange Commission on August 17,
2006).
|
|
|
|
|
|
10.7
|
|
Form
of Series Y Warrant (as incorporated by reference to the Issuer's
Form 8-K
filed with the Securities and Exchange Commission on August 17,
2006).
|
|
|
|
|
|
10.8
|
|
Form
of Series Z Warrant (as incorporated by reference to the Issuer's
Form 8-K
filed with the Securities and Exchange Commission on August 17,
2006).
|
|
|
|
|
|
10.9
|
|
Deed
of Hypothec (as incorporated by reference to the Issuer's Form 8-K
filed
with the Securities and Exchange Commission on August 17,
2006).
|
|
|
|
|
|
10.10
|
|
Form
of Securities Purchase and Loan Agreement dated September 24, 2007
(as
incorporated by reference to the Issuer's Form 8-K filed with the
Securities and Exchange Commission on September 27,
2007).
|
|
|
|
|
|
10.20
|
|
Form
of the 6 % Original Issue Discount Senior Secured Note dated September
24,
2007 (as incorporated by reference to the Issuer's Form 8-K filed
with the
Securities and Exchange Commission on September 27,
2007).
|
|
|
|
|
|
10.30
|
|
Form
of the Warrant dated September 24, 2007 (as incorporated by reference
to
the Issuer's Form 8-K filed with the Securities and Exchange Commission
on
September 27, 2007).
|
|
|
|
|
|
10.40
|
|
Form
of Advisory Warrant dated August 22, 2007 (as incorporated by reference
to
the Issuer's Form 8-K filed with the Securities and Exchange Commission
on
September 27, 2007).
|
|
|
|
|
|
10.50
|
|
Form
of Registration Rights Agreement dated September 24, 2007 (as incorporated
by reference to the Issuer's Form 8-K filed with the Securities and
Exchange Commission on September 27, 2007).
|
|
|
|
|
|
10.60
|
|
Form
of Working Capital Note dated September 24, 2007 (as incorporated
by
reference to the Issuer's Form 8-K filed with the Securities and
Exchange
Commission on September 27, 2007).
|
|
|
|
|
|
10.70
|
|
Form
of Security Agreement dated September 24, 2007 (as incorporated by
reference to the Issuer's Form 8-K filed with the Securities and
Exchange
Commission on September 27, 2007).
|
|
|
|
|
|
10.80
|
|
List
of Subsidiaries (as incorporated by reference to the registrant's
Registration Statement on Form SB-2 filed on August 14,
2006).
|
|
|
|
|
|
16.1
|
|
Consent
of Raymond Chabot Grant Thorton LLP.
|
|
|
|
|
|
31.1
|
|
Certification
of pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under
the
Securities Exchange Act of 1934, as amended
|
|
|
|
|
|
32.1
|
|
Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 Of
The Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
|
|
|
|
|
|
32.2
|
|
Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 Of
The Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
|
ITEM
15.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
(1)
Audit Fees
The
aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for our audit of annual financial
statements and review of financial statements included in our Form 10-K or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years
was:
|
2008
|
|
$
|
251,074
|
|
|
2007
|
|
$
|
203,046
|
|
(2)
Audit-Related Fees
The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to
the
performance of the audit or review of our financial statements and are not
reported in the preceding paragraph:
|
2008
|
|
$
|
22,973
|
|
|
2007
|
|
$
|
78,796
|
|
(3)
Tax Fees
The
aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning was:
|
2008
|
|
$
|
27,418
|
|
|
2007
|
|
$
|
45,888
|
|
(4)
All Other Fees
The
aggregate fees billed in each of the last two fiscal years for the products
and
services provided by the principal accountant, other than the services reported
in paragraphs (1), (2), and (3) was:
(5)
Our audit committee's pre-approval policies and procedures described in
paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee
pre-approve all accounting related activities prior to the performance of any
services by any accountant or auditor.
(6)
The percentage of hours expended on the principal accountant's engagement
to audit our financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full time, permanent employees was 0%.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on this 17
th
day of
October 2008.
|
|
AVENSYS
CORPORATION
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
BY:
|
/s/
John G. Fraser
|
|
|
|
John
Fraser, President and Chief Executive
Officer (Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
André Maréchal
|
|
|
|
André
Maréchal, Chief Financial Officer,
Corporate
Secretary and Treasurer (Principal
Financial
and Accounting Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following person on behalf of the Registrant and in the
capacities.
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
John Fraser
|
|
President
and Chief Executive Officer
|
|
October
17,2008
|
|
John
G. Fraser
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
André Maréchal
|
|
Chief
Financial Officer, Corporate Secretary and Treasurer
|
|
|
|
André
Maréchal
|
|
(Principal
Financial and Accounting Officer)
|
|
October
17, 2008
|
|
|
|
|
|
|
|
/s/
Jean-Marc Fortier
|
|
Director
|
|
October
17, 2008
|
|
Jean-Marc
Fortier
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jos J. Wintermans
|
|
Chairman
of the Board of Directors
|
|
October
17, 2008
|
|
Jos
J. Wintermans
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Bernard Bougie
|
|
Director,
Audit Committee Chairman
|
|
October
17, 2008
|
|
Bernard
Bougie
|
|
|
|
|
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