UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
|_| REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to _______
COMMISSION FILE NUMBER 000-28867
AVEROX INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0407936
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
|
House No. 381, Street No. 13, Sector F-10/2, Islamabad, Pakistan
(Address of principal executive offices)
+92 (0) 51 211 0755
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 14, 2008, there were 100,000,000 shares of Common Stock,
$.004 par value, outstanding.
AVEROX INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .......................................... 1
Consolidated Balance Sheets at September 30, 2008
(unaudited) and June 30, 2008 ............................. 3
Unaudited Consolidated Statements of Operations
for the three months ended September 30, 2008 and 2007 .... 4
Unaudited Consolidated Statements of Cash Flows
for the three months ended September 30, 2008 and 2007 .... 5
Notes to Consolidated Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ...................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 32
Item 4. Controls and Procedures ....................................... 32
Item 4T. Controls and Procedures ....................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ... 33
Item 3. Defaults Upon Senior Securities ............................... 33
Item 4. Submission of Matters to a Vote of Security Holders ........... 33
Item 5. Other Information ............................................. 33
Item 6. Exhibits ...................................................... 33
Signatures ............................................................. 34
Certifications
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AVEROX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
1
AVEROX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
TABLE OF CONTENTS
Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Statements of Operations
Unaudited Condensed Consolidated Statements of Cash Flow
Notes to Unaudited Condensed Consolidated Financial Statements
2
AVEROX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 AND JUNE 30, 2008
ASSETS
September 30, June 30,
2008 2008
--------------- ---------------
Current Assets (Unaudited)
Cash and cash equivalents $ 102,317 $ 16,520
Accounts receivable, net 342,836 307,863
Other receivables 5,252 10,995
Advances 54,970 37,766
Other current assets 3,336 3,834
Prepaid expenses 14,835 28,442
--------------- ---------------
Total Current Assets 523,547 405,420
--------------- ---------------
Property, Plant & Equipment, net 99,738 131,492
--------------- ---------------
Total Fixed Assets 99,738 131,492
--------------- ---------------
Other Assets
Intangible assets, net 973,019 3,595
Deposits 4,252 4,888
--------------- ---------------
Total Other Assets 977,272 8,483
--------------- ---------------
Total Assets $ 1,600,557 $ 545,395
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 341,290 $ 457,277
Payable to related party 1,000,000 --
Shareholder payable 7,000 --
Provision for income tax 98,112 92,327
Dividends payable 609 609
Deferred tax liabilities -- 19,777
Current portion of lease obligations -- 7,076
--------------- ---------------
Total Current Liabilities 1,447,012 577,066
Lease obligation -- --
--------------- ---------------
Total Liabilities 1,447,012 577,066
--------------- ---------------
Minority interest 79,778 79,999
--------------- ---------------
Stockholder's Equity
Common stock, $.004 par value, 25,000,000
shares authorized, 10,000,000, issued and outstanding 40,000 40,000
Additional paid in capital 2,583,779 2,583,779
Subscription receivable (219,568) (477,524)
Other comprehensive income 124,936 81,508
Retained deficit (2,455,379) (2,339,433)
--------------- ---------------
Total Stockholder's Equity 73,767 (111,670)
--------------- ---------------
Total Liabilities and Stockholder's Equity $ 1,600,557 $ 545,395
=============== ===============
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The accompanying notes are an integral part of these financial statements.
3
AVEROX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Month Periods Ended
September 30, 2008 September 30, 2007
------------------ ------------------
(Unaudited) (Unaudited)
Net Revenue $ 161,051 $ 134,152
Cost of revenue 107,645 217,427
--------------- ---------------
Gross profit (loss) 53,407 (83,275)
Operating expenses
General and administrative expenses 137,838 434,671
--------------- ---------------
Loss from operations (84,431) (517,947)
--------------- ---------------
Other (Income) Expense
Interest income (9) (2,771)
Other (income) expense 13,234 --
Interest expense 153 1,596
Currency exchange (gains) losses (1,548) 151
Gain on disposal of asset 4,650 --
--------------- ---------------
Total Other (Income) Expense 16,479 (1,025)
--------------- ---------------
Loss before income taxes and minority interest (100,910) (516,922)
Provision for income taxes 15,258 (1,816)
--------------- ---------------
Net loss before minority interest (116,168) (515,106)
Net income (loss) attributable to minority interest (221) (4,423)
--------------- ---------------
Net loss (115,947) (510,682)
Other Comprehensive income
Foreign Currency Translation 43,428 47,272
--------------- ---------------
Comprehensive Loss $ (72,519) $ (463,411)
=============== ===============
Basic & diluted net income per share $ (0.012) $ (0.051)
=============== ===============
Weighted average shares of share capital outstanding
- basic & diluted 10,000,000 10,000,000
=============== ===============
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4
AVEROX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007
2008 2007
--------------- ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (115,947) $ (510,682)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sales of fixed assets 4,650 --
Depreciation and amortization 40,277 11,804
Allowance for deferred tax asset 14,642 --
Minority interest (221) (4,423)
(Increase) / decrease in assets:
Accounts receivable (79,402) 154,172
Other receivables, deposits and prepaid expenses (174,760) (115,712)
Loans and advances (23,185) --
Increase / (decrease) in liabilities:
Accounts payable and accrued expenses 80,683 (160,998)
Provision for income tax 616 --
--------------- ---------------
Net cash used in operations (252,645) (625,840)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of property and equipment 2,491 25
Acquisition of property and equipment (786) (29,445)
--------------- ---------------
Net cash provided by (used in) investing activities 1,704 (29,420)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from subscription receivable 257,956 383,208
Loan from shareholder 7,000 --
Payment on capital lease (7,730) (10,046)
--------------- ---------------
Net cash provided by financing activities 257,226 373,162
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 79,511 25,779
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 85,797 (256,319)
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE 16,520 775,712
--------------- ---------------
CASH AND CASH EQUIVALENTS, ENDING BALANCE $ 102,317 $ 519,393
=============== ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the twelve months for:
Interest paid $ 153 $ 1,596
=============== ===============
Income tax paid $ -- $ --
=============== ===============
Non Cash transactions:
Intangible asset purchased $ 1,000,000 $ --
=============== ===============
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5
AVEROX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
Note A - ORGANIZATION
Averox, Inc., formerly Flickering Star Financial, Inc. ("Averox"), was
incorporated on November 25, 1996 under the laws of the State of Nevada.
On November 13, 2006, Averox Inc., consummated the transactions
contemplated by a certain Share Exchange Agreement dated October 30, 2006,
by and among Averox, certain shareholders of Averox, Averox FZ-LLC
(formerly Pearl Consulting FZ-LLC), Averox (Private) Limited (formerly
Pearl Consulting (Private) Limited) and Salman Mahmood (the "Exchange
Agreement"). Averox FZ-LLC ("Averox Dubai"), a free zone limited liability
company organized under the Laws of Dubai, was incorporated on November 9,
2004. Averox (Private) Limited ("Averox Pakistan"), a private limited
company organized under the laws of Pakistan, was organized on March 19,
2003. When used in these notes, the terms "Company," "we," "our," or "us"
mean Averox and its consolidated subsidiaries Averox Dubai and Averox
Pakistan.
On August 31, 2006, Averox Pakistan's shareholder transferred 98 ordinary
shares of Averox Pakistan to Averox Dubai. These shares represented ninety
eight percent (98%) of the issued and outstanding shares on that date.
Averox Pakistan became a majority owned subsidiary of Averox Dubai.
On March 31, 2008, Averox Dubai transferred the shares of Averox Pakistan
owned by it to Averox, Inc., subject only to minor regulatory approvals.
Upon such transfer, Averox Pakistan become a wholly-owned subsidiary of
Averox, Inc.
Pursuant to the Exchange Agreement, Averox issued 6,500,000 shares of its
common stock, or 65% of the issued and outstanding capital stock of Averox
after the consummation of the Exchange Agreement and the transactions
contemplated thereby. As a result of the Exchange Agreement, Averox Dubai
became a wholly-owned subsidiary of Averox.
As of March 31, 2008, Averox ceased its operations in Dubai and Averox
Dubai became dormant. On March 31, 2008, Averox Dubai transferred its
shares of Averox Pakistan to Averox, Inc. Averox Pakistan is now a wholly
owned subsidiary of Averox, Inc.
The principle services we provide include the design, deployment,
integration, and the overall management of telecommunications networks for
both large and small companies. Our work for telecommunication companies
involves software development, radio frequency engineering, project
management and the installation of telecommunications equipment. We also
provide network management services, which involve day-to-day optimization
and maintenance of telecommunications networks. To date, most of our
network engineering and deployment services have been for
telecommunications carriers primarily in Pakistan, although we are
actively marketing our services and solutions in Eastern Europe, the
Middle East and the rest of Asia.
Our information technology, or IT, professionals develop and promote
software which delivers industry standard-specific solutions. The
solutions developed by our IT professionals address needs in a wide
spectrum of areas such as e-commerce, enterprise resource planning, IT
strategy and consulting, project management and web-based applications
such as content management systems, and Internet and intranet
applications.
6
Basis of Consolidation
The consolidated financial statements include the accounts of Averox, Inc.
and its wholly owned subsidiary Averox Dubai and majority owned Averox
Pakistan. All material intercompany accounts, transactions and profits
have been eliminated in consolidation.
Revenue Recognition
Under SOP 97-2 as amended, SOP 81-1 and SAB 104 the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is
reasonably assured. In instances where final acceptance of the product,
system, or solution is specified by the customer, revenue is deferred
until all acceptance criteria have been met. The Company also follows the
provisions of the SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," as revised by SAB 104.
Advertising Costs
The Company expenses all advertising costs as incurred. The advertising
costs were not material for all periods presented.
Software Development Costs
Software development costs required to be capitalized pursuant to
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
have not been material to date. Software development costs for internal
use required to be capitalized pursuant to Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," have also not been material to date. The Company did not
incur any software development costs during the three months ended
September 30, 2008.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things,
intense competition associated with the industry in general, other risks
associated with financing, liquidity requirements, rapidly changing
customer requirements, limited operating history, foreign currency
exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The
Company's management and legal counsel assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims as well as the perceived merits
of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or
is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if
determinable and material would be disclosed.
7
Loss contingencies considered to be remote by management are generally not
disclosed unless they involve guarantees, in which case the guarantee
would be disclosed.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Exchange Gain (Loss)
During the three month periods ended September 30, 2008 and 2007, the
transactions of Averox Pakistan were denominated in foreign currency and
were recorded in Pakistan Rupee (PKR) at the rates of exchange in effect
when the transactions occur. Exchange gains and losses are recognized for
the different foreign exchange rates applied when the foreign currency
assets and liabilities are settled.
Translation Adjustment
As of September 30, 2008 and 2007, the accounts of Averox Pakistan were
maintained, and its financial statements were expressed, in PKR. Such
financial statements were translated into U.S. Dollars (USD) in accordance
with Statement of Financial Accounts Standards No. 52, "Foreign Currency
Translation," with the PKR as the functional currency. According to the
Statement, all assets and liabilities were translated at the current
exchange rate, stockholders' equity (deficit) is translated at the
historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are
reported under other comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income," as a component of shareholders' equity
(deficit).
Allowance for Doubtful Accounts
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. Allowance for
doubtful debts amounted to $507,730 and $583,593 as of September 30, 2008
and June 30, 2008, respectively.
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives of:
Equipment 3 -5 years
Furniture & Fixtures 5 -10 years
Motor Vehicles 5 years
8
As of September 30, 2008 and June 30, 2008 property, plant and equipment
consisted of the following:
September 30, 2008 June 30, 2008
------------------ ---------------
Furniture and Fixtures $ 19,949 $ 35,727
Office equipment 104,098 117,836
Motor vehicles 85,220 97,954
--------------- ---------------
209,267 251,516
Accumulated depreciation (109,529) (120,024)
--------------- ---------------
Total $ 99,738 $ 131,492
=============== ===============
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Depreciation expense was $10,169 and $11,804 for the three months ended
September 30, 2008 and 2007.
Capital Leases
Included in Property, Plant and Equipment, as of September 30, 2008 and
June 30, 2008, are $85,845 and $98,672, respectively worth of assets that
were purchased on capital lease arrangements.
Basic and Diluted Earnings Per Share
Earnings per share is calculated in accordance with the Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 superseded Accounting Principles Board Opinion No. 15
("APB 15"). Net loss per share for all periods presented has been restated
to reflect the adoption of SFAS No. 128. Basic net loss per share is based
upon the weighted average number of common shares outstanding. Diluted net
loss per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed
by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at
the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of the identifiable assets and liabilities acquired as a result of the
Company's acquisitions of interests in its subsidiaries. Under Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), goodwill is no longer amortized, but tested for
impairment upon first adoption and annually, thereafter, or more
frequently if events or changes in circumstances indicate that it might be
impaired. The Company assesses goodwill for impairment periodically in
accordance with SFAS 142.
The Company applies the criteria specified in SFAS No. 141, "Business
Combinations" to determine whether an intangible asset should be
recognized separately from goodwill. Intangible assets acquired through
business acquisitions are recognized as assets separate from goodwill if
they satisfy either the "contractual-legal" or "separability" criterion.
Per SFAS 142, intangible assets with definite lives are amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
9
Assets." Intangible assets, such as purchased technology, trademark,
customer list, user base and non-compete agreements, arising from the
acquisitions of subsidiaries and variable interest entities are recognized
and measured at fair value upon acquisition. Intangible assets are
amortized over their estimated useful lives from one to ten years. The
Company reviews the amortization methods and estimated useful lives of
intangible assets at least annually or when events or changes in
circumstances indicate that it might be impaired. The recoverability of an
intangible asset to be held and used is evaluated by comparing the
carrying amount of the intangible asset to its future net undiscounted
cash flows. If the intangible asset is considered to be impaired, the
impairment loss is measured as the amount by which the carrying amount of
the intangible asset exceeds the fair value of the intangible asset,
calculated using a discounted future cash flow analysis. The Company uses
estimates and judgments in its impairment tests, and if different
estimates or judgments had been utilized, the timing or the amount of the
impairment charges could be different.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a Disposal of a Segment of a Business." The Company
periodically evaluates the carrying value of long-lived assets to be held
and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner,
except that fair market values are reduced for the cost of disposal. Based
on its review, the Company believes that, as of September 30, 2008 there
were no significant impairments of its long-lived assets.
As of September 30, 2008 and June 30, 2008, Intangible Assets consist of
the following:
September 30, 2008 June 30, 2008
------------------ ---------------
Software and intellecutal rights $ 1,003,127 $ 3,595
Accumulated amortization (30,108) --
--------------- ---------------
$ 973,019 $ 3,595
=============== ===============
Amortization expense for the twelve month periods ending
September 30, 2009 $ 203,127
September 30, 2010 200,000
September 30, 2011 200,000
September 30, 2012 200,000
September 30, 2013 169,892
---------------
$ 973,019
===============
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Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information,"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
10
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. SFAS 131 has no effect
on the Company's consolidated financial statements as the Company consists
of one reportable business segment as of September 30, 2008 and June 30,
2008.
Recent Accounting Pronouncements
In June 2006, the FASB issued Financial Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109" which prescribes threshold and measurement attribute
for financial statement recognition and measurement of a tax position
taken or expected to taken in a tax return. FIN 48 requires that the
Company recognize in its financial statements the impact of a tax position
if it is more likely than not that such position will be sustained on
audit based on its technical merits. This interpretation also provides
guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The effective
date of the provisions of FIN 48 for all nonpublic companies has been
postponed to fiscal year beginning December 17, 2007. Application did not
have any material impact on the Company.
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Implementation of
this pronouncement did not have any effect on the financial statements of
the Company.
In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R)' This Statement improves financial
reporting by requiring an employer to recognize the over funded or under
funded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity
or changes in unrestricted net assets of a not-for-profit organization.
This Statement also improves financial reporting by requiring an employer
to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. An employer with
publicly traded equity securities is required to initially recognize the
funded status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end
of the fiscal year ending after June 15, 2007. However, an employer
without publicly traded equity securities is required to disclose the
following information in the notes to financial statements for a fiscal
year ending after December 15, 2006, but before June 16, 2007, unless it
has applied the recognition provisions of this Statement in preparing
those financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition provisions of
this Statement, if earlier.
11
The requirement to measure plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The management
is currently evaluating the effect of this pronouncement on financial
statements.
In February 2007, FASB issued FASB Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. FAS 159 is
effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted subject to specific requirements outlined in the new
Statement. Therefore, calendar-year companies may be able to adopt FAS 159
for their first quarter 2007 financial statements.
The new Statement allows entities to choose, at specified election dates,
to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item's
fair value in subsequent reporting periods must be recognized in current
earnings. FAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect
different measurement attributes for similar assets and liabilities.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements". This Statement amends ARB 51 to
establish accounting and reporting standards for the noncontrolling
(minority) interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements. SFAS No. 160 is
effective for the Company's fiscal year beginning October 1, 2009.
Management is currently evaluating the effect of this pronouncement on
financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities. The new standard is
intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entity's financial position,
financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The new standard
also improves transparency about the location and amounts of derivative
instruments in an entity's financial statements; how derivative
instruments and related hedged items are accounted for under Statement
133; and how derivative instruments and related hedged items affect its
financial position, financial performance, and cash flows. Management is
currently evaluating the effect of this pronouncement on financial
statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations". This Statement replaces SFAS No. 141, Business
Combinations. This Statement retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement
141 called the purchase method) be used for all business combinations and
for an acquirer to be identified for each business combination. This
Statement also establishes principles and requirements for how the
acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain
purchase and c) determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141(R) will apply prospectively to
business combinations for which the acquisition date is on or after
Company's fiscal year beginning October 1, 2009. While the Company has not
yet evaluated this statement for the impact, if any, that SFAS No. 141(R)
will have on its consolidated financial statements, the Company will be
required to expense costs related to any acquisitions after September 30,
2009.
On May 9, 2008, The FASB issued FAS # 162, The Hierarchy of Generally
Accepted Accounting Principles. The new standard is intended to improve
financial reporting by identifying a consistent framework or hierarchy,
for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with U.S. generally accepted
accounting principles (GAAP) for nongovernmental entities.
12
Prior to the issuance of Statement 162, GAAP hierarchy was defined in the
American Institute of Certified Public Accountants (AICPA) Statement on
Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. SAS 69 has been
criticized because it is directed to the auditor rather than the entity.
Statement 162 addresses these issues by establishing that the GAAP
hierarchy should be directed to entities because it is the entity, not
auditors, that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. SAS 69
will remain effective for state, local and federal governmental entities.
Note C - SHARE EXCHANGE AGREEMENT
On November 13, 2006, Averox consummated the transactions contemplated by
the Exchange Agreement. Accordingly Averox acquired all of the issued and
outstanding shares of stock of Averox Dubai in exchange for the issuance
in the aggregate of 6,500,000 shares of common stock of Averox, which
shares represented 65% of the issued and outstanding capital stock of
Averox after the consummation of the Exchange Agreement and the
transactions contemplated thereby. As a result of the Exchange Agreement,
Averox Dubai became a wholly-owned subsidiary of Averox.
As a result of the exchange agreement, the reorganization was treated as
an acquisition by the accounting acquiree that is being accounted for as a
recapitalization and as a reverse merger by the legal acquirer for
accounting purposes. Pursuant to the recapitalization, all capital stock
shares and amounts and per share data have been retroactively restated.
Accordingly, the financial statements include the following:
(1) The balance sheet consists of the net assets of the accounting
acquirer at historical cost and the net assets of the legal acquirer at
historical cost.
(2) The statements of operations include the operations of the
accounting acquirer for the period presented and the operations of the
legal acquirer from the date of the merger.
Note D - PREPAID EXPENSES
As of September 30, 2008 and June 30, 2008, prepaid expenses comprised of
the following:
September 30, 2008 June 30, 2008
------------------ ---------------
Advance tax $ 2,819 $ 24,060
Other 12,016 4,382
--------------- ---------------
Total $ 14,835 $ 28,442
=============== ===============
|
13
Note E - CONTINGENCIES
The Company has also filed a suit in the Court of Civil Judge, First
Class, Islamabad against M/s ATIS Systems GmbH for declaration, temporary
and permanent prohibitory and mandatory injunction, rendition of accounts,
and recovery of money/damages worth USD $11,300,00, Euros $644,179 and
Pakistan Rupees $300,750,000. According to the legal representation letter
dated September 25, 2007 from Company counsel, the case was fixed for
further proceedings in the matter in Pakistan Courts.
In regards to the progress of the case, according to the legal
representation letter dated September 9, 2008 from Company counsel, the
suit is fixed for hearing for arguments on application U/O 12, R 06 of CPC
in the Civil Court of Islamabad. The Civil Court passed an order against
the application moved by Atis System for stay of proceedings and referral
of the matter for arbitration. The mentioned application was dismissed by
the learned Civil Court by the order dated April 19, 2007; and Atis System
filed a CR-464/2007 in the Lahore High Court (Rawalpindi Bench). The
mentioned CR is pending in the Lahore High Court (Rawalpindi Bench); and
it is difficult to make any fair assessment of the outcome of the case, as
it is still at an early stage.
Note F - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has sustained net losses of $2,455,379 since its inception, has negative
working capital and the Company's operations do not generate sufficient
cash to cover its operating costs. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company has taken certain restructuring steps to provide the necessary
capital to continue its operations. These steps included: 1) acquire
profitable operations through issuance of equity instruments; and 2) to
continue actively seeking additional funding and restructure the acquired
subsidiaries to increase profits and minimize the liabilities.
Note G - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, at
September 30, 2008 are as follows:
Accumulated Other
Comprehensive loss
------------------
Balance at June 30, 2007 $ 167,872
Change for the year (86,364)
---------------
Balance at June 30, 2008 $ 81,508
Change July 1, 2008 to September 30, 2008 43,428
---------------
Balance at September 30, 2008 $ 124,936
===============
|
14
Note H - COMMITTMENTS
The Company leases various office facilities in Pakistan under operating
leases that terminate on various dates. Rental expense for these leases
consisted of $8,235 for the three month period ended September 30, 2008.
The Company has future minimum lease obligations as follows:
September 30,
2009 $ 21,516
2010 22,876
2011 $ 17,390
------------
Total $ 61,782
============
|
Note I - MAJOR CUSTOMERS AND VENDORS
For the three month period ended September 30, 2008 we have two customers
which account for approximately 90% of our sales. There is approximately
$136,707 receivable from these customers as of September 30, 2008.
For the three month period ended September 30, 2008 we have two major
vendors which account for approximately 100% of our purchases. As of
September 30, 2008, we have $64,816 payable to these vendors.
Note J - CURRENT VULNERABILITY DUE TO RISK FACTORS
Our operations are carried out in Dubai and Pakistan. Accordingly, our
business, financial condition and results of operations may be influenced
by the political, economic and legal environments, by the general state of
the economy. Our business may be influenced by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Note K - SUBSCRIPTION RECEIVABLE
On November 13, 2006, Averox entered into the Stock Purchase Agreement
pursuant to which HALO Investments Ltd. (the "Investor") purchased an
aggregate of 380,000 shares of common stock (the "Share Sale") for
aggregate gross proceeds of $2,650,000, of which $150,000 was to be paid
on November 13, 2006 and the balance is to be paid in installments and is
evidenced by two notes, one interest bearing and one non-interest bearing
note. The interest bearing note in the aggregate principal amount of
$1,850,000, bears interest at the rate of prime plus 2.5%, has a maturity
of November 13, 2007 and principal installments are payable as follows:
$250,000 together with interest is payable on January 13, 2007; $250,000
together with interest is payable on March 13, 2007; $350,000 together
with interest is payable on May 13, 2007; $500,000 together with interest
is payable on July 13, 2007; and the $500,000 balance together with
interest is payable on November 12, 2007. The non-interest bearing note in
the aggregate principal amount of $650,000 is payable over 24 months at
Averox's request provided certain conditions are met. Pursuant to the
Stock Purchase Agreement, Averox has granted the Investor a right of first
refusal on financings Averox may do in the future.
On October 25, 2007, the Company and HALO Investments Ltd. (the"Investor")
amended and restated the promissory note for $1,850,000. The new payment
plan requires that the sum of $65,000 together with interest shall be paid
on or before the first date of each month beginning with the month of
November, 2007 up to and including the month of August, 2008 and the
remaining principal balance of this note with interest shall be paid on or
before September 1, 2008. As of September 30, 2008, $219,568 remains
outstanding.
15
Note L - ACQUISITION
On August 5, 2008, Averox Pvt. Ltd ("Averox"), a subsidiary of Averox
Inc., (the "Company"), entered into a purchase agreement (the "Purchase
Agreement") with Provisus Ltd, a limited liability company organized and
existing under the laws of the United Kingdom ("Provisus"). Provisus is
owned by Salman Mahmood, Averox's controlling shareholder.
Pursuant to the terms of the Purchase Agreement, Averox acquired all
tangible and intangible assets of Provisus, including, but not limited to:
(i) Provisus software, service activation and provisioning, (ii)
Provisus's trademark, website and marketing materials, and (iii)
intellectual proprietary rights, source code of core module and all
developed modules as of August 5, 2008. In exchange for the Provisus
Assets, Provisus acquired Averox's contingent claims for commissions due
from four companies. The aggregate amount of the contingent claims cannot
be determined at this time as no information regarding commissions has
been received. If Provisus collects more than $500,000 from the disputed
accounts, Provisus will pay seventy-five percent (75%) of such excess to
Averox after deducting its legal costs.
In addition to the transfer of the claims, under the terms of the Purchase
Agreement, Averox will pay Provisus (i) in perpetuity a royalty equal to
twenty percent (20%) of all revenue generated from the sale of Provisus
software and services in excess of $5 million dollars in revenues in the
aggregate, and (ii) either (x) $1 million dollars in cash on the first
anniversary of the date of the Purchase Agreement or (y) shares of the
Company's common stock if no cash is available after one year valued at $5
million based upon the then current market price of Averox's shares
Note M - SUBSEQUENT EVENT
On October 25, 2008, Averox Inc. (the "Company") effected a 10-for-1 stock
split of the Company's common stock for shareholders of record as of
October 27, 2008. The split was effected through an amendment to Averox's
articles of incorporation in which each outstanding share of common stock
would be converted into ten outstanding shares of Averox Common Stock.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following presentation of management's discussion and plan of
operation for Averox Inc. has been prepared by its internal management and
should be read in conjunction with the audited financial statements of Averox
Inc., for the years ended June 30, 2008 and 2007, including the notes thereto
and the unaudited financial statements for the three months ended September 30,
2008 and 2007, including the notes thereto included elsewhere in this report.
Some of the statements below discuss "forward-looking" information. Those
statements include statements regarding the intent, belief or current
expectations of Averox and its management team. Investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. These risks and uncertainties include but are
not limited to, those risks and uncertainties discussed under the heading "Risk
Factors" in this report. In light of the significant risks and uncertainties
inherent in the forward-looking statements included in this report, the
inclusion of such statements should not be regarded as a representation by us or
any other person that our objectives and plans will be achieved.
In this report, unless the context otherwise requires, references to
Averox, "we", "us" or "our" include Averox, Averox Dubai and Averox Pakistan,
and references to our business mean the combined businesses of Averox, Averox
Dubai and Averox Pakistan.
Averox was incorporated under the name Flickering Star Financial Inc. on
November 25, 1996 under the laws of the State of Nevada. From January 1, 1997
through March 31, 1997, Flickering Star Financial Inc. was in its development
stage. It originally intended to act as a finder of individuals who would serve
as an additional guarantor of motion picture completion guaranty contracts. As
at December 31, 1996, all funds raised by the sale of shares of Flickering Star
Financial in order to fulfil its initial objective had been expended and, after
March 31, 1997, Flickering Star Financial become dormant.
On November 6, 2006, in anticipation of the acquisition of Averox Dubai
and Averox Pakistan, the name Flickering Star Financial Inc. was changed to
Averox Inc.
On November 13, 2006, Averox consummated the transactions contemplated by
that certain Exchange Agreement, dated October 30, 2006, by and among Averox,
certain shareholders of Averox, Averox Dubai and Salman Mahmood ("Mahmood") by
acquiring all of the outstanding shares of capital stock of Averox Dubai. Averox
Dubai had previously acquired ninety-eight percent (98%) of the capital stock of
Averox Pakistan from Mahmood and his spouse on August 31, 2006. Effective as of
March 31, 2008, Averox ceased its operation in Dubai and Averox Dubai become
dormant. On March 31, 2008, Averox Dubai transferred the shares of Averox
Pakistan owned by it to Averox Inc., subject only to minor regulatory approvals,
all of which have now been obtained. Upon such transfer, Averox Pakistan will
become a wholly-owned subsidiary of Averox Inc.
Averox, through its subsidiaries, is an independent provider of software
solutions, engineering and telecommunications network deployment services,
systems integration and related support services. Although Averox's business has
primarily focused on standard solutions and end products for the
telecommunications industry, Averox's software solutions and services are also
being marketed and employed in other industries and areas of Averox's business.
Averox believes that it has established an excellent reputation for applying
specialized and innovative problem-solving skills to a diverse range of clients
and industries.
17
Historically, the principal services Averox has provided include the
design, deployment, integration, and the overall management of
telecommunications networks for both large and small companies. Averox's work
for telecommunication companies has involved software development, radio
frequency engineering, project management and/or installation of
telecommunications equipment. In some instances, Averox has worked as a
subcontractor for portions of these projects. In other instances, Averox has
contracted to act as general contractor for an entire system engineering project
covering all aspects of design and execution.
Acting as general contractor to provide turnkey telecom engineering
services produces high revenues, but also requires us to incur significant costs
for, among other things, software material costs, subcontractor fees and labor
costs. We also take on all of the financial risks associated with the completion
of the project. Because of these costs, potential risks and limited capital
resources, we have determined to de-emphasize telecom civil works projects such
as base transmitter, or BTS stations, site development, unless the customer is
willing to advance all costs required for the project.
In furtherance of this determination, we have, in one instance,
transferred our obligations as system engineer to a third party in exchange for
the right to receive commissions from project revenues until August 30, 2009.
This agreement will give us a stream of revenue over this period without any
associated costs.
The recent focus of our business has been on proprietary software
development and systems integration. We have also entered the solar and wind
powered generators market, offering a range of wind and solar powered generators
that can be used to produce clean and inexpensive power for domestic and
commercial use.
Our information technology professionals license, develop and promote
software which delivers industry standard-specific solutions. These solutions
cover areas such as telecom billing (retail and interconnect), service
activation, mediation, revenue assurance and fraud management. Our IT solutions
are also being used for customers outside the telecommunications industry. The
solutions developed by our IT professionals or licensed by us for our
telecommunications services business address needs in a wide spectrum of areas
such as e-commerce, enterprise resource planning, IT strategy and consulting and
project management, web-based applications such as content management systems,
and Internet and intranet applications. Additionally, we have built and operate
portals that address needs in the recruitment, real estate and trading
industries. From time to time, we also provide outsourced consulting services.
On August 5, 2008, we acquired Provisus(TM), a product that provides
service activation and provisioning technology to telecom operators, from
Provisus Ltd. Prior to our acquisition of Provisus(TM), we were licensed to sell
the product. Version 1.0 of Provisus(TM) has been developed and we are now in
the process of developing enhancements to Provisus(TM) in a new version that
will be at par with 3G and 4G compatible technologies. We expect to launch
version 2.0 of Provisus(TM) in the first quarter of 2009.
Provisus(TM) is expected to be tested by one of the world's leading mobile
(3G/GSM) operators. If the testing of the product is successful, we believe that
the operator will sublicense the product and that Provisus(TM) will be
attractive to other telecommunications providers. Provisus(TM) has worldwide
application for both fixed and mobile telecommunications. However, even if
Provisus(TM) is successfully tested, it will take at least six to nine months
before Averox derives any significant license fees from this product.
By moving away from providing turnkey telecom engineering projects, Averox
is also focusing on systems integration. Rather than acting as turnkey solution
provider over an entire project, as a systems integrator, Averox will act as a
subcontractor to the turnkey solution provider. Systems integration work does
not involve the same expenses as full telecom engineering. Averox's costs will
consist solely of travel and labor thereby significantly reducing the capital
outlays required for undertaking a project.
18
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2008 AND
2007.
The following table presents the statement of operations for the three month
period ended September 30, 2008 as compared to the comparable period ended
September 30, 2007. The discussion following the table is based on these
results.
2008 2007
--------- ---------
Net Revenue $ 161,051 $ 134,152
Cost of revenue 107,645 217,427
--------- ---------
Gross profit 53,407 (83,275)
General and administrative expenses 137,838 434,671
--------- ---------
Income from operations (84,431) (517,947)
--------- ---------
Other (Income) Expense
Interest income (9) (2,771)
Other income (expense) 13,234 0
Interest expense 153 1,596
Currency exchange (gains) losses (1,548) 151
(Gain) loss on disposal of asset 4,650 0
--------- ---------
Total Other Income 16,479 (1,025)
--------- ---------
Income before income taxes (100,910) (516,922)
Provision for income taxes 15,258 (1,816)
--------- ---------
Net income $(116,168) $(515,106)
========= =========
|
Net revenue
Net revenue for the three month period ended September 30, 2008 totaled
$161,051 compared to $134,152 for the three month period ended September 30,
2007, an increase of $26,899 or approximately 20%. The increase is primarily due
to increase in commission income generated of $63,798 from compared to the
corresponding quarter for 2007.
Cost of Revenue
Cost of revenue for the three month period ended September 30, 2008
totaled $107,645 or 67% of net revenue compared to $217,427 or 162% of net
revenue for the three month period ended September 30, 2007, a decrease of
$109,782, or approximately 50.5%. The decrease in the dollar amount was due to a
decrease in direct cost of telecom equipment and services of approximately
$134,000. During the quarter ended September 30, 2007 our cost of revenue
included costs associated with phase completion on civil works and tower
erections which has a low profit margin as compared to our revenue during the
quarter ended September 30, 2008 which was more service and commission oriented
with a lower cost of revenue and higher profit margin. This also accounts for
the decrease of our cost of revenue as compared to revenue from 162% to 67%.
19
Operating Expense
General and administrative expenses for the three month period ended
September 30, 2008 totaled $137,838, or approximately 86% of net revenue,
compared to $434,671, or approximately 324% of net revenue for the three month
ended September 30, 2007, a decrease of $296,833, or approximately 68%. The
decrease in general and administrative costs during the three months ended
September 30, 2008 was primarily due to a reduction in our administrative staff
in our Dubai and Pakistan offices resulting in a decrease of approximately
$86,000. In addition, we closed our office in Dubai and moved our offices in
Pakistan reducing our rent expense by approximately $20,000. We also put in
place a cost reduction plan whereby we have been able to reduce our general and
administrative costs, including marketing expenses by approximately $141,000.
Income (loss) from Operations
Loss from operations for the three months ended September 30, 2008 totaled
$84,431, or approximately 52% of net revenue, compared to loss from operations
of $517,947, or approximately 386% of net revenue for the three month ended
September 30, 2007, a decrease in loss from operations of $433,516 or
approximately 84%. The decrease in loss from operations was primarily due to the
reasons stated above.
Other expenses (income)
Other expenses for the three month period ended September 30, 2008 totaled
$16,479, or approximately 10% of net revenue, compared to other income of
$1,025, or approximately 8% of net revenue for the three month ended September
30, 2007, an increase in other expenses of $17,504, or approximately 1,708%. The
increase in other expenses has to do primarily with the write off of old
uncollectible accounts for an amount of $10,706 and a loss on asset disposal of
$4,650.
Net Income (Loss)
Net loss for the three month period ended September 30, 2008 totaled
$116,168, compared to a net loss of $515,106, for the three month ended
September 30, 2007, a decrease of net loss of $398,938 or approximately 77%. The
decrease in net loss was primarily due to reasons described above.
Liquidity and Capital Resources
Our primary source of liquidity as of September 30, 2008 is our cash on
hand and accounts receivable. Net cash used in operations for the three month
period ended September 30, 2008 was $252,645, as compared to net cash used in
operations of $625,840, during the same period in 2007. Our cash and cash
equivalents were $102,317 and $16,520, as of September 30, 2008 and June 30,
2008, respectively. Our current assets totaled $523,547 and $405,420, as of
September 30, 2008 and June 30, 2008, respectively. Our current liabilities were
$1,447,012 and $577,066 as of September 30, 2008 and June 30, 2008,
respectively. Working capital was ($923,465) and ($171,646) as of September 30,
2008 and June 30, 2008, respectively.
Net cash provided by investing activities totaled $1,704 for the three
month period ended September 30, 2008, compared to net cash used in investing
activities of ($29,420), for the same period ended September 30, 2007. Net cash
provided by financing activities totaled $257,226 for the three month period
ended September 30, 2008, compared to $373,162 for the same period ended
September 30, 2007. The net cash change was $85,797 and ($256,319) for the three
month ended September 30, 2008 and 2007, respectively.
20
We will continue to evaluate alternative sources of capital to meet our
growth requirements, including other asset or debt financing, issuing equity
securities and entering into other financing arrangements. There can be no
assurance, however, that any of the contemplated financing arrangements
described herein will be available and, if available, can be obtained on terms
favorable to us.
Working Capital Requirements
Historically operations and short term financing have been sufficient to
meet our cash needs. We believe that we will be able to generate revenues from
sales and raise capital through private placement offerings of our equity
securities to provide the necessary cash flow to meet anticipated working
capital requirements. However, our actual working capital needs for the long and
short term will depend upon numerous factors, including operating results,
competition, and the availability of credit facilities, none of which can be
predicted with certainty. Future expansion will be limited by the availability
of financing products and raising capital.
Risk Factors
Owning our shares contains a number of risks. If any of the following
risks actually occur, our business, financial condition or results of operations
would likely suffer. In that case, the trading price of our shares could
decline, and an investor may lose all or a part of the money paid to buy our
shares.
Risks Associated with our Financial Needs
Our lack of cash reserves and liquid assets could result in an interruption of
our business and has led our auditors to express doubt about our ability to
continue as a going concern
We do not currently have significant cash reserves. Although we have a
subscription receivable for $219,568, our ability to fund our operations is
dependent at the present time on collections of our accounts receivable. We have
experienced difficulties in the recent past with collecting on our receivables.
Until we receive the proceeds from our subscription receivable, the failure of
our customers to timely pay accounts receivable could force us to curtail our
operations. Accordingly, our auditors have qualified their report on our
financials statements for the year ended June 30, 2008 by expressing substantial
doubt about our ability to continue as a going concern.
Our lack of readily available working capital has impacted our ability to
execute our business plan
Large, revenue generating engineering projects have been a core part of
our business and require significant upfront investment. We have been successful
in securing large engineering projects from multi-national companies such as
Nokia, Siemens, Ericsson, Huawei, Warid Telecom and China Mobile. However, our
working capital has not been sufficient to fulfill the requirements of these
large projects. As a result, we have had to curtail these activities. Although
we have been able to secure systems integration work from some of these
customers, our inability to provide the full range of services contemplated by
these engineering projects has had, and will continue to have, an adverse effect
on our revenues and profitability.
Political instability in Pakistan has had a material adverse effect on demand
for our services and products
There is significant instability in Pakistan. Certain recent events have
damaged the image of Pakistan internationally. As a result, Pakistan's credit
rating has been down graded by international ratings agencies. This has also
lead to shortage of capital in Pakistan. Each of these factors has had a direct
impact on new telecommunications infrastructure products being undertaken.
21
The fact that a substantial portion of our business is centered in Pakistan has
negatively impacted on our financing efforts.
The negative perception of Pakistan in the western world, particularly in
the United States and western Europe, has made it more difficult for us to
secure new financing. This negative perception may impair our ability to obtain
funding for our business.
The settlement of the purchase price for our acquisition of Provisus(TM)
software could result in significant additional dilution of our equity
On August 5, 2008, we acquired Provisus(TM) software and certain related
intellectual property. We have the option to pay $1,000,000 of the purchase
price in cash or in shares of our stock valued at $5,000,000. In the event that
we do not have sufficient cash to pay the purchase price, we will be forced to
pay the balance in shares of our stock. The number of shares we may be required
to issue will not be known until August 5, 2009.
At the current market price of $1.30 per share, we would issue 3,846,154
shares, 3.7% of our stock on a fully diluted basis. If our stock price were
below $1.30 per share, the dilution of our stock would be more significant.
Specific Risks Associated with our Network Services Business
The success of our network services business is dependent on growth in the
deployment of telecommunications networks and new technology upgrades in the
Middle East, Eastern Europe and Asia and, to the extent that such growth slows,
our business may be harmed
Telecommunications carriers are constantly re-evaluating their network
deployment plans in response to trends in the telecommunications markets,
changing perceptions regarding industry growth, the adoption of new
technologies, increasing pricing competition for customers and general economic
conditions. If the rate of network deployment slows and carriers reduce their
capital investments in telecommunications infrastructure or fail to expand into
new geographic areas, our business may be significantly harmed.
The uncertainty associated with rapidly changing telecommunications
technologies may also negatively impact the rate of deployment of
telecommunications networks and the demand for our services. Telecommunications
service providers face significant challenges in assessing consumer demand and
in accepting rapidly changing enhanced telecommunications capabilities. If
telecommunications service providers perceive that the rate of acceptance of
next generation telecommunications products will grow more slowly than
previously expected, they may, as a result, slow their development of next
generation technologies. Moreover, increasing price competition for subscribers
could adversely affect the profitability of carriers and limit their resources
for network deployment. Any significant sustained slowdown will further reduce
the demand for our services and adversely affect our financial results.
Our network services business depends on telecommunications carriers, network
equipment vendors and other prospective customers outsourcing their
telecommunications services
The success of our network engineering business depends upon the continued
trend by telecommunications carriers and network equipment vendors to outsource
their network design, deployment and management needs. If this trend does not
continue and telecommunications carriers and network equipment vendors elect to
perform more network deployment services themselves, our operating results and
revenues may decline.
Failure to properly manage network services projects may result in costs or
claims
Our engagements often involve large scale, highly complex projects. The
quality of our performance on such projects depends in large part upon our
ability to manage the relationship with our customers, and to effectively manage
22
the project and deploy appropriate resources, including third-party contractors,
and our own personnel, in a timely manner. Any defects or errors or failure to
meet clients' expectations could result in claims for substantial damages
against us. In addition, in certain instances, we guarantee customers that we
will complete a project by a scheduled date or that the network will achieve
certain performance standards and our contracts contain liquidated damages
provisions if we fail to do so. Further, if the project experiences a
performance problem, we may not be able to recover the additional costs we
incur, which could exceed the revenues realized from that project. Finally, if
we underestimate the resources or time we need to complete a project with capped
or fixed fees, our operating results could be seriously harmed.
Changes in the price of Raw Materials, such as Steel, can have a large impact on
our profitability
Our results of operations are impacted by the cost of raw materials. Price
increases in raw material may not be able to be passed along to customers or
customers may chose not to move forward with projects due to cost concerns.
Steel is a principal raw material used in our network services business.
Pakistan, for example, has recently experienced a steel shortage, which is
largely imported, and the price has also risen significantly. The combination of
steel shortages and price increases has caused delays in some projects and may
have impacted our customers determination to pursue projects. This resulted in
decreased revenues in the most recent fiscal period.
We are in highly competitive markets, face competition from large,
well-established competitors with significant resources, and may not be able to
compete effectively
The telecommunications services market is highly competitive. It is not
dominated by a single company or a small number of companies. However, a
substantial number of companies offer services that overlap and are competitive
with those offered by us. Many of these competitors have greater financial,
technical and marketing resources. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
strategic partnerships and other initiatives. Competition in the
telecommunications network services business comes primarily from specialized
network engineering firms and the service arms of large equipment vendors and
telecommunications carriers. In addition, many of our competitors have
well-established relationships with our potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, and they may be able to devote more resources to the development,
promotion and sale of their services than we can.
Our business will suffer if we fail to anticipate and develop new services and
enhance existing services in order to keep pace with rapid changes in technology
and the industry on which we focus
The market for our services is characterized by rapid change and
technological improvements, evolving industry standards, changing client
preferences and new product and service introductions. Failure to anticipate
these advances or respond in a timely and cost-effective way to these
technological developments will result in serious harm to our business and
operating results. We have derived, and we expect to continue to derive, a
substantial portion of our revenues from serving telecommunications providers
with systems that utilize today's leading technologies and that are capable of
adapting to future technologies. Further, products, services or technologies
that are developed by our competitors may render our services non-competitive or
obsolete. As a result, our success will depend, in part, on our ability to
develop and market service offerings that respond in a timely manner to the
technological advances of our customers, evolving industry standards and
changing client preferences.
Risks related to our IT business
Because we have decided to focus on developing proprietary software products and
sublicensing the Provisus(TM) product rather than licensing products from
established developers, we cannot be assured that these products will receive
market acceptance.
23
In the past, we relied on established software products that we licensed
from third parties. We paid significant licensing fees to the developers of
these products for their use. In order to reduce these costs and maximize
revenues and profits, we decided to develop our own products in addition to the
Provisus(TM) product which we acquired from Provisus. However, the process of
developing products is time consuming and costly. Moreover, even if these
products can be successfully developed, there can be no assurance that these
products will gain market acceptance.
Our products are complex and have a lengthy implementation process;
unanticipated difficulties or delays in the customer acceptance process could
result in higher costs and delayed payments
Implementing our IT solutions can be a relatively complex and lengthy
process since we typically customize these solutions for each customer's unique
environment. Often our customers may also require rapid deployment of our
software solutions, resulting in pressure on us to meet demanding delivery and
implementation schedules. Delays in implementation may result in customer
dissatisfaction and/or damage our reputation which could materially harm our
business.
The majority of our existing contracts provide for acceptance testing by
the customer, which can be a lengthy process. Unanticipated difficulties or
delays in the customer acceptance process could result in higher costs, delayed
payments, and deferral of revenue recognition. In addition, if our software
contains defects or we otherwise fail to satisfy acceptance criteria within
prescribed times, the customer may be entitled to cancel its contract and
receive a refund of all or a portion of amounts paid or other amounts as
damages, which could exceed related contract revenue and which could result in a
future charge to earnings. Any failure or delay in achieving final acceptance of
our software and services could harm our business, financial condition, results
of operations and cash flows.
The IT industry in which we compete is subject to rapid technological change, if
we fail to develop or introduce new, reliable and competitive products in a
timely fashion, our business may suffer
The market for our IT products and services is subject to rapid
technological changes, evolving industry standards, changes in customer
requirements and preferences and frequent new product introductions and
enhancements. The introduction of products that incorporate new technologies and
the emergence of new industry standards can make existing products obsolete and
unmarketable. In addition, "internationalizing" products that we have developed
for customers abroad is a complex process. To compete successfully, we must
continue to design, develop and sell enhancements to existing products and new
products that provide higher levels of performance and reliability in a timely
manner, take advantage of technological advancements and changes in industry
standards and respond to new customer requirements. As a result of the
complexities inherent in software development, major new product enhancements
and new products can require long development and testing periods before they
are commercially released and delays in planned delivery dates may occur. We may
not be able to successfully identify new product opportunities or achieve market
acceptance of new products brought to market. In addition, products developed by
others may cause our products to become obsolete or noncompetitive. If we fail
to anticipate or respond adequately to changes in technology and customer
preferences, or if our products do not perform satisfactorily, or if we have
delays in product development, we may lose customers and our sales may
deteriorate.
The IT industry is highly competitive and if our products do not satisfy
customer demand for performance or price, our customers could purchase products
and services from our competitors
The IT markets in which we operate are intensely competitive and we face
continuous demand for improved product performance, new product features and
reduced prices, as well as intense pressure to accelerate the release of new
products and product enhancements. The market for software solutions is
extremely large. Our existing and potential competitors include many domestic
and international companies, including some competitors that have substantially
greater financial, manufacturing, technological, marketing, distribution and
other resources, larger installed customer bases and longer-standing
relationships with customers than we do.
24
Customers also may offer competitive products or services in the future
since customers who have purchased solutions from us are not precluded from
competing with us. Many telecommunications companies have large internal
development organizations, which develop software solutions and provide services
similar to the products and services we provide. We also expect competition may
increase in the future from application service providers, existing competitors
and from other companies that may enter our existing or future markets with
solutions which may be less costly, provide higher performance or additional
features or be introduced earlier than our solutions.
We believe that our ability to compete successfully depends on numerous
factors. For example, the following factors affect our ability to compete
successfully:
o how well we respond to our customers' needs;
o the quality and reliability of our products and services and our
competitors' products and services;
o the price for our products and services, as well as the price for
our competitors' products and services;
o how well we manage our projects;
o our technical expertise;
o the quality of our customer service and support;
o the emergence of new industry standards;
o the development of technical innovations;
o our ability to attract and retain qualified personnel;
o regulatory changes; and
o general market and economic conditions.
Some of these factors are within our control, and others are not. A
variety of potential actions by our competitors, including a reduction of
product prices or increased promotion, announcement or accelerated introduction
of new or enhanced products, or cooperative relationships among competitors and
their strategic partners, could negatively impact the sales of our products and
we may have to reduce the prices we charge for our products. Revenue and
operating margins may consequently decline. We may not be able to compete
successfully with existing or new competitors or to properly identify and
address the demands of new markets. This is particularly true in new markets
where standards are not yet established. Our failure to adapt to emerging market
demands, respond to regulatory and technological changes or compete successfully
with existing and new competitors would materially harm our business, financial
condition, results of operations and cash flows.
Our products are complex and may have errors that are not detected until
deployment, and litigation related to warranty and product liability claims
could be expensive and could negatively affect our reputation and profitability
Our agreements with our customers typically contain provisions designed to
limit our exposure to potential liability for damages arising out of the use of
or defects in our products. These limitations, however, tend to vary from
customer to customer and it is possible that these limitations of liability
provisions may not be effective. We currently do not maintain errors and
omissions insurance, which, subject to customary exclusions, would cover claims
resulting from the failure of our software products or services to perform the
function or to serve the purpose intended. As a result, we would be required to
pay the full amount of any claim. Further, defending such a suit, regardless of
its merits, could be expensive and require the time and attention of key
management personnel, either of which could materially harm our business,
financial condition and results of operations. In addition, our business
reputation could be harmed by product liability claims, regardless of their
merit or the eventual outcome of these claims.
25
General Risks Associated with our Business
We are controlled by Salman Mahmood and this control could be detrimental to our
shareholders
Mr. Mahmood beneficially owns 65% of our common stock. Accordingly, Mr.
Mahmood has the ability to control us and our affairs, including the outcome of
all matters requiring shareholder approval such as the election and removal of
our entire board of directors, and any merger, consolidation or sale of all or
substantially all of our assets. This concentrated control gives Mr. Mahmood the
right to decide whether we should proceed with any action, even if those actions
might be beneficial to all shareholders and could discourage others from
initiating any potential merger, takeover or other change of control
transaction. As a result, the market price our shares could be adversely
affected.
Our failure to attract and retain key managerial and technical personnel could
adversely affect our business
Our success depends upon our attracting and retaining key members of our
management team. The loss of any of our key members might delay or prevent the
achievement of our strategic objectives. Our future performance will be
substantially dependent on our ability to attract, retain and motivate key
members of our management team.
We must also continue to hire and retain highly skilled engineering and
managerial personnel. In an effort to manage our costs, we typically hire many
of our employees on a project-by-project basis. Upon completion of an assigned
project, the employees are no longer employed by us until we hire them for the
next project. Competition for such highly skilled personnel in our industry is
intense, especially for engineers and project managers. We cannot be certain
that we will be able to hire or rehire the requisite number of experienced and
skilled personnel when necessary in order to service a major contract,
particularly if the market for related personnel becomes more competitive. Also,
once a new technical and sales employee has been hired, a significant time lag
exists between the hiring date and the time when they become fully productive.
We also believe that our success depends to a significant extent on the ability
of our key personnel to operate effectively, both individually and as a group.
If we are unable to identify, hire and integrate new employees in a timely and
cost-efficient manner, our operating results will suffer.
We may need additional capital in the future to fund the growth of our business,
and this new capital may not be available
We currently anticipate that our available capital resources and operating
income will be sufficient to meet our expected working capital and capital
expenditure requirements for at least the next 12 months. However, we cannot
assure you that such resources will be sufficient to fund the long-term growth
of our business. We may raise additional funds through public or private debt or
equity financings. New equity offerings would likely dilute our stockholders'
equity ownership. In addition, we cannot assure you that any additional
financing we may need will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of unanticipated opportunities, develop new
products or otherwise respond to competitive pressures, or we might be forced to
curtail our business. In any such case, our business, operating results or
financial condition would be materially adversely affected.
Potential future business acquisitions could be difficult to integrate, disrupt
our business, dilute stockholder value and adversely affect our operating
results
We regularly evaluate opportunities to acquire new businesses as part of
our ongoing strategy. If we successfully complete an acquisition, we will have
to integrate it into our operations. Integration may require significant
26
management time and financial resources. Our failure to properly integrate the
businesses we acquire and to manage future acquisitions successfully could
seriously harm our operating results. In addition, acquired companies may not
perform as well as we expect, and we may fail to realize anticipated benefits.
In connection with an acquisition, we may issue shares of stock that would
dilute our current stockholders' ownership and incur debt and other costs in
connection with future acquisitions which may cause our quarterly operating
results to vary significantly.
Litigation may harm our business or otherwise distract our management
Substantial, complex or extended litigation could cause us to incur large
expenditures and distract our management. Disputes from time to time with
customers or other third parties are not uncommon, and we cannot assure you that
that we will always be able to resolve such disputes on terms favorable to us.
Disclosure of trade secrets could aid our competitors
We do not currently attempt to protect our trade secrets by registering
for trademark, trade name, copyright or patent protection in any jurisdiction.
Rather, we attempt to protect our trade secrets by entering into confidentiality
and intellectual property assignment agreements with third parties, our
employees and consultants. However, these agreements can be breached and, if
they are, there may not be an adequate remedy available to us. In addition,
others may independently discover our trade secrets and information, and in such
cases we might not be able to assert any trade secret rights against such party.
The misappropriation or duplication of our intellectual property could disrupt
our ongoing business, distract our management and employees, reduce our revenues
and increase our expenses. We may need to litigate to enforce our intellectual
property rights or to determine the validity and scope of the rights of others.
Enforcing a claim that a party illegally obtained and is using our trade secrets
is difficult, expensive and time consuming, and the outcome is unpredictable. If
our trade secrets become known it may affect adversely our competitive position.
The laws of Pakistan do not protect intellectual property rights to the same
extent as those of the United States, and we may be unsuccessful in protecting
our intellectual property rights. We may also be subject to third party claims
of intellectual property infringement
The laws of Pakistan, where most of our operations are conducted, do not
protect proprietary rights to the same extent as laws in the United States.
Therefore, our efforts to protect our intellectual property may not be adequate.
Our competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information.
In the event that we are infringing upon the proprietary rights of others or
violating licenses, we may become subject to infringement claims that may
prevent us from selling certain products and we may incur significant expenses
in resolving these claims
It is possible that our business activities may infringe upon the
proprietary rights of others, or that other parties may assert infringement
claims against us. If we become liable to any third party for infringing its
intellectual property rights, we could be required to pay substantial damage
awards and develop non-infringing technology, obtain licenses, or cease selling
the applications that contain the infringing intellectual property. Litigation
is subject to inherent uncertainties, and any outcome unfavorable to us could
materially harm our business. Furthermore, we could incur substantial costs in
defending against any intellectual property litigation, and these costs could
increase significantly if any dispute were to go to trial. Our defense of any
litigation, regardless of the merits of the complaint, likely would be
time-consuming, costly, and a distraction to our management personnel. Adverse
publicity related to any intellectual property litigation also could harm the
sale of our products and services, and damage our competitive position.
27
We have never paid cash dividends and do not anticipate paying cash dividends on
our common stock in the foreseeable future
We have never paid cash dividends on our common stock. We currently intend
to retain all future earnings, if any, for use in the operation of our business.
Accordingly, we do not anticipate paying cash dividends on our common stock in
the foreseeable future.
The economic environment and pricing pressure could negatively impact our
revenues and operating results
Spending on technology products and services in most parts of the world
has been rising for the past few years. If economic growth slows, our
utilization and billing rates for our technology professionals could be
adversely affected, which may result in lower gross and operating profits. Our
ability to maintain or increase pricing is restricted as clients often expect
that as we do more business with them, they will receive volume discounts or
special pricing incentives. Existing and new customers are also increasingly
using third-party consultants with broad market knowledge to assist them in
negotiating contractual terms. Any of these factors could put pressure on our
revenues and profitability.
We may face difficulties in providing end-to-end business solutions for our
clients, which could lead to clients discontinuing their work with us, which in
turn could harm our business
Over the past several years, we have been expanding the nature and scope
of our engagements by extending the breadth of services we offer. The success of
some of our newer service offerings, such as operations and business process
consulting, IT consulting, business process management, systems integration and
infrastructure management, depends, in part, upon continued demand for such
services by our existing and new clients and our ability to meet this demand in
a cost-competitive and effective manner. In addition, our ability to effectively
offer a wider breadth of end-to-end business solutions depends on our ability to
attract existing or new clients to these service offerings. To obtain
engagements for our end-to-end solutions, we also are more likely to compete
with large, well-established international consulting firms as well as other
Pakistan-based technology services companies, resulting in increased competition
and marketing costs. Accordingly, our new service offerings may not effectively
meet client needs and we may be unable to attract existing and new clients to
these service offerings.
The increased breadth of our service offerings may result in larger and
more complex client projects. This will require us to establish closer
relationships with our clients and potentially with other technology service
providers and vendors, and require a more thorough understanding of our clients'
operations. Our ability to establish these relationships will depend on a number
of factors including the proficiency of our technology professionals and our
management personnel.
Larger projects often involve multiple components, engagements or stages,
and a client may choose not to retain us for additional stages or may cancel or
delay additional planned engagements. These terminations, cancellations or
delays may result from the business or financial condition of our clients or the
economy generally, as opposed to factors related to the quality of our services.
Cancellations or delays make it difficult to plan for project resource
requirements, and resource planning inaccuracies may have a negative impact on
our profitability.
Our revenues are highly dependent on clients primarily located in Pakistan as
well as clients concentrated in the telecommunications industry, and economic
slowdowns or factors that affect the economic health of Pakistan and the
telecommunications industry may affect our business
If Pakistan's economy weakens, our clients may reduce or postpone their
technology spending significantly, which may, in turn, lower the demand for our
services and negatively affect our revenues and profitability. Further, any
significant decrease in the growth of the telecommunications services industry
or significant consolidation in the telecommunications industry or decrease in
growth or consolidation in other industry segments on which we focus, may reduce
the demand for our services and negatively affect our revenues and
profitability.
28
Some of our engagements with customers are singular in nature and do not
necessarily provide for subsequent engagements
Some of our customers retain us on a short-term, engagement-by-engagement
basis in connection with specific projects, rather than on a recurring basis
under long-term contracts. Although a substantial majority of our revenues are
generated from repeat business, which we define as revenue from a client who
also contributed to our revenue during the prior fiscal year, our engagements
with our clients are typically for projects that are singular in nature.
Therefore, our revenues may fluctuate significantly from year to year. As a
result, we must seek out new engagements when our current engagements are
successfully completed or are terminated, and we are constantly seeking to
expand our business with existing clients and secure new clients for our
services. In addition, in order to continue expanding our business, we may need
to significantly expand our sales and marketing group, which would increase our
expenses and may not necessarily result in a substantial increase in business.
If we are unable to generate a substantial number of new engagements for
projects on a continual basis, our business and results of operations would
likely be adversely affected.
Our client contracts are often conditioned upon our performance, which, if
unsatisfactory, could result in less revenue than previously anticipated
A number of our contracts have incentive-based or other pricing terms that
condition some or all of our fees on our ability to meet defined performance
goals or service levels. Our failure to meet these goals or a client's
expectations in such performance-based contracts may result in a less profitable
or an unprofitable engagement.
Regional conflicts in South Asia could adversely affect the Pakistan economy,
disrupt our operations and cause our business to suffer
South Asia has, from time to time, experienced instances of civil unrest
and hostilities among neighboring countries, including between Pakistan and
India. In recent years there have been military confrontations between Pakistan
and India that have occurred in the region of Kashmir and along the
Pakistan-India border. Military activity or terrorist attacks in the future
could influence the Pakistan economy by disrupting communications and making
travel more difficult and such political tensions could create a greater
perception that investments in Pakistan companies involve higher degrees of
risk. This, in turn, could have a material adverse effect on the market for our
shares.
29
Changes in the policies of the Government of Pakistan or political instability
could delay the further liberalization of the Pakistan economy and adversely
affect economic conditions in Pakistan generally, which could impact our
business and prospects
Since 1988, successive Pakistan governments have pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Pakistan central and state
governments in the Pakistan economy as producers, consumers and regulators has
remained significant. The current Government of Pakistan, formed in October
1999, has announced policies and taken initiatives that support the continued
economic liberalization policies pursued by previous governments. However, these
liberalization policies may not continue in the future. The rate of economic
liberalization could change, and specific laws and policies affecting technology
companies, foreign investment, currency exchange and other matters affecting
investment in our securities could change as well. A significant change in
Pakistan's economic liberalization and deregulation policies could adversely
affect business and economic conditions in Pakistan generally, and our business
in particular.
International uncertainties could harm our profitability
We currently have operations outside of Pakistan and we expect these
operations to grow in other parts of Asia, the Middle East and Eastern Europe.
For the year ended June 30, 2008 and for the three months ended September 30,
2008, international operations outside of Pakistan, accounted for approximately
24% and 78% of our total revenues, respectively. Our international business
operations are subject to a number of material risks, including, but not limited
to:
o difficulties in building and managing foreign operations including,
without limitation, management and contracts administration
processes;
o regulatory uncertainties in foreign countries, including changing
regulations and delays in telecommunications carriers to build out
their networks in various locations;
o difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
o unexpected restrictions on transferring cash from foreign operations
to the UAE, Pakistan or the United States;
o longer payment cycles;
o foreign and U.S. tax issues;
o potential instability or changes in regulatory requirements or the
potential overthrowing of the current government in certain foreign
countries;
o fluctuations in the value of foreign currencies;
o general economic and political conditions in the markets in which we
operate;
o unexpected domestic and international regulatory, economic or
political changes;
o recessions in foreign countries; and
o difficulties and costs of staffing and managing foreign operations.
Currency fluctuations may affect the value of our shares
Our functional currency is the Pakistani rupee, although we transact a
major portion of our business in U.S. dollars or Euros. Accordingly, we face
foreign currency exposure through our sales and purchases. Historically, we have
held a substantial majority of our cash funds in rupees. Downward fluctuations
in the value of the Pakistani Rupee, compared to other foreign currencies, may
increase the cost of supplies for our business. Accordingly, changes in exchange
rates may have a material adverse affect on our revenues, other income, cost of
services sold, gross margin and net income, which may in turn have a negative
impact on our business, operating results and financial condition. The exchange
rate between the rupee and foreign currencies, including the dollar and the
Euro, has changed substantially in recent years and may fluctuate substantially
in the future. We expect that a majority of our revenues will continue to be
generated in foreign currencies, including the dollar and the Euro, for the
foreseeable future and that a significant portion of our expenses, including
personnel costs, as well as capital and operating expenditures, will continue to
be denominated in Pakistani rupees. Consequently, the results of our operations
are adversely affected if the rupee appreciates or depreciates against the
dollar, the Euro or other applicable foreign currencies.
30
Risks of owning our shares
There has been a limited market for our common stock and, therefore, it may be
difficult for our shares to be sold at attractive prices, if at all
Our shares have only recently begun to trade on a limited basis and there
is no coverage of our company by analysts or market makers. This may or may not
affect the future performance of our shares. There can be no assurance that an
active trading market for our shares will develop or that, if developed, will be
sustained. In addition, the stock market in general has experienced extreme
volatility that often has been unrelated to the operating performance of any
company. These broad market and industry fluctuations may result in the decline
of the price of our shares, regardless of our operating performance.
The market price of our shares is expected to be volatile
If a market for our shares does develop, securities of OTC Bulletin Board
companies, and of technology companies in particular, are often volatile. Other
broad market and industry factors may decrease the trading price of our shares,
regardless of our operating performance. Market fluctuations, as well as general
political and economic conditions such as a recession or interest rate or
currency rate fluctuations, also may decrease the trading price of our shares.
In addition, our stock price could be subject to wide fluctuations in response
to many other factors, including:
o fluctuations in our financial results;
o our actions, and the actions of our customers and competitors,
including announcements of new products, product enhancements,
technological innovations or new services;
o other factors affecting the telecommunications and information
technology industries in general;
o the operating and stock price performance of other companies that
investors may deem comparable;
o news reports relating to trends in our markets;
o volume of trading of our shares on the OTC Bulletin Board or other
exchanges on which our shares may, in the future, be traded;
o conditions or trends in the telecommunications and information
technology industries;
o changes in the market valuations of other technology companies;
o announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o the timing and size of network deployments and technology upgrades
by our carrier customers;
o fluctuations in demand for outsourced network services;
o the timing of expansion into new markets, both domestically and
internationally;
o the length of sales cycles; and
o our success in bidding on and winning new business.
Future sales of our shares in the public market could negatively affect our
stock price
If our stockholders sell substantial amounts of our common stock, the
market price of our common stock could fall. As of November 13, 2008, we had
100,000,000 shares of common stock outstanding. Although 65,000,000 of our
shares constitute restricted securities under the Securities Act, the shares may
be sold into the marketplace under Rule 144. The possible sale of a significant
number of these shares may cause the market price of our shares to fall.
31
ITEM 3. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide information
under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
Averox's management, with the participation of Averox's Chief Executive
Officer and acting Chief Financial Officer, has evaluated the effectiveness of
Averox's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report. As previously reported in
our Annual Report on Form 10-KSB for the year ended June 30, 2008, control
deficiencies were identified that constitute a material weakness in internal
over financial reporting. Such control deficiencies relate to insufficient
personnel, inadequate segregation of duties, and lack of familiarity with the
requirements imposed by the Exchange Act. Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures, as of June 30, 2008 were ineffective.
Management has implemented changes in the processing of transactions to
remediate the inadequate personnel related weakness previously identified.
Additionally, management identified steps at both management and the board of
directors' level to increase the effectiveness of review as it relates to the
financial reporting process. Such changes have been partially implemented during
the first fiscal quarter of the Company's 2008-2009 fiscal year. While
management believes that the changes implemented have strengthened the overall
control over financial reporting, such changes were not sufficient to conclude
that the Company's disclosure and control procedures, as of September 30, 2008,
were effective. Accordingly, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures, as of
September 30, 2008, were ineffective. Other changes will be considered as
additional financial resources become available.
Our management, including our Certifying Officers, confirm that there were
no changes in our internal control over financial reporting during our quarter
ending September 30, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
32
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
With the exception of Averox Pakistan's litigations against Aircom MEA
FZ-LL and ATIS Systems GmbH, each of which has not yet gone to trial, we are not
involved in any legal proceedings which may have a significant affect on our
business, financial position, results of operations or liquidity, nor are we
aware of any proceedings that are pending or threatened which may have a
significant affect on our business, financial position, results of operations or
liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On November 18, 2008, we amended the terms of our Purchase Agreement with
Provisus. Under the amended agreement, our claim against Air Com Ltd. was
revomed as part of the assets transfered by us.
ITEM 6. EXHIBITS
Exhibits:
10.1 Amendment No. 1 to Asset Purchase Agreement by and between Averox (Pvt.)
Ltd and Provisus Ltd., dated November 18, 2008.
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
AVEROX INC.
(Registrant)
Date: November 19, 2008 /s/ Salman Mahmood
----------------- -----------------------
Salman Mahmood
Chief Executive Officer
Date: November 19, 2008 /s/ Mirza Yasser Ahmad
----------------- -----------------------
Mirza Yasser Ahmad
Chief Financial Officer
|
34
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Amendment No. 1 to Asset Purchase Agreement by and between
Averox (Pvt.) Ltd and Provisus Ltd., dated November 18, 2008.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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