UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2006
Commission File No. 000-30486
ActiveCore Technologies, Inc.
(Exact Name of Registrant as specified in its charter)
NEVADA | 65-6998896 | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
156 Front Street West, Suite 210,
Toronto, Ontario M5J 2L6 Canada
(Address of principal executive offices)
(416) 252-6200
(Registrant’s telephone number)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 Par Value 500,000,000 shares authorized
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
State the number of shares outstanding of each of the issuer's classes of common equities as of the latest practicable date: as of May 23, 2006, there were 89,223,634 outstanding shares of the issuer's common stock, par value $0.01.
ACTIVECORE TECHNOLOGIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page | |
PART I | 3 |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 3 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION | 16 |
ITEM 3. CONTROLS AND PROCEDURES | 25 |
PART II | 25 |
ITEM 1. LEGAL PROCEEDINGS | 25 |
PART 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 26 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | 26 |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 27 |
ITEM 5. OTHER INFORMATION | 27 |
ITEM 6. EXHIBITS | 27 |
Signatures | 28 |
2
FINANCIAL INFORMATION
ACTIVECORE TECHNOLOGIES, INC.
As of March 31, 2006
INDEX TO FINANCIAL STATEMENTS
Page 4 | Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005 |
Page 5 | Condensed Consolidated Statements Of Operations For The Three Months Ended March 31, 2006 and 2005 (Unaudited) |
Page 6 | Condensed Consolidated Statement Of Stockholders' Equity For The Three Months Ended March 31, 2006 (Unaudited) |
Pages 7-8 | Condensed Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2006 and 2005 (Unaudited) |
Pages 9-15 | Notes to Condensed Consolidated Financial Statements as of March 31, 2006 (Unaudited) |
3
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2006 (Unaudited) | December 31, 2005 | ||||||
CURRENT ASSETS | |||||||
Cash | $ | 183,580 | $ | 113,421 | |||
Accounts receivable, net | 2,684,426 | 3,701,028 | |||||
Other receivables | 128,745 | 128,095 | |||||
Deferred consulting and financing expenses | 461,382 | 352,750 | |||||
Prepaid expenses and other current assets | 137,106 | 131,139 | |||||
Total Current Assets | 3,595,239 | 4,426,433 | |||||
CAPITAL ASSETS, NET | 337,322 | 336,256 | |||||
OTHER ASSETS | |||||||
Goodwill and other intangible assets, net | 5,069,020 | 5,169,732 | |||||
Deferred consulting and financing expenses | 122,277 | 125,505 | |||||
Total Other Assets | 5,191,297 | 5,295,237 | |||||
TOTAL ASSETS | $ | 9,123,858 | $ | 10,057,926 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Line of credit | $ | 1,222,300 | $ | 1,253,474 | |||
Accounts payable | 2,626,285 | 2,162,663 | |||||
Accrued liabilities | 1,049,328 | 1,099,979 | |||||
Taxes payable | 515,563 | 675,871 | |||||
Leases payable, current portion | 22,271 | 18,788 | |||||
Long-term debt, current portion | 430,105 | 164,524 | |||||
Deferred tax liability | 331,736 | 340,736 | |||||
Due to related parties | 67,749 | 11,863 | |||||
Other current liabilities | 39,028 | 100,923 | |||||
Total Current Liabilities | 6,304,365 | 5,828,821 | |||||
LONG-TERM LIABILITIES | |||||||
Long-term debt | 413,668 | 231,939 | |||||
Leases payable, long-term | 30,571 | 21,485 | |||||
Redeemable preferred shares | 312,500 | 375,000 | |||||
Total Long-Term Liabilities | 756,739 | 628,424 | |||||
TOTAL LIABILITIES | 7,061,104 | 6,457,245 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
STOCKHOLDERS' EQUITY | |||||||
Common stock, $0.01 par value, 500,000,000 shares authorized, 89,223,634 and | |||||||
79,242,114 outstanding as of March 31, 2006 and December 31, 2005, respectively | 892,238 | 792,422 | |||||
Common stock to be issued | 117,108 | 311,025 | |||||
Additional paid-in capital | 43,893,974 | 43,137,898 | |||||
Accumulated deficit | (42,052,162 | ) | (40,736,105 | ) | |||
Accumulated other comprehensive income (loss) | (436,845 | ) | 312,441 | ||||
Treasury stock | (25,478 | ) | (112,000 | ) | |||
Deferred compensation | (326,081 | ) | (105,000 | ) | |||
Total Stockholders' Equity | 2,062,754 | 3,600,681 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 9,123,858 | $ | 10,057,926 |
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2006 | For the Three Months Ended March 31, 2005 | ||||||
REVENUES | $ | 1,654,031 | $ | 376,308 | |||
COST OF SALES | |||||||
Direct wages | 1,411,623 | 141,262 | |||||
Amortization of licensing agreements and other costs | 56,992 | 104,372 | |||||
Total Cost of Sales | 1,468,615 | 245,634 | |||||
GROSS PROFIT | 185,416 | 130,674 | |||||
OPERATING EXPENSES | |||||||
Salaries and wages | 555,433 | 193,090 | |||||
Consulting fees | 144,703 | 158,949 | |||||
Research and development | 55,000 | 55,000 | |||||
Legal and accounting | 190,090 | 68,579 | |||||
General and administrative | 253,313 | 329,745 | |||||
Financial advisory fees | 18,803 | 28,639 | |||||
Amortization and depreciation | 109,882 | 29,719 | |||||
Total Operating Expenses | 1,327,224 | 863,721 | |||||
LOSS FROM OPERATIONS | (1,141,808 | ) | (733,047 | ) | |||
OTHER EXPENSE | |||||||
Interest expense | (148,603 | ) | (68,615 | ) | |||
Foreign exchange loss | (34,646 | ) | (33,740 | ) | |||
Total Other Expense | (183,249 | ) | (102,355 | ) | |||
LOSS FROM CONTINUING OPERATIONS | (1,325,057 | ) | (835,402 | ) | |||
Discontinued Operations | |||||||
Loss from discontinued operations | — | (118,780 | ) | ||||
Net loss before income taxes | (1,325,057 | ) | (954,182 | ) | |||
Income tax recovery | 9,000 | — | |||||
NET LOSS | $ | (1,316,057 | ) | $ | (954,182 | ) | |
Preferred stock dividend | 35,250 | 11,092 | |||||
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (1,351,307 | ) | $ | (965,274 | ) | |
LOSS PER COMMON SHARE FROM CONTINUING | $ | (0.02 | ) | $ | (0.02 | ) | |
OPERATIONS-BASIC AND DILUTED | |||||||
LOSS PER COMMON SHARE FROM DISCONTINUED | |||||||
OPERATIONS - BASIC AND DILUTED | $ | (0.00 | ) | $ | (0.00 | ) | |
NET LOSS PER COMMON SHARE - BASIC AND DILUTED | $ | (0.02 | ) | $ | (0.02 | ) | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - | |||||||
BASIC AND DILUTED | 80,683,165 | 46,999,267 |
See accompanying notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
Common Stock to be Issued / (Returned) | |||||||||||||||||||||||||||||||
Common Shares | Common Stock Amount | Shares | Amount | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Other Comprehensive Income (Loss) | Deferred Compensation | Total | ||||||||||||||||||||||
Balance, December 31, 2005 | 79,242,114 | $ | 792,422 | 5,173,105 | $ | 311,025 | $ | (112,000 | ) | $ | 43,137,898 | $ | (40,736,105 | ) | $ | 312,441 | $ | (105,000 | ) | 3,600,681 | |||||||||||
Stock issued for financing services | 250,000 | 2,500 | 45,000 | 47,500 | |||||||||||||||||||||||||||
Stock issued upon conversion of preferred shares | 4,166,667 | 41,667 | (4,166,667 | ) | (291,667 | ) | 250,000 | (0 | ) | ||||||||||||||||||||||
Stock issued for employment services | 3,822,500 | 38,225 | 321,550 | (359,775 | ) | - | |||||||||||||||||||||||||
Stock issued for consulting services | 960,000 | 9,600 | 86,522 | 57,600 | 153,722 | ||||||||||||||||||||||||||
Stock issued for settlement of debt | 782,353 | 7,824 | 117,176 | 125,000 | |||||||||||||||||||||||||||
Redemption of preferred shares | 62,500 | 62,500 | |||||||||||||||||||||||||||||
Preferred stock dividend | 35,250 | (35,250 | ) | - | |||||||||||||||||||||||||||
Amortization of deferred compensation | 138,694 | 138,694 | |||||||||||||||||||||||||||||
Net loss for period | (1,316,057 | ) | (1,316,057 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | (749,286 | ) | (749,286 | ) | |||||||||||||||||||||||||||
Balance, March 31, 2006 | 89,223,634 | 892,238 | 1,006,438 | 117,108 | (25,478 | ) | 43,893,974 | (42,052,162 | ) | (436,845 | ) | (326,081 | ) | 2,062,754 |
See accompanying notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 2006 | For the Three Months Ended March 31, 2005 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net loss | $ | (1,316,057 | ) | $ | (954,182 | ) | |
Adjustments to reconcile net loss to net cash | |||||||
used in operating activities: | |||||||
Depreciation | 45,407 | 31,232 | |||||
Amortization of intangible assets | 96,059 | 100,250 | |||||
Amortization of deferred consulting and finance fees | 138,694 | 105,012 | |||||
Deferred taxes | (9,000 | ) | — | ||||
Changes in operating assets and liabilities net of acquisition: | |||||||
Decrease (increase) in receivables | 810,188 | (96,003 | ) | ||||
Increase in prepaid expenses and other current assets | (38,277 | ) | (39,654 | ) | |||
Increase in accounts payable | 473,374 | 12,690 | |||||
(Decrease) increase in accrued liabilities | (244,507 | ) | 222,058 | ||||
(Decrease) increase in taxes payable | (213,075 | ) | 52,522 | ||||
(Decrease) increase in other current liabilities | (93,555 | ) | 289,216 | ||||
Net Cash Used In Operating Activities | (350,749 | ) | (276,859 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of capital assets | (28,293 | ) | (3,472 | ) | |||
Acquisition of Disclosure Plus | — | (60,600 | ) | ||||
Net Cash Used In Investing Activities | (28,293 | ) | (64,072 | ) |
See accompanying notes to condensed consolidated financial statements.
7
ACTIVECORE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three | For the Three | ||||||
Months Ended | Months Ended | ||||||
March 31, 2006 | March 31, 2005 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Repayments of line of credit | (30,174 | ) | — | ||||
Proceeds from loan payable | 429,000 | — | |||||
Advance of notes payable | — | 27,261 | |||||
Proceeds received from related parties | 55,886 | 99,600 | |||||
Repayments made to related parties | — | (65,253 | ) | ||||
Proceeds from bank overdraft | — | 100,576 | |||||
Preferred stock dividend | — | (11,092 | ) | ||||
Proceeds from preferred shares subscription | — | 150,000 | |||||
Payment on leases | (5,511 | ) | (7,354 | ) | |||
Net Cash Provided By Financing Activities | 449,201 | 293,738 | |||||
FOREIGN EXCHANGE GAIN | — | 1,150 | |||||
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD | 70,159 | (46,043 | ) | ||||
CASH - BEGINNING OF PERIOD | 113,421 | 53,736 | |||||
CASH - END OF PERIOD | $ | 183,580 | $ | 7,693 | |||
Non-Cash Transactions (Also see Note 3): | |||||||
Isuance of shares related to acquisition of Disclosureplus | — | $ | 176,000 | ||||
Issuance of shares for consulting services to be rendered | — | $ | 120,000 | ||||
Issuance of shares for interest on term loan | $ | 43,542 | — | ||||
Issuance of shares for redemption of preferred shares | $ | 291,667 | — | ||||
Issuance of shares for employment services | $ | 359,775 | — | ||||
Issuance of shares for consulting services | $ | 153,722 | — | ||||
Issuance of shares for settlement of liabilities | $ | 125,000 | — | ||||
Issuance of shares for financing services | $ | 47,500 | — | ||||
Shares to be issued for conversion of preferred shares | $ | 62,500 | — |
See accompanying notes to condensed consolidated financial statements.
8
ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Going Concern
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete consolidated financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-KSB. The results for the three months may not be indicative of the results for the entire year.
Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for 2006. In the Company's opinion all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.
The condensed consolidated financial statements are expressed in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America.
Our independent auditors have issued a going concern opinion on our consolidated financial statements that raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net loss of $1,316,057 and a negative cash flows from operations of $350,749 for the three months ended March 31, 2006 and has a working capital deficiency of $2,709,126 and an accumulated deficit of $42,052,162 at March 31, 2006. These matters raise substantial doubt about its ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ability to continue as a going concern is dependent on its ability to raise additional debt and equity financing and to implement its business plan to market and sell its various enterprise software and services. At the current time, management anticipates that it will be able to address its need for financing through the execution of private placements of the Company’s shares to both related and unrelated parties.
9
ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION - (Continued)
Recent Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised 2004), Shares - Based Payment, (“SFAS No. 123 R”), which amends, “Accounting for Stock Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (R) requires compensation expense to be recognized for all share based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS No. 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures that will change our accounting for stock-based awards in the future.
SFAS No. 123 (R) must be adopted in the annual period beginning after June 15, 2005 , for non small business issuers, and after December 15, 2005 for small business issuers. The statement allows companies to adopt its provision using either of the following transition alternatives:
(i) The modified prospective method, which results in the recognition of compensation expense using SFAS 123(R) for all share-based awards granted after the effective date and the recognition of compensation expense using SFAS 123 for all previously granted share - based awards that remain unvested at the effective date; or
(ii) The modified retrospective method, which results in applying the modified prospective method and restating prior periods by recognizing the financial statement impact of share-based payments in a matter consistent with the pro forma disclosure requirements of SFAS No. 123. The modified retrospective method may be applied to all prior periods presented or previously reported interim periods of the year of adoption. Adoption of this new standard did not have a material impact on the Company’s consolidated financial statements.
In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company has evaluated SAB 107 and has determined that incorporating it as part of its adoption of SFAS 123R will not have a material impact on its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”) which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on the Company’s consolidated results of operations and financial condition.
10
ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ significantly from these estimates.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, other receivables accounts payable, due to related parties, accrued liabilities, taxes payable and other current liabilities approximate fair value because of their short maturities. The carrying amount of the Company’s lines of credit approximates fair value because the interest rates of the lines of credit are based on floating rates identified by reference to market rates. The carrying amounts of the Company’s loans and notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar debt obligations.
Net Loss Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the shares used in the calculation of basic net income per share plus the dilutive effect of common share equivalents, such as stock options, using the treasury stock method. Common share equivalents are excluded from the computation of diluted net income (loss) per share if their effect is anti-dilutive. Common share equivalents totaling 3,582,383 shares of common stock have not been included in the calculation of diluted loss per share at March 31, 2006 as their effect would be anti-dilutive.
NOTE 2 - DISCONTINUED OPERATIONS
During 2005, the Company disposed of Twincentric Limited, which was one of the components of its business which constituted a discontinued operation. The loss on the Company’s condensed consolidated statements of operations for the quarter ended March 31, 2006 and 2005 is summarized as follows:
2006 | 2005 | ||||||
Loss from discontinued operations | $ | — | $ | (118,780 | ) |
The loss from discontinued operations incurred during the quarter ended March 31, 2005 was comprised as follows:
Revenue | $ | 146,700 | ||
Salaries and wages | (180,005 | ) | ||
General and administrative | (67,966 | ) | ||
Legal and accounting | (9,996 | ) | ||
Amortization | (1,513 | ) | ||
Interest expense | (6,000 | ) | ||
Loss from discontinued operations | $ | (118,780 | ) |
11
ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
NOTE 3 - ACQUISITIONS
DisclosurePlus Inc.
On February 25, 2005, the Company acquired all the outstanding common stock of DisclosurePlus Inc. (“DP”) a privately held Canadian corporation which provides publicly traded corporations with the foundation and tools to enhance the scope of corporate disclosure on-line with a standardized regulatory compliant web-based solution. Consideration for this acquisition represented 1,200,000 shares of the Company’s restricted common stock valued at $264,000 in addition to $125,000 payable in cash. The Company also acquired intellectual property relating to the DP business in a concurrent transaction. The consideration above represents the total consideration for this entire acquisition. The value allocated to the common share consideration and was based on the weighted average share price of the Company’s common shares for the two trading days before, the day of, and the two days after the day the Company entered into the terms of the acquisition agreement. The Company accounted for this acquisition using the purchase method of accounting in accordance with the provisions of SFAS No. 141, and accordingly, DP’s operating results have been included in the Company’s consolidated statement of operations from February 25, 2005. The Company assumed net tangible liabilities of $29,000, though the transaction provided the Company with intellectual property, customers, and a set of employees who had operated this business prior to the acquisition. Goodwill recorded in connection with this business combination is not deductible for tax purposes.
The purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are based on an assessment undertaken by management.
The Company has accounted for the purchased goodwill in accordance with the provisions of SFAS 142. The entire balance of goodwill recorded on this transaction has been allocated to the Company’s Corporate Disclosure and Messaging segment. Pro Forma financial information giving effect to the acquisition of DP has not been presented on the basis that it is not material.
The Company’s purchase price allocation recorded for the acquisition of DP is as follows:
Technology assets | $ | 250,000 | ||
Goodwill | 168,000 | |||
Total assets acquired | 418,000 | |||
Liabilities assumed | (29,000 | ) | ||
Net assets acquired | $ | 389,000 |
The components of accounts receivable, net, as of March 31, 2006 and December 31, 2005 consist of:
2006 | 2005 | ||||||
Trade receivables | $ | 2,743,024 | $ | 3,802,531 | |||
Allowance for doubtful accounts | (58,598 | ) | (101,503 | ) | |||
Accounts receivable, net | $ | 2,684,426 | $ | 3,701,028 |
Included in accounts receivable at March 31, 2006 were amounts due from three customers whose balances individually represented in excess of 10% of the Company’s net accounts receivable. These three customers cumulatively represented 55% of the Company’s net accounts receivable balance (2005 - 39%).
Debt consists of the following as of March 31, 2006 and December 31, 2005:
2006 | 2005 | ||||||
Note payable to SCI Healthcare Group, unsecured (1) | $ | 7,946 | $ | 46,948 | |||
Short term loans (2) | 132,995 | 21,272 | |||||
Bank term loan, seven year term with monthly equal principal payments, bearing interest at the Canadian prime plus 3% (3) | 145,860 | 152,805 | |||||
Bank term loan, three year term with monthly equal principal payments, bearing interest at the Canadian prime plus 1% (4) | 158,093 | 175,438 | |||||
Term loan, two year term with equal monthly payments, bearing Interest at 20% (5) | 398,879 | — | |||||
$ | 843,773 | $ | 396,463 | ||||
Less current portion | 430,105 | 164,524 | |||||
Long term portion | $ | 413,668 | $ | 231,939 |
(1) | The promissory note relating to the acquisition of SCI Healthcare Group bears interest at 10%. SCI Healthcare is acting as a billing and collection agent for the Company with respect to a specific customer in the healthcare industry. Amounts collected by SCI Healthcare are not remitted back to the Company but rather serve to reduce this promissory note. Following the repayment of this promissory note, amounts received from this specific customer will be remitted to the Company. This debt is unsecured. |
(2) | During 2004 and 2005, various related parties loaned the Company, on a short term basis, funds to assist with working capital. Certain of these loans were converted into equity during 2005. The balances outstanding at December 31, 2005 and March 31, 2006 are due on demand and bear no interest. This debt is unsecured. |
(3) | On August 17, 2004 one of the Company’s Canadian subsidiaries obtained a term loan with a Canadian Chartered Bank in the amount of (CAD) $220,000. Under the terms of the agreement, the loan is repayable over a seven year term with principal and interest payments due monthly. Interest on the borrowings is the bank’s prime rate plus 3%, which as of December 31, 2005 was 7.4%. This debt is secured by the assets of the Company's subsidiary to whom the debt is outstanding. |
(4) | During 2005 one of the Company’s Canadian subsidiaries obtained a term loan with a Canadian Chartered Bank in the amount of (CAD) $250,000. Under the terms of the agreement, the loan is repayable over a three year term with principal and interest payments due monthly. Interest on the borrowings is at prime plus 1% which as of December 31, 2005 was 5.4%. This debt is secured by the assets of the Company's subsidiary to whom the debt is outstanding. |
12
ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
(5) | During 2006, the Company entered into a two year term loan with an unrelated party. The loan is repayable in equal monthly payments and the interest rate on the loan is 20%. In conjunction with this loan, the Company issued the lender 250,000 common shares of the Company, and placed 5,000,000 common shares into escrow as security for the lender. |
Future maturities of the Company’s debt as of March 31, 2006 are as follows for each of the twelve months periods ending March 31 of the respective years:
2007 | $ | 430,105 | ||
2008 | 296,119 | |||
2009 | 45,924 | |||
2010 | 23,653 | |||
Thereafter | 47,972 | |||
$ | 843,773 |
NOTE 6 - DUE TO RELATED PARTIES
The Company’s officers and directors have loaned various amounts to the Company and its subsidiaries to meet operating cash flow requirements. The amounts due to related parties are non-interest bearing and have no specific repayment terms. The balances due them were $67,749 and $11,863 as of March 31, 2006 and December 31, 2005 respectively, and are classified as current liabilities in the accompanying condensed consolidated balance sheet.
Included in the Company’s accounts receivable balance are amounts due from Global Sterling Payments Systems Limited, a related party to the Company, totaling $847,002 (2005 - $647,002).
NOTE 7 - REDEEMABLE PREFERRED SHARES
The Company has outstanding series C preferred shares which are mandatorily redeemable over 16 quarters. The initial value of these shares was $500,000, and the quarterly redemption values are $31,250. These preferred shares have been recorded as debt on the Company’s condensed consolidated balance sheets on the basis that these shares are manditorily redeemable by the Company. After a redemption of $62,500 during the three months ended March 31, 2006, as of March 31, 2006, $312,500 of these Series C preferred shares remain outstanding and were yet to be redeemed.
NOTE 8 - LINE OF CREDIT
In conjunction with the close of the Cratos acquisition, in May 2005 the Company secured a line of credit with a one year term with annual renewals with a Canadian chartered bank. This line of credit allows for maximum borrowings under it of $1.5 million CAD and bears interest at the rate of prime plus 1%. Security for this facility is comprised of a general security agreement over all of the assets of the Company’s subsidiary which entered into this facility, as well as personal guarantees by two of the Company’s senior executives. Borrowings under this facility may not exceed 85% of specified receivables as defined in the respective credit agreement. At March 31, 2006, no amounts were available under the Company’s line of credit and the interest rate on this facility was 6%.
Included in the line of credit are several overdraft facilities maintained by certain subsidiaries of the Company.
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ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
TPG Corporation
On March 17, 2000, the Company entered into a consulting agreement with TPG Capital Corporation regarding an inactive reporting shell company that the Company acquired. The consulting agreement provides that one year after the execution of the agreement, (“reset date”), 350,000 common shares issued by the Company under the agreement would be increased or decreased based upon the average closing bid for the Company’s stock 30 days prior to the reset date, so the value of the 350,000 shares will equal $500,000.
In December, 2005 an arbitrator determined that the Company was obligated to pay TPG Capital Corporation $448,000 to be issued in either common stock which must be registered by June, 2006 or in cash. The Company recorded an expense of this amount in its consolidated statement of operations for the year ended December 31, 2005 and such amount is included in accrued liabilities at December 31, 2005 and March 31, 2006.
Orchestral Corporation
On June 13, 2002, the Company canceled its “Power Audit” software distribution agreement with Orchestral (the “licensor”). In November 2002, the licensor commenced a proceeding in Ontario, Canada against the Company which was discontinued while the parties discussed a settlement. That proceeding alleged that the Company had infringed upon the copyright that the licensor maintained, and further that the Company had breached the distribution contract claiming damages of CAD $4,000,000. The licensor also claimed punitive and exemplary damages in the amount of CAD $1,000,000. When a settlement was not concluded, Orchestral commenced a second, identical action in August, 2003. The Company retained legal counsel to defend itself on the basis that there is no merit to the case and even if there was merit, the time frame in which to bring an action under the distribution agreement has expired. The Company has not yet determined if it will counter-sue for return of all proceeds paid to Orchestral during the period of time between 1999 and 2001.
Compulsory mediation has occurred in the second lawsuit. The next step would normally be “examination for discovery” then on to a trial. Instead of proceeding with the prosecution of its second lawsuit, Orchestral commenced an Application before the Ontario courts to enforce a settlement which it alleges was reached with the Company during the negotiations between its first and second lawsuits. The court ordered that a settlement was enforceable and that $226,824 was owed by the Company to the licensor. The Company appealed this decision and in January 2006 the initial judgement was upheld. A liability of $226,824 has been recorded in the Company’s condensed consolidated financial statements for the settlement claim.
Cesar Correia and InfoLink Technologies Ltd.
From December 2003 to April 2004, the Company was engaged in discussions with certain major shareholders of Infolink Technologies Limited with regard to the potential acquisition of Infolink Technologies Ltd., a public company listed on the Toronto Stock Exchange venture board under the symbol “IFL”. During the course of discussions, an offer to purchase was rebuffed by Cesar Correia, the former Chairman of the Board, President and CEO, and 34% shareholder of Infolink. At the time, Mr. Correia was told that the Company would purchase another competitor to Infolink, C Comm Network Corporation. In May of 2004, the Company purchased C Comm. In July of 2004, an unrelated minority shareholder of Infolink commenced an action in Ontario alleging that Mr. Correia has mismanaged Infolink and amongst other things that he had inappropriately obtained funds from Infolink and converted them to his own purposes. The day prior to the court hearing with regard to the minority shareholder action against Infolink, Infolink Technology commenced a proceeding in the same Ontario court against the Company alleging unfair competition as a result of an alleged improper acquisition of confidential information from Infolink and numerous other causes of action. The Company has not yet had to file a defence to any of Infolink’s claims against the Company. Meanwhile, the court appointed a monitor and investigator to look into the allegations against Mr. Correia. The court appointed monitor and investigator issued an interim report in October 2004 which found that several of the allegations against Mr. Correia were substantiated. Mr. Correia was removed from the position of Chairman, President and CEO of Infolink and is now an employee of Infolink. The Company believes that Infolink as a corporate entity will not proceed with any action against the Company as the Company believes that the action was commenced as a defensive move by Mr. Correia and now that he has been removed from management of Infolink there is little basis for the action to continue.
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ACTIVECORE TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
NOTE 10 - COMMON AND PREFERRED SHARES
Common Shares
On February 7, 2006, the Company issued 250,000 common shares to an unrelated party who provided the Company with a two-year term loan. The value of these shares, based on the fair value of the Company's common shares on the date this agreement was entered into, was $47,500 and as of March 31, 2005 $43,542 is recorded in deferred consulting and financing charges.
On February 7, 2006, the Company issued 4,166,667 common shares to the former holders of its entire Class A and B preferred shares. In 2005, these former preferred shareholders agreed with the Company to convert their preferred shares to common shares, and as of December 31, 2005 these shares were included in common stock to be issued.
On March 28, 2006, the Company issued, based on the closing market price of the Company's common shares on the date this agreement was entered into, 3,822,500 common shares to numerous employees in exchange for employment services having a value of $359,775. As of March 31, 2006, $108,694 of this amount was expensed and $251,081 was included in deferred consulting and financing expense.
On March 28, 2006, the Company issued 960,000 common shares to two consultants of the Company who will provide services during 2006. These shares have a value of $67,200, based on the closing market price of the Company's common shares on the date this agreement was entered into. As of March 31, 2006, $11,550 of this amount had been expensed and $55,650 was included in deferred consulting and financing expense.
On March 28, 2006, the Company issued 782,353 common shares to two employees in consideration for unpaid wages. The value of these common shares was $125,000, based on the closing market price of the Company's common shares on the date this agreement was entered into.
On January 9, 2006, the Company used 1,081,521 shares of treasury stock with a value of $86,522, based on the closing market price of the Company's common shares on the date this agreement was entered into, to pay a third party for investor relations services.
The Company is authorized to issue three series of preferred shares:
Series A and B
On September 14, 2004, the board of directors authorized the issuance of 8,333,333 Series A and 4,167,667 Series B preferred shares which had a purchase price of $0.03 and $0.06, respectively totaling $500,000. With respect to the Series A shares, the Company may force conversion if the trading price of the Company’s common shares exceeds $2.00 for 30 days. With regard to the Series B shares, the Company may force conversion if the trading price of the Company’s common shares exceeds $4.00 for 30 days. These shares have a right of redemption whereby if the stock is not converted within 5 years, the Company, at its option, shall have the right to redeem all outstanding but unconverted shares of series A (same for B) Preferred Stock held by such person by paying to the holder thereof $0.30 (for B, $0.60) per share plus all accrued but unpaid dividends thereon, if any. These shares are not manditorily redeemable. The preferred shareholders will be paid a dividend at the rate of 10% per annum. On December 21, 2005 the Company reached an agreement with the holders of the Series A and B shares to convert their entire holdings of these classes of shares into common shares of the Company. The conversion price in this transaction was higher than the market price of the Company’s commons shares on the conversion agreement date. Specifically, the carrying value of the preferred shares prior to conversion exceeded the fair value of the common stock consideration by $208,333. As a result, and consistent with Emerging Issues Task Force Topic D-42. The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, the Company has added back this excess in determining net loss available to common shareholders in its consolidated statement of operations. Additionally, the Company has recorded this excess as an increase to additional paid-in capital in its consolidated balance sheet, consistent with the guidance provided in Staff Accounting Bulletin 5 T. In order to satisfy this conversion agreement, subsequent to December 31, 2005 the Company issued common shares to the former shareholders of the Series A and B preferred shares totaling 4,166,667. These shares were included in common stock to be issued at December 31, 2005, and were subsequently issued during the quarter ended March 31, 2006
Series C
In 2004, the Company and the International Brotherhood of Electrical Worker’s Union (See Note 8) agreed to settle the outstanding loan of $500,000 into Series C convertible preferred shares. The terms of the Series C preferred stock require the Company to redeem the preferred shares over 16 quarters, commencing on December 31, 2004. The Company shall have the option of paying the quarterly redemptions in the form of cash or common shares. Also the preferred shares have a 12% annual dividend rate payable quarterly based on the number of preferred shares outstanding at the end of the quarter. As of March 31, 2006 the Company has an obligation to issue common shares with a value of $62,500 in order to satisfy the terms of its Series C Preferred Stock and this amount has been recorded as common shares to be issued within Shareholders' Equity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements and Associated Risks. This Report contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (a) the Company’s projected sales and profitability, (b) the Company’s growth strategies, (c) anticipated trends in the Company’s industry, (d) the Company’s future financing plans, (e) the Company’s anticipated needs for working capital, (f) the benefits related to ownership of the Company’s common stock. Forward-looking statements, which involve assumptions and describe the Company’s future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause the Company’s actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis or Plan of Operations” as well as in this Report generally. You should not place undue reliance on our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and, except as otherwise required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible to predict all of them. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Certain Business Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.
Overview
ActiveCore Technologies, Inc. (“ActiveCore” or the “Company”) is a Nevada registered Company with its head office in Toronto, Canada, and operations in Canada and the United States. The Company operates within the enterprise software and services market in a sector which has been described by the Gartner Group as that group of vendors of software and services that sell and install “Smart Enterprise Suites” and related products. The Company has organized itself into two distinct divisions to deliver its products and services. The Systems Integration and Migration (SIM) division focuses on large projects in the financial services, insurance, healthcare, education and manufacturing industries. These projects are aimed at protecting the customer’s investment in, improving the functionality of, and extending the life span of their existing information technology systems. The acquisition of Cratos Technologies Solutions Inc. (“Cratos”) during the quarter ended June 30, 2005 is expected to begin to give this division critical mass. The Corporate Disclosure and Messaging (CDM) division is focused on working with these same and additional customers to provide them with a range of communication and information distribution based products that allow them to leverage existing corporate information and share it with their customers, employees and other stakeholders and facilitates their move towards a Smart Enterprise.
The Company’s products encompass application integration, application modernization, application migration, content management, vertical application portals, a corporate disclosure portal and an outbound corporate messaging portal. This product set gives ActiveCore the capability to deliver effective, efficient and economical integration, modernization, migration and corporate messaging services or complete solutions to clients seeking to enable or extend their existing systems to stakeholders and customers without wholesale changes to their systems. ActiveCore’s products are designed to enable the Company’s clients to extend the functions of their current systems, often called “legacy systems”, by using the Company’s integration, modernization and migration product sets that are sold and delivered by the SIM division. For organizations wanting to take the next step in achieving what ActiveCore terms “A Smart Enterprise” the Company offers its disclosure and messaging products that are sold and delivered by the CDM division. By concentrating on the improvement of the customers existing systems and providing an additional communication/messaging product layer the Company is able to offer its customers a cost effective way to rapidly improve the overall capability and extend the life of their existing information technology assets.
The two divisions of the Company have very different revenue models and it is important that this is clearly understood. See Note 15 to the consolidated financial statements for segmented information which provide more granular reporting by division so that shareholders can develop a better understanding of the Company’s revenue sources and how the revenue mix within the two divisions affects the gross profit margin at a consolidated level.
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The SIM division derives its revenue from the sale of value added labor and software licenses. This division has repeat customers and maintenance revenue but to grow it must find new customers on a regular basis to replace revenue from completed projects. Projects in this division usually range from one to two years in length and can exceed one million dollars in value. These projects tend to have long sell cycles and are predominantly with large customers. The gross profit percentage of this division varies based on the mix of sales as product revenue tends to yield a higher margin than services revenue. The Company considers this division to be a “solutions provider”, therefore, there will always be a mix of both product and service revenue but normally the mix will be weighted towards services. In this division the Company competes with a variety of System Integration “SI” vendors but has the advantage of having ownership of most of the products it uses to develop client specific and industry specific solutions.
The CDM division of the Company derives its revenue from the sale of product based services and usually delivers these services via an Application Service Provider (ASP) model. The size of the individual sales in this division are much smaller than in the SIM division but the revenue generated by this division is recurring in nature. Contracts in this division can vary from a one time job to three years and the length is determined by the target customer. Customers that purchase the DisclosurePlus product set usually sign three year contracts that consist of an initial setup fee and monthly payments and once the customer has committed to use this product set they become long term customers. Customers that purchase the Messaging product set tend to sign shorter contracts or choose to use the service as required. This division has shorter sell cycles and employs both telephone and direct sales representatives. The contribution margin from this division will vary based on the mix of Messaging sales versus DisclosurePlus sales. DisclosurePlus sales will yield a higher margin once the division has reached a critical mass of repeat customers.
The Company has set up a “service bureau” operation under the product identity “ActiveCast” to implement the Messaging ASP service whereby it offers broadcast services to customers on an outsourced basis using its own internal installation of ActiveLINK and DynaPortal. The Company is actively increasing the scope and revenue earning capacity of this operation by investing in fixed assets and personnel to grow the revenue and client base.
The Company completed the DisclosurePlus acquisition in the first quarter to add additional revenue opportunities to this division and to increase the amount of recurring revenue for the overall Company. The Company continues to search for potential acquisition candidates that can expand the range of products and services that the Company can offer within the context of the CDM division. In this area of operations, the Company competes with such companies as Infolink Technologies Limited in Canada, J2 Global Communications, Inc., and Xpedite Corporation.
The Company has developed a clear vision of how it intends to expand the business in the future. Expansion will be accomplished by growing the SIM and the CDM divisions organically as well as developing markets via strategic acquisitions in either division. The Company will also expand its marketing program to increase the “upselling” and “cross selling” opportunities which naturally exist between the two divisions.
The Company continues to hold a minority interest in ePocket, an organization currently completing a major round of funding that will allow it to enter the “electronic payment” market with a revolutionary product. The Company maintains strong business relationships with both companies. The Company envisions significant benefits from the Cratos acquisition as the relationship and synergies between ePocket and ActiveCore become more developed in the upcoming quarters.
Market Positioning Summary
The Company’s “Smart Enterprise Suite”
The Company provides organizations of all sizes with the capability to integrate, enable, and extend their “legacy systems” to connect to and communicate with their customers, employees and stakeholders. Therefore, the Company’s products and services facilitate the creation of the “Smart Enterprise”.
The Company’s products encompass application integration, application modernization, application migration, content management, vertical application portals, a corporate disclosure portal and an outbound corporate messaging portal. In addition the Company delivers its DisclosurePlus and ActiveCast product sets via an “Application Service Provider” (ASP) model using a Company hosted corporate messaging service bureau. The Company’s products can be sold individually or as a combination to form customized solutions based on the customers’ most immediate need. This approach allows the customer to deal with information technology problems in a tactical manner and can often alleviate customer capital expenditure restrictions.
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ActiveLINK is the Company’s core application integration product and is used to create solutions that integrate disparate databases and applications, creating a hub through which legacy system functionality can be enabled and extended. The other products owned by the Company are ActiveCast, DisclosurePlus and MD LINK. In addition the Company sells and services third party products that complete its “Smart Enterprise Suite”. These include DynaPortal, Caravel, and Micro Focus.
ActiveCore normally sells its products and services to companies that want to improve their existing “legacy systems”, however, the Company has also identified three other target markets: software resellers, independent software vendors and system integrators.
MDI Solutions sells a vertically optimized version of ActiveLINK known as MD LINK to health care facilities to support their systems integration needs. The MDI group also sells consulting support services for other integration products resulting in recurring income from support contracts. The MDI acquisition provided the Company with the knowledge to vertically enhance ActiveLINK and create MD LINK.
ActiveCast, the Company’s corporate messaging software product is sold to companies that want to extract data from internal “legacy systems” and use it for outbound messaging. These opportunities have short sales cycles resulting in rapid cash flow and recurring revenue from organizations sending information to dedicated lists. This product is also directly marketed to all companies that need to communicate “stand alone” information to their customers, employees and stakeholders. The C Comm acquisition provided the base product from which ActiveCast evolved.
DisclosurePlus provides corporations with a standard methodology for reporting and distributing information related to public disclosure required by public companies. This division is adding additional products to their offering to expand the functionality available within the DisclosurePlus product.
Cratos is a technology solution provider that focuses on payment solutions for the financial services industry and on the migration of mainframe systems to a Microsoft environment. Its expertise in various payment technologies is well known globally as evidenced by its blue chip customers. Cratos uses the Micro Focus product set to perform system migrations for large customers and they have a well trained consulting group that manages and delivers complex payment integration projects. There is an opportunity to introduce several of the Company owned products into Cratos projects.
Recent Developments
In the MDI Solutions group, further progress has been made in the development of the MD LINK product and the Company recently released version 4.1 during 2005. During the last few months, the Company has secured and shipped several orders for the new version of MD LINK. The Company expects the number of MD Link product sales to rise during 2006 and this is a direct result of the new product features and the marketing efforts of this group in 2004 and early 2005.
In the Company’s ActiveCore and ActiveCast business lines, the Company is continuing to obtain additional clients. On the ActiveCast side of operations, the Company is also adding additional sales personnel to accelerate the rollout of the Company’s innovative messaging portal product. This division has generated new revenue in the first quarter and continues to improve the margins on this business. We expect revenues from this division to continue to increase throughout the remainder of 2005. For the year ended December 31, 2005, the Company made relatively large investments in equipment and new staff in this area of the business.
Acquisitions and Reorganizations
The Company maintains an active interest in acquisitions and the reorganization of its component parts to better service clients. The Company has undertaken an internal restructuring to facilitate better customer service, increased sales and reduced costs. Investment in its existing operations augmented by growth through acquisitions is a key goal of management as is the effective use of capital to drive acceptable returns on investment. The following paragraphs briefly describe recent acquisitions and reorganizations that have occurred.
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Acquisition of Disc losurePlus
Prior to being acquired by the Company, DisclosurePlus operated as a private company developing its intellectual property and test marketed its product to several clients before agreeing to be acquired by ActiveCore.
On February 25, 2005, the Company entered into a purchase and sale agreement with the shareholders of DisclosurePlus whereby the Company paid 1,200,000 shares of the Company’s common stock representing $264,000 plus $125,000 in cash for a total value of $389,000 for 100% of the DisclosurePlus common shares. In connection with this acquisition the Company also entered into management contracts with Gord Sutton and Dean Peloso.
DisclosurePlus offers a unique set of products to the public company market. These products are offered as an ASP model and are targeted at public companies that want to provide better disclosure of corporate information to their shareholders, customers and other stakeholders. This division will also add press release dissemination to the product set later this year which is expected to have a positive impact on revenue opportunities.
Acquisition of Cratos Technology Solutions
Prior to being acquired by the Company, Cratos operated as a private company providing technical consulting services and mainframe migration to companies in the financial services sector in many countries.
During the quarter ended June 30, 2005, the Company entered into a purchase and sale agreement with the shareholders of Cratos Solutions whereby the Company paid 9,021,030 shares of the Company’s common stock in addition to cash and debt consideration of $159,120 representing total consideration of $2.1 million in exchange for 100% of the shares of Cratos. In conjunction with this acquisition the Company also paid CAD $470,000 of debt owed to SQL Tech. by Cratos along with 3,921,633 common shares of ActiveCore. The Company also arranged a bank credit facility to help finance Cratos’ debt that was personally secured by the senior managers of ActiveCore.
Cratos is a service based company that specializes in providing project management and delivery to large companies in the financial service, education and insurance market place.
Twincentric, Limited
On August 13, 2005, the Company entered into an agreement to sell its wholly owned U.K. subsidiary, Twincentric Limited (“Twincentric”) to Tony McGurk. Mr. McGurk was the majority shareholder of Twincentric at the time it was acquired during 2004 by the Company, and he had continued to operate the Twincentric business since that time. Consideration received by the Company was 1,400,000 of its common shares. These common shares represented the same shares originally issued by the Company to Mr. McGurk in the transaction which resulted in the Company originally acquiring Twincentric.
Recent Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised 2004), Shares - Based Payment, (“SFAS No. 123 R”), which amends, “Accounting for Stock Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (R) requires compensation expense to be recognized for all share based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS No. 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures that will change our accounting for stock-based awards in the future.
SFAS No. 123 (R) must be adopted in the annual period beginning after June 15, 2005 , for non small business issuers, and after December 15, 2005 for small business issuers. The statement allows companies to adopt its provision using either of the following transition alternatives:
(i) The modified prospective method, which results in the recognition of compensation expense using SFAS 123(R) for all share-based awards granted after the effective date and the recognition of compensation expense using SFAS 123 for all previously granted share - based awards that remain unvested at the effective date; or
(ii) The modified retrospective method, which results in applying the modified prospective method and restating prior periods by recognizing the financial statement impact of share-based payments in a matter consistent with the pro forma disclosure requirements of SFAS No. 123. The modified retrospective method may be applied to all prior periods presented or previously reported interim periods of the year of adoption. Adoption of this new standard did not have a material impact on the Company’s consolidated financial statements.
In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company has evaluated SAB 107 and has determined that incorporating it as part of its adoption of SFAS 123R will not have a material impact on its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”) which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on the Company’s consolidated results of operations and financial condition.
Critical Accounting Policies
Significant Accounting Policies and Critical Accounting Estimates
The Company’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company’s control.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.
Revenue: A significant portion of all of the Company's net sales are derived from commercial software development and sales activities, which are subject to increasing competition, rapid technological change and evolving customer preferences, often resulting in the frequent introduction of new products and short product lifecycles. Accordingly, the Company's profitability and growth prospects depend upon its ability to continually acquire, develop and market new, commercially successful software products and obtain adequate financing. If the Company is unable to continue to acquire, develop and market commercially successful software products, its operating results and financial condition could be materially adversely affected in the near future.
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The Company recognizes revenue for software sales in accordance with Statement of Position ("SOP") 97-2 "Software Revenue Recognition", as amended by SOP 98-9 "Modification of SOP 97-2 Software Revenue Recognition with respect to Certain Transactions." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-9 deals with the determination of vendor specific objective evidence ("VSOE") of fair value in multiple element arrangements, such as maintenance agreements soldin conjunction with software packages. For 2005 and 2004 the Company does not have any multi-element arrangements that would require it to establish VSOE for each element, nor does the Company have any sales activity that requires the contract method of accounting. The Company's software transactions generally include only one element, the software under license. The Company recognizes revenue when the price is fixed and determinable, there is persuasive evidence of an arrangement, the fulfillment of its obligations under any such arrangement, and determination that collection is probable. Accordingly, revenue is recognized when the license or title and all risks of loss are transferred to the customer, which is generally upon receipt by customer.
The Company recognizes revenue in the period in which the service is performed and collection is reasonably assured.
Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoing credit evaluations of its customer’s financial condition and if the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would likely be required. Actual collections could differ materially from our estimates.
Income Taxes. The Company has currently recorded a full valuation allowance against all of its deferred income tax assets as management believes it is more likely than not that all of the deferred income tax assets will not be realized. In making this determination, management has considered factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
Litigation. The Company is a party, from time to time, in legal proceedings. In these cases, management assesses the likelihood that a loss will result, as well as the amount of such loss and the financial statements provide for the Company’s best estimate of such losses. To the extent that any of these legal proceedings are resolved and result in the Company being required to pay an amount in excess of what has been provided for in the financial statements, the Company would be required to record, against earnings, the excess at that time. If the resolution resulted in a gain to the Company, or a loss less than that provided for, such gain is recognized when received or receivable.
Valuation of Intangible Assets. The Company has a history of acquiring other businesses, and expects that this trend will likely continue in the future. As part of the completion of any business combination, the Company is required to value any intangible assets acquired at the date of acquisition. This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. However, there can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. If management makes judgments or estimates that differ from actual circumstances, the Company may be required to write-off certain of its intangible assets. Similarly, in accordance with SFAS No. 142 Goodwill and Other Intangible Assets , the Company is required to annually test the value of its goodwill as well as its acquired intangible assets. This testing requires management to make estimates of the market value of its various operating segments. Changes in estimates could result in different conclusions for the value of goodwill. The Company performs its annual impairment testing on its goodwill at December 31st of each year, provided that circumstances don’t arise during the year that would necessitate an earlier evaluation.
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Results of Operations
Three Months Ended March 31, 2006 Compared With the Three Months Ended March 31, 2005
Overview
During the quarter ended March 31, 2006, the Company recorded revenues of $1.7 million, and a loss from continuing operations of $1.3 million. These amounts compare to revenue of $0.4 million during the quarter ended March 31, 2005, when a loss from continuing operations of $0.8 million was incurred. The increase in revenue from the prior year was the result of several factors. Most importantly, as the Company didn’t begin consolidating the results of Cratos until May 1, 2005, during the period ended March 31, 2005 the Company’s results of operations did not include any contribution from this acquisition. As Cratos was a fairly sizable acquisition for the Company, this acquisition had a significant impact on revenue. During the quarter ended March 31, 2006, revenue from Cratos totaled $1.0 million and therefore this acquisition accounted for most of the increase from 2005 to 2006. The balance of the increase came predominately from the Company’s ActiveCast business, which has grown organically quite significantly since the same time a year ago.
The increased net loss of $1.3 million in 2006 as compared to $1.0 million in 2005 was also largely related to the Cratos acquisition for a couple of reasons. Firstly, the first calendar quarter has historically been Cratos’ weakest and 2006 was no exception. The $1.0 million revenue it generated during the quarter ended March 31, 2006 was down considerably from the $2.2 million recognized during the fourth quarter of 2005. In the Company’s fourth quarter ended December 31, 2005, many large projects were completed and which therefore had no corresponding revenue during the quarter ended March 31, 2006. The Company feels that the Cratos sales pipeline remains strong and that during the quarter ending June 30, 2006 that the Cratos revenue should return to levels close to those realized at the end of 2005.
Revenues
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
1,654,031 | 376,308 | 340% |
During the quarter ended March 31, 2006 the Company generated $1.7 million in revenue from the sale of products and services versus $0.4 million in revenue during the quarter ended March 31, 2005. From a revenue source perspective, the vast majority of the revenue recorded in both 2006 and 2005 was service related, while product related revenue represented only a small percentage of the total. During 2006, the majority of the Company’s revenue was generated from services work and product installation performed by the Company’s SIM division (see note 16 to the notes to the Financial Statements for segmented information). Specifically, the Cratos acquisition was completed during the quarter ended June 30, 2005, and the Company has consolidated Cratos’ operations in its consolidated financial statements beginning May 1, 2006. Therefore, in the quarter ended March 31, 2005 the Company’s revenue included no amounts from Cratos as compared to the quarter ended March 31, 2006 when the Company’s total of $1.7 million included $1.0 million from Cratos.
The Company has also seen revenue growth over the past year from its CDM division - a division that did not formally exist until mid-2004 when the Company completed a small acquisition of C-Comm Networks. Since that time, the Company has added to that business through significant investments of both capital and personnel, and that business has now been rebranded as the ActiveCast. It appears these investments are beginning to pay off. Although this division’s total revenues remain small relative the overall corporate totals, they are growing very quickly in percentage terms. Specifically, revenues in the CDM business grew over 300% from the quarter ended March 31, 2005 to the quarter ended March 31, 2006.
Cost of Sales
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
1,468,615 | 245,634 | 498% |
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Cost of sales for the quarter ended March 31, 2006 were $1.5 million, which consisted primarily of direct wages paid to consulting services staff of $1.4 million, and amortization of software licensing agreements and other direct costs of $0.1 million. These amounts are significantly higher than during 2005 when the Company’s cost of sales for the year totaled $0.2 million which was split almost evenly between direct wages and amortization. The vast majority of the increase in cost of sales in 2006 as compared to 2005 relates the recent addition of Cratos. Cratos is a services business, and the majority of their operating expenses relate to compensation costs paid to its consultants. This differs substantially from the Company’s business model prior to the Cratos acquisition when the Company generated most of its revenue through software licensing agreements. As the cost of sale on software licenses is much lower than that for services revenue, the Company’s gross margin has decreased significantly from 2005 to 2006. Specifically, the quarter ended March 31, 2006 had a gross margin of $.2 million, or 35%, versus a gross margin of $0.2 million, or 11% during the quarter ended March 31, 2005. The gross margin percentage realized during the Company’s first quarter ended March 31, 2005 was atypically low as a result of losses realized on certain fixed price projects. The Company believes that this lower gross margin will not be indicative of gross margins to be realized in future quarters, and that beginning in the quarter ending June 30, 2006 the Company’s gross margin will return to levels consistent with the last few quarter since the Cratos acquisition in the 30% - 35% range.
Operating Expenses
Total operating expenses for the quarter ended March 31, 2006 were $1.3 million versus $0.9 million during the quarter ended March 31, 2005. After these expenses, the Company recognized a loss from operations of $1.1 million in the quarter ended March 31, 2006 versus a loss from operations of $0.7 million during the quarter ended March 31, 2005.
The largest components of operating expenses for the first three years of 2006 year were salaries and wages, consulting fees, legal and accounting and other general and administration expenses. These expenses are discussed below.
Salaries and Wages
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
555,433 | 193,090 | 188% |
Salaries and wages in 2006 represent the cost of administration and sales and marketing staff except for certain contractors who are shown as consulting costs. For the quarter ended March 31, 2006, salaries and wages were $0.6 million as compared with $0.2 million during the quarter ended March 31, 2005, representing an increase of 189%. Most of the increase in the quarter ended March 31, 2006 as compared to 2005 reflects the additions made to the CDM business in terms of personnel which occurred throughout 2005 as well as the addition of the Cratos business which occurred in May, 2005. From a sequential perspective, the salaries and wages incurred during the quarter ended March 31, 2006 are consistent with those incurred during the quarter ended December 31, 2005.
Consulting fees
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
144,703 | 158,949 | (9%) |
For the quarter ended March 31, 2006, consulting fees decreased 9% to $144,703 from $158,949 during the quarter ended March 31, 2005. During the quarter ended March 31, 2006 most of the consulting fees incurred relate to stock compensation paid to consultants of the Company relating to agreements that are generally in place for the duration of 2006. Therefore, the Company expects that this expense will remain fairly consistent through 2006. The 2005 consulting fees also related almost exclusively to the recognition of deferred stock compensation.
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Legal and Accounting
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
190,090 | 68,579 | 177% |
For the quarter ended March 31, 2006, legal and accounting expenses increased 169% to $190,090 from $68,579 during the quarter ended March 31, 2005. Legal and accounting expense includes legal costs associated with using third party lawyers to act on behalf of the Company in current legal matters. Most of the increase in legal and accounting expense in 2006 as compared with 2005 relates to the fact that the Company recorded an expense during the quarter ended March 31, 2006 relating to its year-end audit of 2005. The annual audit costs represent a more significant cost than those incurred throughout most of the year, and as a result the Company expects to see a slight decrease in legal and accounting fees over the next few quarters.
Quarter ended March 31 | ||||
2006 | 2005 | % Change | ||
253,313 | 329,745 | (23%) |
For the quarter ended March 31, 2006, general and administrative expenses decreased 23% to $244,976 from $329,745 during the quarter ended March 31, 2005. The 2005 balance included several one-time items including an unusually high bad debt expense and certain costs related to restructuring certain management roles within the Company. Of the $253,313 incurred during the quarter ended March 31, 2006, over $150,000 relates to the Cratos organization which was not part of the organization during the same period during 2005. In future quarter, the Company expects that its general and administrative expenses will remain relatively consistent.
Other Income/Expenses
Quarter ended March 31 | |||||
2006 | 2005 | % Change | |||
Interest Expense | (148,603) | (68,615) | 117% | ||
Other income (loss) | (34,646) | (33,740) | 3% |
Other income represented a loss of $34,646 for the quarter ended March 31, 2006 and represented a loss of $33,740 for the quarter ended March 31, 2005. These balances are primarily the result of the fluctuations of the U.S. dollar relative to the Canadian dollar.
Discontinued Operations
During the quarter ended March 31, 2005, the Company incurred a loss from discontinued operations relating to Twincentric of $118,780. Twincentric had consistent incurred losses from the time it was acquired in 2004 and the decision was made by the Company to divest of this investment in August 2005 when it was ultimately disposed of.
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Liquidity and Capital Resources
At March 31, 2006, the Company’s need for cash included satisfying $6,304,365 of current liabilities. The Company’s ability to continue as a going concern is dependent on its ability to raise additional funding through expansion of its current bank facility, an equity injection, a convertible loan and increased sales revenue. The Company anticipates that its cash needs over the next 12 months will consist of $2,500,000 for general working capital. The Company expects that this amount will be raised through a combination of private placements and short-term borrowings provided by management and other related parties. At March 31, 2006, the Company had $183,580 of cash on hand. In addition, certain shareholders have also supported the Company by deferring the timing of certain payments from time-to-time or converting shareholders loans into equity. While there is no legal commitment for them to do so, the Company believes that certain shareholders will continue to support the Company in a similar manner.
The failure of the Company to obtain additional debt and equity funding will have a material adverse effect on the Company’s business and may force the Company to reorganize, reduce its investment in, or otherwise divest of one or more of the Company’s operations, or to reduce the cost of all operations to a lower level of expenditure thereby reducing the Company’s expected revenues and net income in 2006.
Going Concern
The Company’s Condensed Consolidated Financial Statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of $1,316,057 and a negative cash flow from operations of $350,749 for the quarter ended March 31, 2006. The Company also has a working capital deficiency of $2,709,126 and an accumulated deficit of $42,052,162 at March 31, 2006. There is substantial doubt that the Company will continue as a going concern and will likely still incur a going concern note as of December 31, 2006. The Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty. Management’s plan to continue operations is to raise additional debt or equity capital until such time as the Company is able to generate sufficient operating revenues through its new acquisitions.
Consolidated Statement of Cash Flows
Cash on the consolidated balance sheet increased from $113,421 in the period ended December 31, 2005 to $183,580 at March 31, 2006.
Net Cash From Operating Activities
Net cash used in operating activities were $350,749 and $276,859 in the quarters ended March 31, 2006 and 2005, respectively. During the quarter ended March 31, 2006, the Company generated over $800,000 from collections of accounts receivable which almost offset its net loss of $1,316,057. The remaining working capital items effectively offset one another. In the quarter ended March 31, 2005, the Company incurred a net loss of $954,182 which was largely offset by a $222,058 use of cash relating to accrued liabilities and a $289,216 use of cash relating to other current liabilities.
Net Cash From Investing Activities
Net cash provided by investing activities during the quarter ended March 31, 2006 was $28,293 which related entirely to the purchase of capital assets. In the quarter ended March 31, 2005, the company spent $3,472 on the purchase of capital assets as well as $60,600 relating to the acquisition of DisclosurePlus such that the Company used a total of $64,072 on investing activities.
Net Cash From Financing Activities
Net cash provided by financing activities of $449,201 during the quarter ended March 31, 2006 was primarily comprised of $429,000 relating to net proceeds resulting from a new term loan secured by the Company. In the quarter ended March 31, 2005 the Company generated $293,738 from financing activities. The most significant sources of cash were $150,000 relating to proceeds from a preferred share subscription, $99,600 relating to proceeds advanced from related parties, and $100,576 proceeds received from bank overdraft. These amounts were partially offset by some uses of cash through financing activities, the most significant of which was a use of cash of $65,253 relating to repayments made to related party advances.
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Certain Business Risk Factors
A significant portion of the Company's net sales are derived data integration services and from sale of enterprise software, which are subject to increasing competition, rapid technological change and evolving customer preferences, often resulting in the frequent introduction of new products and short product lifecycles. Accordingly, the Company's profitability and growth prospects depend upon its ability to continually acquire, develop and market new, commercially successful software products and obtain adequate financing. If the Company is unable to continue to acquire, develop and market commercially successful software products, its operating results and financial condition could be materially adversely affected in the near future.
The preparation of financial statements in conformity with generally accepted accounting principles 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 dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates and assumptions relate to the recoverability of capitalized software development costs and other intangibles, realization of deferred income taxes, and doubtful accounts. Actual amounts could differ significantly from these estimates.
(A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-QSB, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a - 15(e) promulgated under the Securities Exchange Act of 1934, as amended. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Chief Executive Officer and Acting Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at this reasonable assurance level as of the period covered.
(B) Changes in Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls during the Company's quarter ended March 31, 2006, the Company's Chief Executive Officer and Acting Chief Financial Officer have determined that there are no changes to the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company's internal controls over financial reporting.
OTHER INFORMATION
TPG Corporation
On March 17, 2000, the Company entered into a consulting agreement with TPG Capital Corporation regarding an inactive reporting shell company that the Company acquired. The consulting agreement provides that one year after the execution of the agreement, (“reset date”), 350,000 common shares issued by the Company under the agreement would be increased or decreased based upon the average closing bid for the Company’s stock 30 days prior to the reset date, so the value of the 350,000 shares will equal $500,000.
In December, 2005 an arbitrator determined that the Company was obligated to pay TPG Capital Corporation $448,000 to be issued in either common stock which must be registered by June, 2006 or in cash. The Company recorded an expense of this amount in its consolidated statement of operations for the year ended December 31, 2005 and such amount is included in accrued liabilities at March 31, 2006.
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Orchestral Corporation
On June 13, 2002, the Company canceled its “Power Audit” software distribution agreement with Orchestral (the “licensor”). In November 2002, the licensor commenced a proceeding in Ontario, Canada against the Company which was discontinued while the parties discussed a settlement. That proceeding alleged that the Company had infringed upon the copyright that the licensor maintained, and further that the Company had breached the distribution contract claiming damages of CAD $4,000,000. The licensor also claimed punitive and exemplary damages in the amount of CAD $1,000,000. When a settlement was not concluded, Orchestral commenced a second, identical action in August, 2003. The Company retained legal counsel to defend itself on the basis that there is no merit to the case and even if there was merit, the time frame in which to bring an action under the distribution agreement has expired. The Company has not yet determined if it will counter-sue for return of all proceeds paid to Orchestral during the period of time between 1999 and 2001.
Compulsory mediation has occurred in the second lawsuit. The next step would normally be “examination for discovery” then on to a trial. Instead of proceeding with the prosecution of its second lawsuit, Orchestral commenced an Application before the Ontario courts to enforce a settlement which it alleges was reached with the Company during the negotiations between its first and second lawsuits. The court ordered that a settlement was enforceable and that $226,824 was owed by the Company to the licensor. The Company appealed this decision and in January 2006 the initial judgement was upheld. A liability of $226,824 has been recorded in the Company’s financial statements for the settlement claim.
Cesar Correia and InfoLink Technologies Ltd.
From December 2003 to April 2004, the Company was engaged in discussions with certain major shareholders of Infolink Technologies Limited with regard to the potential acquisition of Infolink Technologies Ltd., a public company listed on the Toronto Stock Exchange venture board under the symbol “IFL”. During the course of discussions, an offer to purchase was rebuffed by Cesar Correia, the former Chairman of the Board, President and CEO, and 34% shareholder of Infolink. At the time, Mr. Correia was told that the Company would purchase another competitor to Infolink, C Comm Network Corporation. In May of 2004, the Company purchased C Comm. In July of 2004, an unrelated minority shareholder of Infolink commenced an action in Ontario alleging that Mr. Correia has mismanaged Infolink and amongst other things that he had inappropriately obtained funds from Infolink and converted them to his own purposes. The day prior to the court hearing with regard to the minority shareholder action against Infolink, Infolink Technology commenced a proceeding in the same Ontario court against the Company alleging unfair competition as a result of an alleged improper acquisition of confidential information from Infolink and numerous other causes of action. The Company has not yet had to file a defence to any of Infolink’s claims against the Company. Meanwhile, the court appointed a monitor and investigator to look into the allegations against Mr. Correia. The court appointed monitor and investigator issued an interim report in October 2004 which found that several of the allegations against Mr. Correia were substantiated. Mr. Correia was removed from the position of Chairman, President and CEO of Infolink and is now an employee of Infolink. The Company believes that Infolink as a corporate entity will not proceed with any action against the Company as the Company believes that the action was commenced as a defensive move by Mr. Correia and now that he has been removed from management of Infolink there is little basis for the action to continue.
On February 7, 2006, the Company issued 250,000 common shares to an unrelated party who provided the Company with a two-year term loan. The value of these shares was $47,500 and as of March 31, 2005 $43,542 is recorded in deferred consulting and financing charges.
On February 7, 2006, the Company issued 4,166,667 common shares to the former holders of its entire Class A and B preferred shares. In 2005, these former preferred shareholders agreed with the Company to convert their preferred shares to common shares, and as of December 31, 2005 these shares were included in common stock to be issued.
None.
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None.
None.
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit No. | Description | Location | ||
31.1 | Certification by Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Provided herewith | ||
31.2 | Certification by Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Provided herewith | ||
32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Provided herewith | ||
32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Provided herewith | ||
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SIGNATURES
Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: | |||
ACTIVECORE TECHNOLOGIES, INC. | |||
/s/ Peter J. Hamilton | June 1, 2006 | ||
By: Peter J. Hamilton Chief Executive Officer | |||
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