UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.: 000-33471
YAK COMMUNICATIONS (USA), INC.
(Exact name of small business issuer as specified in its charter)
| Florida | | 98-0203422 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
55 Town Centre Court, Suite 610 Toronto,
Ontario, Canada, M1P 4X4
(Address of principal executive offices)
Issuer’s Telephone Number, Including Area Code:(416) 296-7111
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
As of September 30, 2003, 4,576,658 shares of the issuer’s Common Stock, no par value per share, were outstanding.
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
2
PART I
FINANCIAL INFORMATION
| Item 1. | | Financial Statements. |
Immediately following the signature page in this Form 10-QSB.
| Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein should be read in conjunction with the Consolidated Financial Statements of Yak Communications (USA), Inc. and Subsidiaries, and the related notes to the Financial Statements included in the Company’s Form 10-KSB for the fiscal year ended June 30, 2003, and the Consolidated Financial Statements and the related notes to the Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-QSB. Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. and have been audited by our independent auditors.
The financial information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refers to our continuing operations.
Critical Accounting Policies
Yak’s consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our consolidated financial statements. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company’s consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate
3
methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
Our critical accounting policies are as follows: determining functional currency for the purpose of consolidation; and valuation of long-lived assets.
Determining Functional Currency for the Purpose of Consolidation
We have a foreign subsidiary in Canada that accounts for 99% of our revenue and 96% of our assets as of September 30, 2003. In preparing our consolidated financial statements we translate the accounting records from Canadian dollars into U.S. dollars. This process results in exchange gains and losses which under the provisions of SFAS No. 52 and SFAS No. 130, are included as a separate part of our net equity under the caption “accumulated other comprehensive income.” Under these provisions, the treatment of these translation gains or losses is dependant upon our management’s determination of the functional currency of our subsidiary. The functional currency is determined based on management’s judgment of the currency that its subsidiary conducts substantially all of its transactions, including billings, financing and other expenditures, which also includes the dependency upon the parent and the nature of the subsidiary’s operations.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include: (i) significant decrease in the market value of an asset; (ii) significant changes in the extent or manner for which the asset is being used or in its physical condition; (iii) a significant change, delay or departure in our business strategy related to the asset; (iv) significant negative changes in the business climate, industry or economic conditions; and (v) significant changes in technology.
When we determine that the carrying value of property and equipment may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. For example, we are aware that we may need to revise our estimates to accommodate more rapid depreciation with respect to certain equipment due to expected changes in relevant technologies. Net property and equipment totaled $14,823,241 as of September 30, 2003 that represents 41% of our total assets.
4
Results of Operations
Comparison of Three Months Ended September 30, 2003 and 2002
Net revenue increased $10,612,113, or 130%, to $18,791,218 for the three months ended September 30, 2003, from $8,179,105 for the three months ended September 30, 2002. This increase in revenues primarily resulted from: our acquisition of Contour Telecom Inc. on July 2, 2003 that added sales of $4,591,000; continued growth in our existing Canadian markets, which had total sales of $3,762,000; sales in new Canadian markets, which totaled $300,000; and sales from our Looney Call product of $2,031,000. Our revenue in our U.S. operating territories decreased by $72,654 to $230,329 for the three months ended September 30, 2003, from $302,982 for the three months ended September 30, 2002, primarily as a result of our reduced spending on marketing in those markets.
Cost of revenue increased $6,797,022, or 126%, to $12,196,519 for the three months ended September 30, 2003, from $5,399,497 for the three months ended September 30, 2002. This increase is in a lower proportion to the increased traffic volumes associated with the growth in our dial-around revenues. Cost of revenue is comprised primarily of the cost of long distance services, fees for the processing and transporting of our calls and fixed and variable line access costs. The overall cost of revenue decreased to 65% of sales for the three months ended September 30, 2003, from 66% of sales for the three months ended September 30, 2002. This decrease was due to greater purchasing power for long distance costs and higher utilization of our fixed-cost access lines. The cost of long distance services was 35% for the three months ended September 30, 2003, which was the same for the three months ended September 30, 2002.
Sales and marketing expenses decreased $94,850 or 10% to $894,304 for the three months ended September 30, 2003, from $989,154 for the three months ended September 30, 2002. This decrease was primarily due to reduced spending for the launch of our services in the U.S. of $452,000 for the three months ended September 30, 2003, as compared to the three months ended September 30, 2002. Spending in our core markets for the three months ended September 30, 2003 increased by $ 410,000 or 80% over the three months ended September 30, 2002. This increase is in a lower proportion to our increased revenues.
General and administrative expenses (“G&A”) increased $1,550,678, or 223%, to $2,245,139 for the three months ended September 30, 2003, from $694,461 for the three months ended September 30, 2002. A significant portion of this increase, $1,140,000, resulted from our acquisition of Contour Telecom Inc. The largest component of G&A was salaries, which increased to $1,401,262 for the three months ended September 30, 2003, from $306,000 for the three months ended September 30, 2002. This salary increase was a result of hiring additional administration, technical and customer service employees that were required to support our growth during fiscal year 2003 and included $590,000 in salaries from the acquisition of Contour Telecom Inc.
Accounts receivable financing costs related to the factoring of our trade accounts receivable, increased $60,628, or 67%, to $150,203 for the three months ended September 30, 2003, from $89,575 for the three months ended September 30, 2002. This is a direct result of increased
5
borrowings to finance increased sales.
Organizational and start-up costs for the development of new operations were $33,024 for the three months ended September 30, 2003, as compared to $58,772 for the three months ended September 30, 2002. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts required to launch operations in new markets. For the three months ended September 30, 2003, organizational and start-up costs include $33,024 spent for the development of international operations in Peru. For the three months ended September 30, 2002 organizational and start-up costs included $ 58,772 related to operations in the U.S.
Depreciation and amortization increased $731,128 to $852,968 for the three months ended September 30, 2003, as compared to $121,840 for the three months ended September 30, 2002. Of this increase, $290,000 related to the change in our estimate of the useful life of certain telecom switching equipment and $264,000 related to the amortization of our next generation software. The balance of the increase was a result of increased capital spending of $1,579,304 for the three months ended September 30, 2003, as compared to $764,176 for the three months ended September 30, 2002.
Net income increased by $954,045 to $1,598,758 for the three months ended September 30, 2003, from $644,713 for the three months ended September 30, 2002. This increased net income is consistent with the increase in revenue for the period.
Liquidity and Capital Resources
Our liquidity requirements arise from cash used in operating activities, purchases of capital assets and interest and principal payments on outstanding indebtedness. To date, we have financed our growth through the private placement of equity securities, borrowings, accounts receivable financing, vendor financing and capital lease financing.
Net cash provided from operating activities increased by $4,289,728 to $4,329,450 for the three months ended September 30, 2003, as compared to $39,722 for the three months ended September 30, 2002. This was principally due to the increase in our net income from operating activities for the three months ended September 30, 2003. The remaining increases in net cash provided from operating activities are represented by the net change in assets and liabilities of $1,744,439, an increase in the non-cash provision for future income taxes of $779,393 and an increase in non-cash depreciation and amortization of $731,128 for fiscal year 2003.
Net cash used in investing activities was $6,900,651 for the three months ended September 30, 2003, as compared to $237,291 for the three months ended September 30, 2002. This was primarily due to the costs of acquiring Contour Telecom Inc. of $5,317,433 for the three months ended September 30, 2003. For the three months ended September 30, 2003, the Company used $1,579,304 in cash for acquisition of property and equipment, as compared to $237,291 used for acquisition of property and equipment for the comparable period ended September 30, 2002.
6
Net cash provided by financing activities was $454,100 for the three months ended September 30, 2003, as compared to $440,362 used by financing activities for the three months ended September 30, 2002. This increase is principally due to the issuance of a short-term note in the amount of $713,570 during the three months ended September 30, 2003
In September 2003, we acquired a “state of the art” Santera switch for an aggregate purchase price of approximately $2 million of which $450,000 was paid in cash and the balance of the price was financed over a period of 60 months. Under our financing arrangement, monthly payments of approximately $74,700 each are due through the end of fiscal year 2004 and, thereafter, we will make 51 monthly payments of approximately $17,800 each.
We believe we have sufficient fixed capacity to meet our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2004. In addition, with the acquisition of the Santera switch, we believe we are capable of providing for future long-term growth while as well as accommodating technological change. With the Santera switch, we expect to seamlessly migrate our traffic from our more traditional legacy systems to these next generation platforms.
We expect that the only capital additions to be made during fiscal year 2004 will be those required to maintain our existing telephony capacity, which are not expected to be greater than the capital additions made during fiscal year 2003.
TRENDS
During the three months ended September 30, 2003, the Company focused on expanding its operations across Canada and developing services in the U.S. With our acquisition of Contour occurring just after our last fiscal year end, we will be able to expand our customer base to small and medium business and to also expand telecommunication services offered to our customers. For the twelve months ended June 30, 2003, Contour had revenue of $21,266,155. We expect this amount to be substantially equal for the next 12 months. We believe that we can successfully integrate the operations of Contour and as a result obtain certain synergies that we expect will have a positive effect on both sales and net income with no anticipated corresponding material impact on liquidity.
We believe that our current operations will be able to generate sufficient cash to meet our current obligations and maintain our planned level of operations. We do not intend to invest further significant funds in developing our operations in the United States until we are satisfied that there is a suitable return on our investment to acquire new customers in the United States. We have no further significant cash commitment to develop our international operations in Peru. In July 2003 we received a short-term loan of $713,570 ($1,000,000 Canadian) repayable on December 31, 2003. In connection with this loan, we issued 10,000 shares of our common stock to the lender. We may seek to obtain additional funds from public or private equity or debt offerings to fund new opportunities that may arise.
7
FORWARD LOOKING STATEMENTS
From time to time, we make statements about our future results in this Form 10-QSB that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and the current economic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual future results and developments to differ materially from those currently projected. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company’s other reports filed with the SEC. Our actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause our actual results to differ materially from those in the forward-looking statements, include, but are not limited to: (i) access to sufficient working capital to meet our operating and financial needs; (ii) our ability to respond to growing competition in our markets for discount long distance services as well as the extent, timing and success of such competition; (iii) our ability to expand into new markets and to effectively manage our growth; (iv) the profitability of our entry and expansion into the U.S. market; (v) customer acceptance and effectiveness of us as a discount long distance provider and our ability to assimilate new technology and to adapt to technological change in the telecommunications industry; (vi) our ability to develop and provide voice over internet and web-based communications services; (vii) changes in, or failure to comply with, applicable governmental regulation; (viii) our reliance on our key personnel and the availability of qualified personnel; (ix) the duration and extent of the current economic downturn; (x) general economic conditions or material adverse changes in markets we serve; (xi) the risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful; (xii) changes in our accounting assumptions that regulatory agencies, including the Securities and Exchange Commission, may require or that result from changes in the accounting rules or their application, which could result in an impact on our earnings; (xiii) integrating the operations of our newly-acquired businesses; (xiv) the successful deployment of new equipment and realization of material savings therefrom; and (xv) various other factors discussed in this filing. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. The Company believes that its assumptions are based upon reasonable data derived from and known about its business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of the Company’s future activities will not differ materially from its assumptions.
| Item 3. | | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures.The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities
8
and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive and principal financial officers of the Company concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Controls.The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive and principal financial officers.
PART II
OTHER INFORMATION
| Item 6. | | Exhibits and Reports on Form 8-K. |
| | 31 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Principal Financial Officer. |
| | 32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
On July 7, 2003, we filed a current report on Form 8-K reporting under Item 2 – “Acquisition or Disposition of Assets” that we had acquired certain “next generation” telecommunications software from Consortio, Inc., a Delaware corporation and Convenxia Limited, a corporation organized under the laws of the United Kingdom pursuant to the terms and conditions of a Software Acquisition Agreement.
On July 15, 2003, we filed a current report on Form 8-K reporting under Item 2 – “Acquisition or Disposition of Assets” that we had acquired Contour Telecom Inc. and Argos Telecom Inc. from Allstream Inc., formerly AT&T Canada Corp., pursuant to the terms and conditions of a Share and Debt Purchase Agreement.
On July 25, 2003, we filed a current report on Form 8-K reporting under Item 9 – “Information Provided Under Item 12 (Results of Operations and Financial Condition)” our results of operations and financial condition for the quarter ended June 30, 2003.
On September 15, 2003, we filed a current report on Form 8-K/A reporting under Item 7 – “Financial Statements and Exhibits” financial statements and pro forma information arising from our acquisition of Contour Telecom Inc. and Argos Telecom Inc.
9
SIGNATURES
Pursuant to the requirements 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.
Date: November14, 2003 | | | | YAK COMMUNICATIONS (USA), INC. |
| | | | |
| | | | | | | By: | | /s/ Charles Zwebner |
| | | | | | | |
|
| | | | | | | | | Charles Zwebner, Chief Executive Officer and Principal Financial Officer |
10
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | Note
| | September 30, 2003
| | June 30, 2003
|
| | | | | $ | | $ |
ASSETS | | | | | | |
CURRENT | | | | | | |
Cash and cash equivalents | | | | 3,293,507 | | 5,442,538 |
Accounts receivable, net | | 8 | | 13,506,833 | | 9,336,032 |
Unbilled revenue | | | | 377,847 | | — |
Prepaid expenses and sundry | | | | 945,746 | | 656,939 |
| | | | |
| |
|
| | | | | 18,123,933 | | 15,435,509 |
| | | |
PROPERTY AND EQUIPMENT, NET | | 5 | | 14,823,241 | | 13,858,204 |
| | | |
DEFERRED ACQUISITION COSTS | | | | — | | 1,659,458 |
| | | |
LOAN RECEIVABLE | | 6 | | 251,490 | | 160,925 |
| | | |
INVESTMENT IN AFFILIATE | | 7 | | 435,482 | | 470,905 |
| | | |
GOODWILL | | 3 | | 2,275,073 | | — |
| | | |
DEFERRED INCOME TAXES | | | | 420,360 | | — |
| | | | |
| |
|
| | | | | 36,329,579 | | 31,585,001 |
| | | | |
| |
|
The accompanying notes are an integral part of these consolidated financial statements.
11
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | Note
| | September 30, 2003
| | June 30, 2003
|
| | | | | $ | | $ |
LIABILITIES | | | | | | |
CURRENT | | | | | | |
Accounts payable and accrued liabilities | | | | 3,077,360 | | 2,675,110 |
Amounts due for network access and usage | | | | 1,984,519 | | 966,111 |
Amounts due to long distance carriers | | | | 5,146,903 | | 3,123,583 |
Amounts due for equipment | | | | 780,656 | | 351,727 |
Due to Factor | | 8 | | 4,687,137 | | 4,689,751 |
Income taxes payable | | | | 261,345 | | 613,051 |
Short-term notes payable | | 9 | | 993,570 | | 400,000 |
Current portion of advances from TELUS Communications Inc. | | 10 | | 1,231,285 | | 1,030,716 |
Current portion of obligations under capital leases | | 11 | | 11,639 | | 13,008 |
Current portion of note payable | | 12 | | 101,586 | | 99,824 |
Deferred revenue | | | | 974,061 | | — |
| | | | |
| |
|
| | | | | 19,250,061 | | 13,962,881 |
| | | | |
| |
|
LONG-TERM DEBT | | | | | | |
Advances from TELUS Communications Inc. | | 10 | | 1,270,305 | | 1,585,270 |
Obligations under capital leases | | 11 | | 15,208 | | 14,606 |
Note payable | | 12 | | 8,409,108 | | 8,435,176 |
| | | | |
| |
|
| | | | | 9,694,621 | | 10,035,052 |
| | | | |
| |
|
DEFERRED INCOME TAXES | | 13 | | — | | 1,858,998 |
| | | | |
| |
|
| | | | | 28,944,681 | | 25,856,931 |
| | | | |
| |
|
STOCKHOLDERS’ EQUITY | | | | | | |
| | | |
COMMON STOCK | | 14 | | 199,366 | | 199,266 |
| | | |
ADDITIONAL PAID-IN CAPITAL | | | | 2,140,215 | | 2,050,315 |
| | | |
ACCUMULATED OTHER COMPREHENSIVE INCOME-TRANSLATIONADJUSTMENT | | | | 445,150 | | 477,080 |
| | | |
RETAINED EARNINGS | | | | 4,600,167 | | 3,001,409 |
| | | | |
| |
|
| | | | | 7,384,898 | | 5,728,070 |
| | | | |
| |
|
| | | | | 36,329,579 | | 31,585,001 |
| | | | |
| |
|
The accompanying notes are an integral part of these consolidated financial statements.
12
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | Common stock
| | | Additional
paid-in
capital
| | | Accumulated
other
comprehensive
income
| | | Retained
earnings
(deficit)
| | | Stockholders’
Equity
(Deficit)
| |
| | | Shares
| | | Amount
| | | | | |
| | | | | | $ | | | $ | | | $ | | | $ | | | $ | |
Balance, June 30, 2002 | | 4,792,158 | | | 201,521 | | | 1,732,060 | | | 67,232 | | | (487,111 | ) | | 1,513,702 | |
Foreign currency translation adjustment | | — | | | — | | | — | | | 409,848 | | | — | | | 409,848 | |
Common stock redeemed | | (400,000 | ) | | (4,000 | ) | | (796,000 | ) | | — | | | — | | | (800,000 | ) |
Common stock issued for cash | | 160,000 | | | 1,600 | | | 998,400 | | | — | | | — | | | 1,000,000 | |
Common stock issued for services | | 14,500 | | | 145 | | | 115,855 | | | — | | | — | | | 116,000 | |
Net income | | — | | | — | | | — | | | — | | | 3,488,520 | | | 3,488,520 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Balance, June 30, 2003 | | 4,566,658 | | | 199,266 | | | 2,050,315 | | | 477,080 | | | 3,001,409 | | | 5,728,070 | |
Foreign currency translation adjustment | | — | | | — | | | — | | | (31,930 | ) | | — | | | (31,930 | ) |
Common stock issued to obtain note payable | | 10,000 | | | 100 | | | 89,900 | | | — | | | — | | | 90,000 | |
Net income | | — | | | — | | | — | | | — | | | 1,598,758 | | | 1,598,758 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Balance, September 30, 2003 | | 4,576,658 | | | 199,366 | | | 2,140,215 | | | 445,150 | | | 4,600,167 | | | 7,384,898 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
13
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(Unaudited)
| | | Note
| | 2003
| | | 2002
| |
| | | | | $ | | | $ | |
NET REVENUE | | | | 18,791,218 | | | 8,179,105 | |
COST OF REVENUE | | | | 12,196,519 | | | 5,399,497 | |
| | | | |
|
| |
|
|
GROSS MARGIN | | | | 6,594,699 | | | 2,779,608 | |
| | | | |
|
| |
|
|
EXPENSES | | | | | | | | |
General and administration | | | | 2,245,139 | | | 689,615 | |
Sales and marketing | | | | 894,304 | | | 989,000 | |
Interest on note payable | | | | 153,465 | | | — | |
Accounts receivable financing | | | | 150,203 | | | 89,575 | |
Common stock issued to obtain note payable | | | | 45,300 | | | — | |
Share of net loss of affiliate | | | | 35,423 | | | — | |
Organizational and start-up costs | | | | 33,024 | | | 58,772 | |
Interest on capital lease obligations | | | | 1,644 | | | 4,916 | |
Interest earned | | | | (19,946 | ) | | — | |
Income from joint marketing agreement | | | | (150,000 | ) | | — | |
Depreciation and amortization | | | | 852,968 | | | 121,840 | |
| | | | |
|
| |
|
|
| | | | | 4,241,524 | | | 1,953,718 | |
| | | | |
|
| |
|
|
INCOME BEFORE INCOME TAX PROVISION | | | | 2,353,175 | | | 825,890 | |
PROVISION FOR INCOME TAXES | | 13 | | 754,417 | | | 181,177 | |
| | | | |
|
| |
|
|
NET INCOME | | | | 1,598,758 | | | 644,713 | |
OTHER COMPREHENSIVE INCOME | | | | | | | | |
Foreign currency translation adjustment | | | | (31,930 | ) | | (51,792 | ) |
| | | | |
|
| |
|
|
COMPREHENSIVE INCOME | | | | 1,566,828 | | | 592,921 | |
| | | | |
|
| |
|
|
BASIC EARNINGS PER SHARE | | | | 0.35 | | | 0.13 | |
| | | | |
|
| |
|
|
DILUTED EARNINGS PER SHARE | | | | 0.27 | | | 0.11 | |
| | | | |
|
| |
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | | 4,574,991 | | | 4,792,158 | |
| | | | |
|
| |
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES—ASSUMING DILUTION | | | | 5,858,991 | | | 6,076,158 | |
| | | | |
|
| |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
14
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(Unaudited)
| | | Note
| | 2003
| | | 2002
| |
| | | | | $ | | | $ | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
Net income | | | | 1,598,758 | | | 644,713 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | |
Deferred income taxes | | | | 811,068 | | | 31,675 | |
Depreciation and amortization | | | | 852,968 | | | 121,840 | |
Share of net loss of affiliate | | | | 35,423 | | | — | |
Common stock issued to obtain note payable | | | | 45,300 | | | — | |
Net changes in assets and liabilities | | 16 | | 985,933 | | | (758,506 | ) |
| | | | |
|
| |
|
|
Net cash provided by operating activities | | | | 4,329,450 | | | 39,722 | |
| | | | |
|
| |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of shares of Contour Telecom | | | | (6,976,891 | ) | | — | |
Foreign exchange difference on purchase of shares of Contour Telecom | | | | 86,651 | | | — | |
Purchase of property and equipment | | | | (1,579,304 | ) | | (237,291 | ) |
Deferred acquisition costs repaid | | | | 1,659,458 | | | — | |
Loan receivable | | | | (90,565 | ) | | — | |
| | | | |
|
| |
|
|
Net cash used in investing activities | | | | (6,900,651 | ) | | (237,291 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Advances from TELUS Communications Inc. | | | | (114,396 | ) | | 490,896 | |
Issuance of note payable | | | | 713,570 | | | — | |
Repayments on note payable | | | | (120,000 | ) | | — | |
Repayments on obligations under capital leases | | | | (768 | ) | | (50,534 | ) |
Repayments of principal portion of note payable | | | | (24,306 | ) | | — | |
| | | | |
|
| |
|
|
Net cash provided by financing activities | | | | 454,100 | | | 440,362 | |
| | | | |
|
| |
|
|
| | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | | | (31,930 | ) | | — | |
| | | | |
|
| |
|
|
| | | |
INCREASE IN CASH AND CASH EQUIVALENTS | | | | (2,149,031 | ) | | 242,793 | |
| | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | | 5,442,538 | | | 582,513 | |
| | | | |
|
| |
|
|
| | | |
CASH AND CASH EQUIVALENTS, END OF YEAR | | | | 3,293,507 | | | 825,306 | |
| | | | |
|
| |
|
|
| | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Interest paid | | | | 155,009 | | | — | |
Taxes paid | | | | 325,059 | | | — | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | |
Issuance of common stock to obtain note payable | | | | 90,000 | | | — | |
Obligation under capital leases incurred in connection with acquisition of equipment | | | | — | | | 31,675 | |
The accompanying notes are an integral part of these consolidated financial statements.
15
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | ORGANIZATION AND BUSINESS |
Yak Communications (USA), Inc. is a switch based reseller specializing in offering dial-around long-distance services to consumers. The Company was incorporated in the State of Florida on December 24, 1998 and operates as a holding company of its wholly-owned subsidiaries in the United States and Canada.
The Company began offering its services to consumers in Canada in July 1999 and in the United States commencing December 2001.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying unaudited consolidated financial statements of Yak Communications (USA), Inc. (“The Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB of Regulations S-B. Accordingly, they do not include all the information, necessary for a comprehensive presentation of financial position and results of operations.
It is management’s opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-KSB for the year ended June 30, 2003.
Principles of consolidation
These consolidated financial statements include the accounts of Yak Communications (USA), Inc. and its wholly-owned subsidiaries—Yak Communications (America), Inc. and Yak Communications (Canada) Inc. and Contour Telecom Inc. (collectively referred to as the “Company”). All intercompany balances and transactions are eliminated upon consolidation.
16
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
Revenue recognition
The Company records revenue using the following recognition policies:
| | (a) | Dial-around services and the resale of long-distance services revenues are recorded at the time of customer usage based upon minutes of use. |
| | (b) | Service revenues are recorded as the related client telecommunications costs, less applicable supplier discounts, are incurred. |
| | (c) | Management fees are recorded on a monthly basis over the term of the management agreement. |
| | (d) | Revenue from the resale of voice and data telecommunications service is recorded at the time the Company is billed by the respective service providers. |
Cost of revenue
Cost of revenue includes network costs that consist of the cost of long-distance services, processing costs, line access and usage costs. These costs are recognized when incurred.
17
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Cost of revenue (cont’d)
Contour Telecom Inc.’s supplier service costs come directly from the telecommunications carriers and are recorded once billed.
Argos Telecom records voice and data telecommunications services costs once billed by the respective telecommunications carriers.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and term deposits with original maturity dates of less than 90 days.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation which is provided over the estimated useful lives of the assets as follows:
| | | | | |
“Next Generation” software | | 9 years straight line | | |
Computer software | | 20% declining balance | | |
Telecom switching systems | | 20% declining balance | | |
Billing, administration and customer service systems | | 20% declining balance | | |
Installed lines | | 20% declining balance | | |
Office furniture and equipment | | 20% declining balance | | |
Leasehold improvements | | over term of the lease | | |
Automobile | | 20% declining balance | | |
Computer equipment | | 20% declining balance | | |
Carrier identification codes loading | | 20% declining balance | | |
18
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Property and equipment (cont’d)
Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity of assets as well as expenditures necessary to place assets into readiness for use. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the systems. Expenditures for maintenance and repairs are expensed as incurred.
The Company periodically evaluates the realizability of its property and equipment. In making such evaluations, the Company compares certain financial indicators such as expected undiscounted future revenues and cash flows to the carrying amount of the assets.
Assets under capital leases are amortized using rates consistent with similar assets.
Joint venture
The Company’s proportionate share of revenues, expenses, assets and liabilities in unincorporated joint venture are consolidated in the Company’s accounts.
Investment in affiliate
The Company records its investment in affiliate under which it exercises significant influence by the equity method. Under this method, an investment is recorded at its original cost and its carrying value is thereafter adjusted to include the Company’s share of the income or loss for each fiscal year of the entity since its acquisition.
Unbilled revenue
Unbilled revenue represents services performed that have not yet been invoiced.
Unearned revenue
Unearned revenue represents advances received and customer deposits for future services.
19
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Cost of Start-up Activities
The Company expenses the cost of start-up activities and organizational costs as incurred in accordance with statement of position 98-5 “Reporting on the Costs of Start-up Activities”.
Advertising and promotion expense
The production costs of commercials and programming are charged to operations in the fiscal year during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the fiscal year incurred. The cost of promotional marketing materials are deferred and expensed as used.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Computation of earnings per common share
Basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options.
20
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Foreign currency translation and foreign assets
In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”), No. 52, “Foreign Currency Translation,” assets and liabilities of the Company’s foreign subsidiary were translated into United States dollars at the exchange rates in effect on the reporting date. Income and expenses are translated at an average exchange rate for the respective period. For the foreign subsidiary which utilizes its local currency as its functional currency, the resulting translation gains and losses are included in other comprehensive income. Gains or losses resulting from foreign exchange transactions are reflected in earnings.
Stock-based compensation
Employee expense under stock options is reported using the intrinsic method. No stock-based compensation cost is reflected in net income applicable to common stockholders, since all options had an exercise price equal to or greater than the market price of the underlying common stock at the date of grant.
In addition to this Stock Option Plan, on December 21, 2000, nonqualified options for 1,284,000 common shares were granted to an individual who is a director and chief executive officer and are exercisable at $1.56 per share on or before December 31, 2003, or upon the sale of the Company. In the event of the chief executive officer's death or termination of employment prior to the exercise of the options and before December 31, 2003, the Company is obligated to purchase the optioned shares at a price equal to the fair market value of the shares less the option price. The purchase consideration of the option shares shall be in stock of the Company.
21
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Stock-based compensation (cont’d)
If compensation cost for the Company’s grants for stock-based compensation had been recorded consistent with the fair value-based method of accounting per SFAS No. 123, the Company’s pro forma net income, and pro forma basic and diluted net income per share for the three months ending September 30, would be as follows:
| | | For the three months ended
|
| | | September 30, 2003
| | September 30, 2002
|
| | | $ | | $ |
Net income as reported | | 1,598,758 | | 644,713 |
Pro forma net income | | 1,598,758 | | 79,753 |
Basic net income per share | | | | |
As reported | | 0.35 | | 0.13 |
Pro forma | | 0.35 | | 0.02 |
Diluted net income per share | | | | |
As reported | | 0.27 | | 0.11 |
Pro forma | | 0.27 | | 0.01 |
Financial instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial instruments for which it is practicable to estimate fair value. For purposes of the disclosure requirements, 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 values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and other current liabilities are reasonable estimates of their fair value due to the short-term maturity of the underlying financial instruments. The carrying value of the capital leases is a reasonable estimate of its fair value based on current rates for equipment obligations.
22
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Financial instruments (cont’d)
The estimated difference between the carrying value and the fair value of the advances from TELUS Communications Inc. in which no interest has been charged is not material.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and accrued liabilities and deferred revenue. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or currency risks arising from these financial instruments. The Company has in place systems to prevent and detect fraud. On occasion, defaults occur on receivables. The Company makes a provision when deemed necessary. As of September 30, 2003 and June 30, 2003, the allowance for doubtful accounts was approximately $490,355 and $15,000, respectively. The Company places its cash and cash equivalents in high quality financial instruments.
New Accounting Pronouncement
In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires that an issuer classify financial instruments that are within scope of SFAS No. 150 as a liability. Under prior guidance, these same instruments would be classified as equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2002. The Company has not yet determined the effect on its consolidated financial position and results of operations.
23
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On July 2, 2003, the Company acquired all of the outstanding shares and debt of Contour Telecom Inc., which included its wholly-owned subsidiary, Argos Telecom Inc. Contour Telecom Inc. is a provider of outsourced telecommunications management services. Argos Telecom Inc., the wholly-owned subsidiary, is a value added reseller of telecommunications services. Consideration for this purchase was $5,572,710 in cash plus costs associated with the transaction of $1,404,181. The goodwill recognized on this transaction is not expected to be deductible for tax purposes. This acquisition was accounted for under the purchase method of accounting, and the operating results of the business are included in the consolidated operating results from the effective date of acquisition. The purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on the exchange rate in effect on July 2, 2003 at their estimated fair values as follows:
| | | $ | |
Current assets | | 5,377,419 | |
Capital assets | | 241,942 | |
Future tax asset | | 3,125,491 | |
Goodwill | | 2,305,959 | |
| | |
|
|
| | | 11,050,811 | |
Liabilities assumed | | (4,073,920 | ) |
| | |
|
|
Net assets acquired | | 6,976,891 | |
| | |
|
|
The purchase price allocation has been prepared on a preliminary basis and reasonable changes may be expected as further information becomes available.
In conjunction with the acquisition on July 2, 2003, management began implementing its plan to restructure operations. The estimated costs of this restructuring plan totalling approximately $887,000 is a result of the reduction of workforce and consolidation of operations and locations.
24
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3. | ACQUISITION COSTS (cont’d) |
The unaudited pro-forma combined historical results, as if Contour Telecom Inc. had been acquired at the beginning of the three months ended September 30, 2002, are estimated to be:
| | | $ |
Net revenue | | 13,406,120 |
Net income (excludes Contour Telecom Inc. non-recurring impairments of $1,297,039) | | 673,681 |
Basic Earnings per share | | 0.14 |
Fully Diluted Earnings per share | | 0.11 |
The pro-forma results are not necessarily indicative of what actually would have accrued if the acquisition had been completed as of the beginning of the period presented.
Effective July 1, 2003, the estimated useful life for existing telecom switching systems has been changed to reflect the expected replacement by the new Switch that was purchased in September, 2003 (see Note 17)
This change in estimate has been applied on a prospective basis and the effect of this change increased amortization for the period by approximately $290,000 and reduced net income for the period by approximately $290,000.
25
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and equipment consist of the following:
| | | | | | | September 30,
2003
| | June 30, 2003
|
| | | Cost
| | Accumulated
depreciation
| | Net book value
|
| | | $ | | $ | | $ | | $ |
Next generation software | | 9,565,170 | | 265,699 | | 9,299,471 | | 9,608,479 |
Telecom switching systems | | 5,154,196 | | 1,879,196 | | 3,275,000 | | 2,462,928 |
Billing, administration and customer service systems | | 1,367,261 | | 501,691 | | 865,570 | | 780,259 |
Installed lines | | 747,521 | | 176,474 | | 571,047 | | 495,593 |
Computer software | | 640,137 | | 393,913 | | 246,224 | | 140,113 |
Office furniture and equipment | | 507,611 | | 319,128 | | 188,483 | | 101,218 |
Carrier identification codes loading | | 247,446 | | 61,496 | | 185,950 | | 195,566 |
Computer equipment | | 1,296,548 | | 1,186,953 | | 109,595 | | — |
Leasehold improvements | | 142,533 | | 64,157 | | 78,376 | | 70,321 |
Automobile | | 6,424 | | 2,899 | | 3,525 | | 3,727 |
| | |
| |
| |
| |
|
| | | 19,674,847 | | 4,851,606 | | 14,823,241 | | 13,858,204 |
| | |
| |
| |
| |
|
Telecom switching systems include assets under capital leases having a net book value of approximately $1,548,000 as of September 30, 2003 and $1,838,000 as of June 30, 2003.
Depreciation expense for equipment under capital leases for the periods ended September 30, 2003 and 2002 was approximately $290,000 and $122,000 respectively.
On June 20, 2003, the Company purchased certain “next generation” telecommunications software from an unrelated third party for $9,500,000. Consideration was cash and a short term note for $965,000 and the balance was a long-term note payable (note 12). This long-term note is collateralized only by the software. On June 24, 2003, the Company entered into a joint marketing agreement with the vendor of the software referred to above for the exploitation of the software outside of Canada by non-customers of the Company. The Company is entitled to receive 4% of all gross revenue with minimum quarterly payments of $150,000 to June 30, 2006 and thereafter 2.75% of gross revenue with minimum quarterly payments of $175,000.
26
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has entered into a commercial services and marketing agreement with a company in Peru to provide up to $400,000 to assist in its development of dial-around long-distance services for which the Company will process its international traffic and earn 50% of the profits generated by the business. At September 30, 2003 and June 30, 2003 the Company had made advances of $558,383 and $392,261 respectively under this agreement, of which $251,490 ($160,925—June 30, 2003) is a loan receivable (see Note 15).
| 7. | INVESTMENT IN AFFILIATE |
On March 28, 2003, the Company purchased 20% of the outstanding shares of Odyssey Management Group, Inc., (“Odyssey”) a corporation of which the Company’s chairman is a shareholder and director, for $500,000. Consideration was cash for $174,290 and a note for $325,710, payable in installments of $36,190 per month commencing April 15, 2003. Repayment of the note was accelerated. The balance outstanding at September 30, 2003 and June 30, 2003 was $nil and $110,817 respectively and is included in accounts payable.
The Company has the option until March 28, 2005, to purchase up to an additional 31% of the outstanding shares of Odyssey Management Group, Inc. at their fair market.
| | | September 30,
2003
| | | June 30,
2003
| |
| | | $ | | | $ | |
Shares at cost | | 470,905 | | | 500,000 | |
Share of net loss of affiliate | | (35,423 | ) | | (29,095 | ) |
| | |
|
| |
|
|
| | | 435,482 | | | 470,905 | |
| | |
|
| |
|
|
Odyssey is in the development stage providing real time data transfer for electronic money cards and currently operates in the State of Florida. Odyssey was recently requested to become a registered “money transmitter” in the State of Florida. Odyssey has submitted its application and is waiting for regulatory approval which management based on advice of counsel expects to be received sometime in the calendar year 2003. Any failure to obtain this registration may impair the Company's investment in Odyssey.
27
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amounts due to factor are secured by a pledge of the Company’s accounts receivable. The Company has an agreement to sell an undivided interest in certain accounts receivable with recourse to a Factor. Payments are collected by the Factor from the sold accounts receivable; the collections are reinvested by the Factor in new accounts receivable of the Company, and a yield, as defined in the agreement is transferred to the Factor. As at September 30, 2003, the amount sold under the agreement, expiring February 2004, that had not been collected was approximately $6,003,000 (June 30, 2003—$6,177,000) which will be forwarded to the Company once collected after repayment of the Factor's advances.
| 9. | SHORT-TERM NOTES PAYABLE |
| | | September 30,
2003
| | June 30,
2003
|
| | | $ | | $ |
Non-interest bearing, repayable in monthly payments of $40,000. | | 280,000 | | 400,000 |
Note payable repayable on December 31, 2003. The Company issued 10,000 common shares to obtain the note payable | | 713,570 | | — |
| | |
| |
|
| | | 993,570 | | 400,000 |
| | |
| |
|
| 10. | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus) |
Telus provides the Company with marketing credits to a total maximum value of $3,250,000. The marketing credits are calculated as 25% of the value of monthly billed revenue to the Company by Telus in the preceding month to a maximum of $270,000 per month.
The Company is restricted to spend this amount on advertising and promotional activities within sixty days of the credits being advanced to the Company.
28
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 10. | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus) (cont’d) |
Repayment of the marketing credits commenced September 15, 2003 and is ending February 15, 2005. Repayments are by way of paying an additional $0.005/minute, at a minimum of $100,686 per month. The repayments are non-interest bearing as long as no payments are in default, and are classified as follows:
| | | September 30,
2003
| | June 30,
2003
|
| | | $ | | $ |
Current | | 1,231,285 | | 1,030,716 |
Long-term | | 1,270,305 | | 1,585,270 |
| | |
| |
|
| | | 2,501,590 | | 2,615,986 |
| | |
| |
|
| 11. | OBLIGATIONS UNDER CAPITAL LEASES |
The Company’s capital leases are for terms of 24 to 36 months at annual interest rates ranging from 9.25% to 15.00%.
The future minimum lease payments required under the capital lease agreements are as follows:
| | | $ |
Year ending September 30, 2004 | | 17,561 |
Year ending September 30, 2005 | | 13,171 |
| | |
|
Total minimum lease payments | | 30,732 |
Amounts representing interest | | 3,885 |
| | |
|
Principal | | 26,847 |
Current portion | | 11,639 |
| | |
|
| | | 15,208 |
| | |
|
29
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The note payable for the purchase of the “next generation” telecommunications software referred to in Note 5 bears interest at 7.25% per annum and interest and principal are payable quarterly in the amount of $174,965 commencing September 30, 2003 and is due July 15, 2012. The sole recourse by the lender is the software referred to in Note 5.
Principal payments due in each of the next five years are as follows:
| | | $ |
Year ending 2004 | | 101,586 |
2005 | | 108,951 |
2006 | | 116,849 |
2007 | | 125,321 |
2008 | | 134,407 |
Thereafter | | 7,923,580 |
| | |
|
| | | 8,510,694 |
| | |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax liabilities relate to the difference between the depreciation used for Canadian tax purposes and financial reporting purposes.
The provision for income taxes for the three months ended September 30, 2003 includes $754,417 (2002—$32,010) which represents the deferred income tax portion of the provision.
As of September 30, 2003, the Company has net operating loss carryforwards for income tax purposes of $4,564,085, which may provide future income tax benefits expiring between 2006 and 2009.
As of September 30, 2003, the Company’s wholly-owned subsidiary, Contour Telecom Inc., has net operating loss carryforwards for income tax purposes of $563,126, which may provide future tax benefits expiring between 2007 and 2010.
30
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
100,000,000 shares authorized, no par value, stated value $0.01 per share.
On March 3, 2003, 400,000 common shares were redeemed by the Company for $800,000.
On June 17, 2003, 120,000 common shares were issued for $750,000.
On June 30, 2003, 40,000 common shares were issued for $250,000.
On June 30, 2003, 14,500 common shares were issued for services rendered of $116,000.
On July 15, 2003, 10,000 common shares were issued to obtain a loan in the amount of $713,570 due December 31, 2003 (see Note 9).
Included in the consolidated financial statements are the Company's proportionate share of revenues, expenses, assets and liabilities of the unincorporated joint venture as follows:
| | | September 30,
2003
| | | June 30
2003
| |
| | | $ | | | $ | |
Assets | | | | | | |
Prepaid expenses | | 15,854 | | | — | |
Property and equipment | | 116,804 | | | 95,679 | |
| | |
|
| |
|
|
| | |
| | | 132,658 | | | 95,679 | |
| | |
|
| |
|
|
Liabilities | | | | | | |
Accounts payable | | 16,398 | | | 53,349 | |
Due to Yak Communications (USA), Inc. | | 251,490 | | | 160,925 | |
| | |
|
| |
|
|
| | |
| | | 267,888 | | | 214,274 | |
| | |
Deficit | | (135,230 | ) | | (118,595 | ) |
| | |
|
| |
|
|
| | |
Total liabilities and deficit | | 132,658 | | | 95,679 | |
| | |
|
| |
|
|
31
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 15. | JOINT VENTURE (cont’d) |
| | | September 30,
2003
| | | September 30,
2002
| |
| | | $ | | | $ | |
Revenue | | — | | | — | |
| | |
Expenses | | 16,635 | | | 118,595 | |
| | |
|
| |
|
|
| | |
Net loss | | (16,635 | ) | | (118,595 | ) |
| | |
|
| |
|
|
| | |
Cash used in operating activities | | (54,432 | ) | | (65,246 | ) |
| | |
Cash used in investing activities | | (21,125 | ) | | (95,679 | ) |
| | |
Cash provided by financing activities | | 75,557 | | | 160,925 | |
| | |
|
| |
|
|
| | |
Cash, beginning of year | | — | | | — | |
| | |
|
| |
|
|
| | |
Cash, end of year | | — | | | — | |
| | |
|
| |
|
|
| 16. | STATEMENT OF CASH FLOWS |
The following recap presents the detail of the net change in assets and liabilities presented in the statement of cash flows for the three months ended September 30, 2003 and 2002:
| | | $ | | | $ | |
Decrease (increase) in: | | | | | | |
Accounts receivable | | (4,170,801 | ) | | (756,751 | ) |
Unbilled revenue | | (377,847 | ) | | — | |
Prepaid expenses and sundry | | (244,107 | ) | | 12,635 | |
Income taxes recoverable | | — | | | — | |
Deposits | | — | | | 2,296 | |
Increase (decrease) in: | | | | | | |
Deferred revenue | | 974,061 | | | — | |
Accounts payable and accrued liabilities | | 402,251 | | | 25,909 | |
Amounts due for network access and usage | | 1,018,408 | | | 3,857 | |
Amounts due to long distance carriers | | 2,023,320 | | | 47,739 | |
Amount due for equipment | | 428,929 | | | (12,845 | ) |
Due to Factor | | (2,614 | ) | | (228,952 | ) |
Income taxes payable | | (351,706 | ) | | 147,606 | |
Less: Net assets acquired from Contour | | 1,286,039 | | | — | |
| | |
|
| |
|
|
| | | 985,933 | | | (758,506 | ) |
| | |
|
| |
|
|
32
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 16. | STATEMENT OF CASH FLOWS (cont’d) |
The following is the breakdown of amounts included in the purchase of Contour cash outflow:
| | | $ |
Future tax asset | | 3,090,427 |
Goodwill | | 2,275,073 |
Capital assets | | 238,701 |
Current assets net of liabilities | | 1,286,039 |
| | |
|
| |
Purchase price net of currency translation adjustment | | 6,890,240 |
Currency translation adjustment | | 86,651 |
| | |
|
| |
Purchase price | | 6,976,891 |
| | |
|
The Company has operating lease commitments for its premises and commitments for leased lines which expire at various dates through July 2009. The future minimum lease payments (exclusive of operating costs and payments for additional volume) are as follows:
| | | $ |
2004 | | 3,295,400 |
2005 | | 3,321,873 |
2006 | | 3,265,174 |
2007 | | 3,265,174 |
2008 | | 3,265,174 |
Under the terms of an agreement with one of their long distance providers, Contour Telecom Inc. and Argos Telecom Inc. are committed to purchasing a minimum amount of long distance for their customers use. The minimum amount of customer use is $1,842,308 for the year ending September 30, 2004 and $1,454,453 for the year ending September 30, 2005.
33
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 11, 2003, the Company entered into an agreement to acquire a new telecommunications switch for approximately $2,000,000 of which $450,000 was paid in cash and the balance financed over a period of 60 months. Management intends to bring the switch into use at the end of second quarter.
Effective June 30, 1999, the Company adopted a Stock Option Plan (the “Plan”) which permits the issuance of stock options to selected employees and directors. The Company reserved 640,000 shares of common stock for grant under the Plan. Options granted may be either nonqualified or incentive stock options and will expire no later than 20 years from the date of grant (10 years for incentive options). No options have been issued under this plan.
34
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 19. | RELATED PARTY TRANSACTIONS |
| | (a) | The Company purchased property and equipment of $nil and $12,000 for the periods ended September 30, 2003 and 2002 from a corporation of which the Company’s chairman is a shareholder and director, and made advances for the periods ending September 30, 2003 and 2002 of $2,490 and $nil respectively. |
| | (b) | The Company paid marketing and design fees for the periods ending September 30, 2003 and 2002 of $15,618 and $20,945 respectively to a corporation controlled by an officer and shareholder. |
| | (c) | The Company paid professional fees for legal services for the periods ending September 30, 2003 and 2002 of $20,442 and $11,642 respectively to a director and minority shareholder. |
| | (d) | The Company paid consulting fees for the periods ended September 30, 2003 and 2002 of $nil and $75,000 respectively to a shareholder for the development of international operations in Peru. This shareholder is a Director of the Company in Peru with which the Company has a commercial service and marketing agreement. |
| | (e) | The Company paid a management fee for the periods ended September 30, 2003 and 2002 of $nil and $75,000 respectively to a Corporation controlled by the Company’s chairman. |
These transactions have all been accounted for at their exchange amounts.
The Company is dependent in Ontario, Quebec, British Columbia and Alberta upon carriers to provide billing and collection services to its customers under renewable agreements. The Company is also dependent upon TELUS Communications Inc. to provide billing, transport and handling services under a renewable agreement which expires in June 2004. Management expects that these agreements will automatically renew.
35
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 21. | SEGMENTED AND RELATED INFORMATION |
The Company operates in one reportable segment in three geographic regions—Canada, United States and International. Summary information with respect to the Company's operations by geographic regions are as follows:
| | | For the three months ended
| |
| | | September 30, 2003
| | | September 30, 2002
| |
| | | $ | | | $ | |
Net revenue | | | | | | |
Canada | | 18,560,890 | | | 7,876,123 | |
United States | | 230,328 | | | 302,982 | |
Peru | | — | | | — | |
| | |
|
| |
|
|
| | | 18,791,218 | | | 8,179,105 | |
| | |
|
| |
|
|
Operating profit (loss) | | | | | | |
Canada | | 2,693,416 | | | 1,481,891 | |
United States | | (301,422 | ) | | (656,001 | ) |
Peru | | (38,819 | ) | | — | |
| | |
|
| |
|
|
| | | 2,353,175 | | | 825,890 | |
| | |
|
| |
|
|
| | | September 30, 2003
| | | June 30, 2003
| |
| | |
| | | $ | | | $ | |
Assets | | | | | | |
Canada | | 34,866,443 | | | 30,237,617 | |
United States | | 1,322,097 | | | 1,251,705 | |
Peru | | 141,039 | | | 95,679 | |
| | |
|
| |
|
|
| | | 36,329,579 | | | 31,585,001 | |
| | |
|
| |
|
|
The Canadian assets include goodwill of $2,275,073.
36
YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Various lawsuits and claims are pending against the Company and estimated provisions have been included in current liabilities where appropriate. It is the opinion of management that the final determination of these claims will not have a material adverse effect on the financial position or the results of the Company.
37
Exhibit Index
Exhibit No.
| | Description
|
| |
| 31 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Principal Financial Officer. |
| |
| 32 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
