UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDEDSeptember 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number:000-30695
ARVANA INC.
(Exact name of small business issuer as specified in its charter)
NEVADA | 87-0618509 |
(State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
organization) |
2610-1066 West Hastings St., Vancouver, British Columbia, Canada V6E 3X2
(Address of principal executive offices)
604-684-4691
(Issuer's telephone number)
Not Applicable
(Former name, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the
latest practicable date. 21,766,500 shares of Common Stock as of November 14, 2006
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I
Item 1. Financial Statements
The following unaudited consolidated interim financial statements of Arvana Inc. are included in this Quarterly Report on Form 10-QSB:
- 2 -
ARVANA INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2006
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
ASSETS | |||
Current | |||
Cash and cash equivalents | $ | 290,523 | |
Receivables (net of allowance) | 1,242,622 | ||
Amounts due from related parties (Note 7) | 46,498 | ||
1,579,643 | |||
Long-term | |||
Deferred income tax asset, | |||
net of valuation allowance of $1,182,110 | 2,617 | ||
Property and equipment (Note 6) | 686,142 | ||
Subscriber accounts (Note 5) | 2,779,853 | ||
$ | 5,048,255 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||
Current | |||
Accounts payable and accrued liabilities | $ | 2,469,321 | |
Note payable | 319,850 | ||
Amounts due to related parties (Note 7) | 187,951 | ||
2,977,122 | |||
Commitments (Note 10) | |||
Stockholders' equity | |||
Common stock (Note 8) | |||
100,000,000 common shares authorized at $0.001 par value; | |||
17,641,500 common shares issued and outstanding | 17,642 | ||
Additional paid-in capital | 20,197,612 | ||
Shares to be issued | 731,400 | ||
Deficit | (95,331 | ) | |
Deficit accumulated during the development stage | (18,777,622 | ) | |
Accumulated other comprehensive loss | (2,568 | ) | |
2,071,133 | |||
$ | 5,048,255 |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Cumulative amounts | |||||||||||||||
from the beginning of the | |||||||||||||||
For the three months ended | For the nine months ended | development stage on | |||||||||||||
September 30, | September 30, | January 1, 2005 to | |||||||||||||
2006 | 2005 | 2006 | 2005 | September 30, 2006 | |||||||||||
Sales | $ | 751,223 | $ | - | $ | 751,223 | $ | - | $ | 751,223 | |||||
Cost of sales | (647,792 | ) | - | (647,792 | ) | - | (647,792 | ) | |||||||
Gross profit | 103,431 | - | 103,431 | - | 103,431 | ||||||||||
Operating expenses | |||||||||||||||
Selling and promotion | 37,886 | - | 37,886 | - | 37,886 | ||||||||||
General and administrative | 306,921 | 315,965 | 836,240 | 408,041 | 1,796,815 | ||||||||||
Research and development | 40,384 | 15,834 | 117,886 | 15,834 | 170,720 | ||||||||||
Depreciation | 5,818 | 35 | 5,968 | 35 | 6,168 | ||||||||||
Operating loss | 287,578 | 331,834 | 894,549 | 423,910 | 1,908,158 | ||||||||||
Other items | |||||||||||||||
Stock-based compensation (Note 8) | - | 1,869,944 | 1,424,000 | 7,569,944 | 9,656,540 | ||||||||||
Loss on acquisition of Arvana Networks (Note 3) | - | 7,013,310 | - | 7,013,310 | 7,013,310 | ||||||||||
Loss on acquisition of Arvana Com (Note 4) | - | 233,149 | - | 233,149 | 233,149 | ||||||||||
Other income | (30,645 | ) | - | (30,645 | ) | - | (30,645 | ) | |||||||
Net loss before income taxes | (256,933 | ) | (9,448,237 | ) | (2,287,904 | ) | (15,240,313 | ) | (18,780,512 | ) | |||||
Income taxes | 2,890 | - | 2,890 | - | 2,890 | ||||||||||
Net loss of the period | $ | (254,043 | ) | $ | (9,448,237 | ) | $ | (2,285,014 | ) | $ | (15,240,313 | ) | $ | (18,777,622 | ) |
Other comprehensive income (loss) | (2,568 | ) | 1,545 | (2,568 | ) | 1,545 | (2,568 | ) | |||||||
Comprehensive loss for the period | $ | (256,611 | ) | $ | (9,446,692 | ) | $ | (2,287,582 | ) | $ | (15,238,768 | ) | $ | (18,780,190 | ) |
Loss per share - basic and diluted | $ | (0.02 | ) | $ | (0.86 | ) | $ | (0.16 | ) | $ | (1.66 | ) | |||
Weighted average number of common shares outstanding | 15,440,400 | 10,976,870 | 14,413,500 | 9,173,681 |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Cumulative amounts | |||||||||
from the beginning of the | |||||||||
For the nine months ended | development stage on | ||||||||
September 30, | January 1, 2005 to | ||||||||
2006 | 2005 | September 30, 2006 | |||||||
Cash flows from operating activities | |||||||||
Net loss for the period | $ | (2,285,014 | ) | $ | (15,240,313 | ) | $ | (18,777,622 | ) |
Adjustments to reconcile net loss for the period to net cash | |||||||||
used in operating activities | |||||||||
Depreciation and amortization | (5,968 | ) | 35 | (5,768 | ) | ||||
Stock-based compensation | 1,424,000 | 7,569,944 | 9,656,540 | ||||||
Loss on acquisition of Arvana Networks | - | 7,013,310 | 7,013,310 | ||||||
Loss on acquisition of Arvana Comunicacoes | - | 233,149 | 233,149 | ||||||
Gain on disposal of equipment | 19,409 | - | 19,409 | ||||||
Deferred income taxes | (2,890 | ) | - | (2,890 | ) | ||||
Increase in receivables | (292,511 | ) | (5,175 | ) | (264,817 | ) | |||
Increase(decrease) in payables and accrued liabilities | 324,888 | 176,135 | 454,497 | ||||||
Net cash used in operations | (818,086 | ) | (252,915 | ) | (1,674,192 | ) | |||
Cash flows from investing activities | |||||||||
Acquisition of equipment | (100,295 | ) | (15,605 | ) | (139,312 | ) | |||
Cash portion of Investment in BCH Beheer / Hallotel | (639,700 | ) | - | (639,700 | ) | ||||
Cash of BCH Beheer / Hallotel on acquisition date | 105,659 | - | 105,659 | ||||||
Cash of Arvana Networks on acquisition date | - | 33,154 | 5,800 | ||||||
Cash of Arvana Comunicacoes on acquisition date | - | - | 62,465 | ||||||
Net cash provided by (used in) investing activities | (634,336 | ) | 17,549 | (605,088 | ) | ||||
Cash flows from financing activities | |||||||||
Amounts due to (from) related parties | 167,339 | (250,629 | ) | (293,121 | ) | ||||
Contribution to capital | - | 900 | 900 | ||||||
Stock subscriptions received | 731,400 | 200,000 | 731,400 | ||||||
Proceeds from issuance of common stock | - | 1,626,000 | 2,121,250 | ||||||
Net cash provided by financing activities | 898,739 | 1,576,271 | 2,560,429 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 8,142 | (2,262 | ) | 8,142 | |||||
Increase in cash and cash equivalents | (545,541 | ) | 1,338,643 | 289,291 | |||||
Cash and cash equivalents, beginning of period | 836,064 | 1,232 | 1,232 | ||||||
Cash and cash equivalents, end of period | $ | 290,523 | $ | 1,339,875 | $ | 290,523 | |||
Supplementary information | |||||||||
Interest paid | $ | 318 | $ | - | $ | 318 | |||
Taxes Paid | (118 | ) | - | (118 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
1. Nature of Business and Ability to Continue as a Going Concern
Arvana Inc., (the ‘Company’) (formerly Turinco, Inc.) is a development stage company incorporated under the laws of the State of Nevada on September 16, 1977, with authorized common stock of 2,500 shares with a par value of $0.25. On October 16, 1998, the authorized capital stock was increased to 100,000,000 shares with a par value of $0.001. On July 24, 2006, the shareholders approved a change of the Company’s name from Turinco, Inc. to Arvana Inc.
In 1998, the Company completed a common stock split of eight shares for each outstanding share. In 2005, the Company completed another common stock split of nine shares for each outstanding share. These consolidated financial statements have been prepared showing after stock split shares with a par value of $0.001.
The Company was inactive from 1982 until 2005, during which time the Company was in the process of seeking profitable business opportunities. In 2005, the Company was introduced to the emerging technology of Voice over Internet Protocol (VoIP) telephone services. Since then, the Company has been engaged in the exploration and development of the business plan for the provision of VoIP telephone services, and is actively engaged in implementing the digital technology of the VoIP solutions in market areas that present business opportunities.
Management identified a communications company in Germany that is presently in the carrier pre-select and wholesale carrier business carrying traffic to Turkey. On August 23, 2006, Arvana Inc. acquired this company through BCH Beheer and its wholly-owned subsidiary Hallotel Deutschland GmbH. The Company plans on expanding this business including VoIP and calling card services. The Company had planned on developing its VoIP business through its wholly-owned subsidiary Arvana Networks Inc. (‘Arvana Networks’), a company incorporated in Barbados, which wholly owns Arvana Participações (‘Arvana Par’) a company incorporated in Brazil. This business was planned to be carried out by Arvana Comunicações do Brasil S. A. (“Arvana Com”), a Brazilian company intended to be 75% owned by Arvana Par and 25% owned by Gloinfo 500 Soluções EM Telemática Ltda. (“Gloinfo”). Gloinfo was planned to be our local associate in Brazil. This business did not develop in accord with our plan or expectations and we decided to withdraw from the telecommunications market in Brazil. We have since agreed with Gloinfo to terminate our agreement, to acquire 100% ownership of Arvana Com.
These consolidated interim financial statements for the nine-month period ended September 30, 2006, include the accounts of the Company, its subsidiary Arvana Networks (including its wholly-owned subsidiary Arvana Par , Arvana Comunicações do Brasil S. A. (“Arvana Com”) and BCH Beheer (and its wholly-owned subsidiary Hallotel Deutschland GmbH) . These financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. At September 30, 2006, the Company has an accumulated deficit during the development stage of $18,777,622. To date, the Company has generated no revenue from its VoIP business but now has revenues through the acquisition of Hallotel and its carrier preselect and wholesale carrier business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might arise from this uncertainty.
The continuation of the Company is dependent upon achieving a profitable level of operations as well as obtaining further long-term financing. During 2005, the Company completed private placements of its common stock raising $2,340,000 ($2,121,250 net of issuance costs) in cash for working capital purposes. To September 30, 2006, the Company has received advances on private placements in the amounts of
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
$731,400 for use in the acquisition of BCH Beheer and Hallotel as well as working capital purposes. As of September 30, 2006, it had $290,523 to fund its operational costs and the remaining commitment for the acquisition. Management plans to raise up to $3,000,000 in additional equity capital over the next twelve months to finance the commitments regarding the acquisition of BCH Beheer, its operations and capital requirements of the Company for the remainder of 2006 and for 2007. While the Company is expending its efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for operations.
2. Summary of Significant Accounting Policies
a) Basis of presentation
The Company is currently in the development stage and presents its financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”. The Company’s fiscal year end is December 31. The accompanying consolidated interim financial statements of Arvana Inc. for the nine-month periods ended September 30, 2006 and 2005, and for the cumulative amounts from the beginning of the development stage on January 1, 2005, through September 30, 2006, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements. Although they are unaudited, in the opinion of management, they include all adjustments, consisting only of normal recurring items, necessary for a fair presentation. Results are not necessarily indicative of results which may be achieved in the future.
Included in the financial statements are the accounts of the Company, its wholly-owned subsidiaries Arvana Networks, Arvana Par, Arvana Com, BCH Beheer and Hallotel. All significant inter-company transactions and balances have been eliminated.
b)Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
c)Foreign currency translation and transactions
Arvana Inc.’s functional currency is the United States dollar.
The Company uses the temporal method when translating the Brazilian subsidiary operations. Long-term assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate in effect on the transaction date. Revenue and expenses are translated at the average rates of exchange prevailing during the periods. The cumulative effects of these translation adjustments were included in administration expenses as they were insignificant.
The Company uses the current rate method when translating the German subsidiary operations. All assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate in effect on the balance sheet date. Revenue and expenses are translated at the average rates of exchange prevailing during the periods. The cumulative effects of these translation adjustments are presented as a component of comprehensive income.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
Transactions conducted in currencies other than the respective functional currency of the Company are recorded using the exchange rate in effect on the transaction date. At the period end, monetary assets and liabilities are translated to the functional currency of each entity using the exchange rate in effect at the period end date. Transaction gains and losses are recorded in foreign exchange gain or loss in administration expenses as they were insignificant.
The exchange rate prevailing at September 30, 2006, was 2.166, stated in the Brazilian Real per one US dollar. The average exchange rate during the nine-month period ended September 30, 2006, was 2.17 stated in the Brazilian Real per one US dollar. For the Euro, the exchange rate prevailing at September 30, 2006, was 1.2687 per one US dollar. The average exchange rate from the BCH Beheer acquisition date of August 23, 2006 to September 30, 2006, was 1.2749 stated in the Euro per one US dollar.
d)Revenue recognition
The Company records revenues upon the completion of the services and where collectability is reasonably assured.
e)Comprehensive income
The Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and presentation of comprehensive income, its components and accumulated balances.
f)Cash equivalents
The Company considers all highly liquid investments, with terms to maturity of three months or less when acquired, to be cash equivalents.
g)Property and equipment:
Property and equipment is stated at cost less accumulated depreciation and is depreciated on a straight line basis, commencing when the assets are put into use over the estimated useful lives of the assets as follows:
Machinery & equipment | 10 years |
Office equipment | 3 – 5 years |
Computer hardware | 5 years |
Software | 1 – 4 years |
In accordance with SFAS 144,Accounting for Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of long-lived assets for impairment whenever events and circumstances indicate that the carrying value of the assets might be impaired and the carrying value may not be recoverable. Recoverability of these assets is measured by comparison of the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets over the remaining economic life. If the undiscounted cash flows are not sufficient to recover the carrying value of such assets, the assets are considered impaired. The impairment loss is measured by comparing the fair value of the assets to their carrying values. Fair value is determined by either a quoted market price or a value determined by a discounted cash flow technique, whichever is more appropriate under the circumstances involved. No impairment was required to be recorded during the periods presented in these consolidated financial statements.
h)Financial instruments
Financial instruments of the Company are comprised of cash and cash equivalents, receivables, accounts payable and accrued liabilities, and amounts due to and from related parties. The estimated fair values of financial instruments were considered by management to be not materially different from their carrying values due to their short term to maturity or capacity for prompt liquidation.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
i)Concentration of credit risk
Financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash equivalents, trade accounts receivable and investment securities. Trade accounts receivable in our operation in Germany consists of amounts from the carrier preselect customers and amounts from the wholesale carrier customers. The receivable from the carrier preselect customers is distributed among many customers. The receivable from the wholesale customers is considered a credit risk however with some customers, traffic is traded therefore the risk is mitigated by the accounts payable to those customers. The Company maintains cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
j)Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company also records a corresponding asset which is amortized over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost). The Company does not have any asset retirement obligations for the periods presented.
k)Income taxes
Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
l)Stock-based compensation
The Company accounts for all stock-based payments to employees and non-employees using the fair value based method. Under the fair value method, stock-based payments are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date. The Company granted stock options in June 2006 and accordingly recorded an expense of $1,424,000 in the second period. There were no options granted or outstanding for the nine-month period ended September 30, 2005.
m)Net loss per share
Basic loss per share is computed using the weighted average number of common shares outstanding during the year. Diluted loss per share is computed using the weighted average number of common shares and potentially dilutive common stock equivalents, including stock options and warrants. As of September 30, 2005, there were no potentially dilutive instruments. As of September 30, 2006, the Company had 1,600,000 of potentially dilutive instruments that were excluded from the determination of dilutive loss per share.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
3. Arvana Networks Transaction
On August 18, 2005, Arvana Inc. (“Arvana”) completed a transaction with Arvana Networks whereby 100% of the 4,500,000 shares (1,500,000 shares which are described below) of Arvana Networks were exchanged for an equal number of shares in Arvana Inc. Arvana Networks’ business activities to date have been directed towards the development of a technology platform and billing system that would allow us to implement in multiple markets, developing business plans and searching out appropriate local partners in order to launch VoIP telephone services.
Arvana Networks has an agreement with IP Horizon LLC (“IPH”), whereby IPH was issued 1,500,000 shares in exchange for a commitment to deliver equipment, software and network hardware for the initial launching of VoIP service in Brazil. IPH will also provide termination services to Arvana Networks, at its cost plus an administration fee not to exceed 13 percent. These shares are not considered issued for accounting purposes because the Company had not yet received the assets to be acquired in connection with this transaction. As both Arvana and Arvana Networks are development stage companies, the share exchange transaction was outside the scope of Statement of Financial Accounting Standard No. 141, “Business Combination”. Consequently, the transaction was recorded at the fair value of the 3.0 million Arvana’s common shares issued for the transaction based on the quoted market price of the Company’s common stock on the date of the agreement of $2.28 per share. This agreed upon consideration paid for the transaction was calculated based on the fair value of the assets recorded on Arvana Networks financial statements at the time of the transaction and on the compensation expenses given to management of Arvana Networks for pre-operating services provided to Arvana Networks and to retain their services. As such, the purchase price of the transaction was allocated among the $5,800 in cash and $131,747 in other assets acquired and $310,857 in liabilities assumed based on the fair value and the excess of purchase price over fair value of assets acquired and liabilities assumed was recorded in 2005 as compensation expense paid of $7,013,310 to the management of Arvana Networks at the time of the transaction.
4. Arvana Comunicações Transaction
On October 6, 2005, the Company, through its wholly-owned subsidiaries, completed the first closing of an investment agreement with Gloinfo 500 Soluções EM Telemática Ltda. (“Gloinfo”) and Paulo Messina (described below) for the acquisition of Arvana Comunicações.
Arvana Com was incorporated in January 2005. In March 2005, the Company’s subsidiary Arvana Networks signed a letter of intent to acquire Arvana Com. The Company had supplied Arvana Com a non-interest bearing, no repayment term loan to be used for the pre-operating costs of the business. Arvana Com would not be able to operate without this loan and this capital was therefore at risk. Accordingly, the Company was considered the beneficiary of Arvana Com (because it absorbed the expected risk and residual gain of Arvana Com), and Arvana Com was treated as a Variable Interest Entity up until October 6, 2005. Upon completion of the first closing, the Company acquired 75% of Arvana Com’s shares, at no additional cost, and it is now considered a majority owned subsidiary for accounting purposes.
Similarly to the transaction between the Company and Arvana Networks, the share exchange transaction was scoped out of Statement of Financial Accounting Standard No. 141, “Business Combination”. Consequently, the transaction was recorded at the fair value of the net assets acquired of Arvana Com on the date of the agreement. The purchase price of the transaction has been allocated among the $62,465 in cash, $78,258 of equipment, $8,482 of receivables, and $382,354 in liabilities assumed based on their respective fair values. Accordingly, $233,149, being the excess of purchase price over fair value of assets acquired and liabilities assumed was recorded in 2005 as the loss on acquisition of Arvana Com.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
In 2006, management entered into negotiations with the principals of Gloinfo with the intention of terminating the Investment Agreement by mutual agreement. We have completed these negotiations and on October 31, 2006 have signed a definitive agreement with Gloinfo pursuant to which the Investment Agreement is terminated. The main terms of the termination of the Investment Agreement that have been agreed to by Gloinfo are as follows:
(a) | The terms of the Investment Agreement will be cancelled and Gloinfo will transfer its 25% ownership to Arvana Par. |
(b) | The customers that were to be transferred to Arvana Com following the final closing will remain with Gloinfo. |
(c) | The employees that were to be transferred following the final closing will remain with Gloinfo. |
(d) | Employees that were hired into the project were terminated and the termination costs were shared 75% by Arvana Com and 25% by Gloinfo. |
(e) | Arvana Com will obtain the “Televoz” branding and the website associated with this product from Gloinfo. |
(f) | Arvana Com will retain ownership and operating control of the technology platform currently used by Gloinfo to service their customers. Gloinfo will purchase and install a new technology platform prior to February 28, 2007. |
5. BCH Beheer and Hallotel Deutschland GmbH transaction
On August 9, 2006, Arvana Inc. (the “Company”), Brulex – Consultadoria Economica E Marketing Ltda. (the “Vendor”) and Hallotel Deutschland GmbH (“Hallotel”) entered into a share purchase agreement (the “Share Purchase Agreement”) pursuant to which the Company acquired control over Hallotel through the acquisition (the “Acquisition”) of all of the outstanding shares of BCH Beheer B.V., a wholly-owned subsidiary of the Vendor that owns all of the outstanding shares of Hallotel. The purchase price for the Acquisition was paid by way of:
(i) | the issue of 3,541,700 shares of common stock of the Company, valued at $0.40 per share; |
(ii) | the payment of €500,000 ($639,700) in cash; and |
(iii) | the issuance of a promissory note in the principal amount of €250,000 ($319,850), provided that the promissory note will not be payable and will be deemed cancelled if certain information as set out in the Share Purchase Agreement to be delivered by the Vendor to the Purchaser within 30 days of the closing of the Acquisition relating to certain assets is not delivered or, if delivered, does not materially conform with information provided to the Company as of the date of the Share Purchase Agreement. |
Pursuant to the Share Purchase Agreement, the purchase price was increased by:
(i) | a payable to the Vendor in the amount of €80,932 ($103,544) for the price actually paid by Hallotel for any telephone technology hardware or software assets acquired after October 19, 2005 |
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
and before the closing date of the Acquisition that are required for the provision of established Hallotel services to its customers; and | |
(ii) | a payable to the Vendor in the amount of €277,630 ($355,200) for commissions paid by Hallotel to its salespersons in respect of carrier pre-select sign-ups on net new customers after October 19, 2005 and before the closing date of the Acquisition, as provided in the Share Purchase Agreement. |
Prior to the acquistion date, Arvana had paid $26,941 for acquistion related expenses and this amount was included in the purchase price. A transaction fee was paid by issuing 208,300 additional shares of common stock of the Company, valued at $0.40 per share.
The Vendor has agreed that it will not sell or transfer any of the Company’s shares issued as part of the consideration for the Acquisition (or any interest therein) until one year after the closing date of the Acquisition. In addition, the Vendor has agreed to deposit such Company shares in escrow with the Company to be released from escrow twelve months after the closing date, except in the event of a claim made by the Company under the Share Purchase Agreement, in which case such Company shares will be released on a final resolution of the claim.
The purchase price of the transaction, with a deemed value of $2,945,235 was allocated as to $105,659 in cash, $1,478,020 in other assets acquired, $1,418,297 and, $2,779,853 to the value of monthly subscribers held by Hallotel at the time of the acquisition. Equipment valued at $494,346 and software valued at $8,875 were held by Hallotel on the acquisition date.
Hallotel is a communications service provider offering carrier pre-select and wholesale carrier services and focused on the provision of long distance telephone calls between Germany, Austria, Switzerland and Turkey
6. Property and Equipment
Accumulated | Net | ||||||||
Cost | Amortization | Book Value | |||||||
Equipment | $ | 539,438 | $ | 5,889 | $ | 533,549 | |||
Computer hardware | 61,117 | - | 61,117 | ||||||
Software | 91,755 | 279 | 91,476 | ||||||
$ | 692,310 | $ | 6,168 | $ | 686,142 |
The Company has not taken amortization on equipment if utilization of the equipment has not yet begun. The net carrying amount of equipment not being amortized was $187,586 as of September 30, 2006.
7. Related Parties
At September 30, 2006, the Company was owed $27,850 from a company with a director in common. The loan bears no interest and has no specific terms of repayment. We have a corresponding payable to a previous director which relates to start-up operations in Brazil.
The Company was owed $18,648 from an officer of the company.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
At September 30, 2006, the Company owed $140,150 to three directors for services rendered during the year. This amount is to be paid part in cash and part in stock at a future date with the number of common shares determined by the fair value of the shares on the settlement date. The amounts owing bear no interest.
For the nine-month period ended September 30, 2006, $88,807 was incurred by the Company for services rendered by the President, and the Corporate Secretary of Arvana Inc. As of September 30, 2006, $44,288 was owed to these individuals.
The Company owed $3,513 to an officer of the company.
The amount of imputed interest would not be material. Therefore, it was not recorded in the period.
8. Share Capital
(a) During the quarter ended September 30, 2006, the Company issued 3,541,700 shares for part of the consideration for the purchase of BCH Beheer and its wholly-owned subsidiary Hallotel Deutschland GmbH. The Company also issued 208,300 shares as a finders fee for the same transaction.
(b) The Company follows SFAS No. 123R, “Accounting for Stock-Based Compensation,” in accounting for stock-based employee compensation plans and transactions in which an entity issued its equity instruments to acquire goods or services from non-employees. Where the fair value of equity instruments issued in connection with the provision of goods or services or the issuance of share capital is more reliably measurable than the fair value of the consideration received, the transaction is accounted for based on the fair value of the equity instruments issued and the difference between the fair value and recorded value of the transaction is recorded as stock-based compensation expense.
(c) On June 5, 2006, the Company granted 1,600,000 stock options to its directors and employees. Each option is exercisable into one common share until December 31, 2009 at an exercise price of $1.25. The options were valued at $1,424,000 using the Black-Scholes model.
9. Segmented Information
The Company has one reportable segment, being the development of the VoIP telephone services. This reportable segment was determined based on the nature of the products offered. Of the total property and equipment, $1,078 is located in Canada, $43,589 is located in Brazil and $641,475 is located in Germany.
10. Subsequent Events
On July 26, 2006, the Company received an advance on a private placement of its common shares in the amount of 500,000 Euros ($631,400). This amount was required in order to complete the first closing of a transaction to acquire BCH Beheer and Hallotel. In August and September, the Company received two cash payments of $50,000, for a total of $100,000, in advance of private common share placements. On October 31, 2006, this private placement was closed and the board of directors approved the issuance of 2,625,000 shares for $0.40 per share for gross proceeds of $1,050,000.
On October 31, 2006, the Company signed a definitive agreement with Gloinfo pursuant to which the Investment Agreement is terminated.
ARVANA INC. |
(A development stage company) |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Nine Months Ended September 30, 2006 and 2005 |
(expressed in US dollars) |
(Unaudited) |
11. Commitments
The Company has the following commitments:
1. | Software platform lease of €1,238 ($1,571) per month until September 15, 2009. | |
2. | Vehicle lease of €1,100 ($1,396) per month until March 15, 2009. | |
3. | Vehicle lease of €1,620 ($2,055) per month until April 1, 2010. | |
4. | Office lease of €1,490 ($1,890) per month until February 1, 2007. |
Item 2. Management’s Discussion and Analysis or Plan of Operations
In this Quarterly Report:
(i) | references to “we”, “us”, “our”, or the “Company” refer to Arvana Inc. (formerly, Turinco Inc.) and our wholly-owned subsidiaries, namely: | |
• | BCH Beheer B.V. (“BCH Beheer”), which wholly owns Hallotel Deutschland GmbH (“Hallotel”), our German based operating subsidiary; and | |
• | Arvana Networks Inc. which wholly owns Arvana Participações (“Arvana Par”), a company that holds our 75% interest in Arvana Comunicações do Brazil S.A. (“Arvana Com”); and | |
(ii) | all dollar amounts are expressed in United States dollars, unless otherwise indicated. |
You should read the following discussion and analysis of our financial condition, results of operations and plan of operations together with the interim consolidated financial statements and notes to the interim consolidated financial statements included in this Quarterly Report, as well as our most recent annual report Form 10-KSB for the year ended December 31, 2005, our subsequently filed quarterly reports on Form 10-QSB and current reports on Form 8-K.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. You can often identify forward-looking statements by terminology such as “may”, “will”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “goal”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks and uncertainties, including the risks and uncertainties set forth in reports and other documents we have filed with or furnished to the SEC, including, without limitation, our annual report on Form 10-KSB for the year ended December 31, 2005, any of which may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, we do not undertake to update any of the forward-looking statements to conform these statements to actual results.
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Overview
We are engaged in the telecommunications industry through our Hallotel and Arvana Networks subsidiaries. Hallotel is a German based telecommunications service provider that is focused on the provision of long distance telephone calls between Germany, Austria, Switzerland and Turkey. Hallotel has been in operations since August 2000 and was acquired by us on August 23, 2006. Arvana Networks plans to provide voice over the internet (VOIP) telephone technology services and has been in the start-up phase of its operations since March 2005. Our business plan is to develop Arvana Networks as a provider of Internet services dedicated to serving our subsidiaries and customers with complete turnkey IP telephone solutions which enable fast deployment of voice services over existing data networks.
Arvana Networks and Internet Telephony Business
In each country that we target in our internet telephony business, we intend to build our own network of Internet access points, called “POP’s”, which will enable users to access the network through a local call. Once established, these networks will bypass the existing phone carrier’s trunk lines and will enable us to complete calls at our own highly competitive rates. To minimize time to market, we plan to partner with local companies in targeted markets who we believe will enable us to assemble all the required components of the service.
We intend to generate revenues in our Internet telephony business through three main types of service using our proposed networks:
1. | Inexpensive call handling for both outbound and inbound calls. |
2. | Monthly subscriptions to our voice service offering a further significant reduction in telephony costs. We anticipate that our primary focus will be on residential users who are likely to call frequently between countries and the corporate market where long distance and international calls are frequent, and thus where the savings and call features we offer are of the greatest value. |
3. | Long distance/international calling cards for both the corporate and consumer markets. |
Our plan is to link all of the above services using an underlying Arvana network infrastructure. Our network infrastructure is planned to be comprised of a series of access gateways located in major cities and regions involving several countries. Each gateway is planned to incorporate sufficient phone lines to handle the peak number of calls in each respective area, enabling anyone to gain access to the Arvana network for the cost of a local call. We plan to offer a calling card system that will use our network infrastructure to provide local access for long distance and international calls.
We plan to enable corporate subscribers to use their analog/digital gateway to route long distance calls from their existing PBX to the Arvana service, while local calls remain routed to the local carrier.
A primary source of revenue is expected to be of the provision of long distance and international calling services to residential customers that are likely to call frequently between countries, and to business enterprises which have several national or international offices, or have a need to communicate with their employees, major customers, and suppliers remotely. Our Arvana service will provide for the origination and termination of calls on the public switched network (PSTN), enabling an Arvana user to call any other phone user in the world at competitive rates and will also permit each subscriber to call another subscriber anywhere on an unlimited time basis at no incremental cost. We plan to bill customers through a monthly subscription which we anticipate will include a base bundle of minutes and a core set of call features, such as caller identification and voicemail.
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We plan to complement the above Arvana services by providing long distance/international telephone calling cards which are prepaid and provide access to our digital network locally from any landline phone, cell phone or payphone. Arvana expects to provide businesses with branded calling cards for promotions as well as corporate cards for employees who travel, enabling them to minimize the cost of long distance calling.
IP Horizon LLC is Arvana’s technology and termination partner and a significant shareholder. IP Horizon is controlled by Draper Holdings Business Trust. IP Horizon has expertise in carrier-class digital telephony systems, provides comprehensive management/billing software, a high capacity calling card management system and contributed hardware and software to Arvana. IP Horizon is also able to provide competitive international call termination rates.
Acquisition of BCH Beheer and Hallotel
On August 9, 2006, we entered into a share purchase agreement with Brulex – Consultadoria Economica E Marketing Ltda. (“Brulex”) and Hallotel whereby we agreed to acquire Hallotel through the acquisition of all of the outstanding shares of BCH Beheer from Brulex. We completed this transaction on August 23, 2006 and we paid to Brulex the following consideration for the purchase:
the issuance of 3,541,700 shares of our common stock;
the payment of 500,000 Euros in cash (equivalent to $639,700 based on an exchange rate of $1.00 per 0.78 Euros); and
the issuance of a promissory note in the amount of 250,000 Euros (equivalent to $[319,850] based on an exchange rate of $1.00 per 0.78 Euros).
Business of Hallotel
Hallotel, a company based in Frankfurt, Germany, was organized under the laws of Germany in August, 2000 and is a telecommunications service provider focused on the provision of long distance telephone calls between Germany, Austria, Switzerland and Turkey. Hallotel’s switching facilities and agreements with the incumbent carriers enable its customers to call between cities within Germany and to international destinations. Hallotel’s marketing efforts and rate structures are designed to be attractive to those customers that are likely to call frequently between countries and specifically between Germany, Russia and Turkey. As an example, Hallotel focuses on generating revenues by marketing to members of the Turkish community living in Germany who make frequent calls to their families and friends in Turkey.
The services provided by Hallotel are comprised primarily of the following:
Carrier Pre-Select:
Carrier Pre-Select (CPS) is a service that allows the customer to route their outgoing calls using Hallotel’s network. There is no installation or programming of equipment required and the customer does not have to dial a code to activate the service. CPS gives the customer access to competitive call rates because Hallotel is free to negotiate wholesale deals with different network providers and to make use of cost effective VoIP technology and the Internet whenever appropriate.
Call By Call Pre-Select:
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Call by call pre-select service is provided in essentially the same manner as CPS described above, except that the customer does not need to authorize the change of long distance access to one of Hallotel’s carrier partners. Call by call pre-select allows the customer to choose Hallotel’s long distance service and benefit from competitive rates at any time and for any particular call and the customer can choose on a call by call basis. The customer initially establishes an account with Hallotel and may then make long distance calls at any time by using a pre-select code ahead of all routing and called-party numbers.
Wholesale Carrier Services:
Hallotel has established agreements with certain other telecommunications service providers whereby Hallotel will accept long distance telephone traffic from these wholesale carriers and provide terminations in Germany and Turkey.
Calling Cards:
Hallotel is in the process of producing calling cards to be distributed to a network of resellers in Austria and Germany. A calling card user can call a toll free number to make long distance calls to destinations throughout the world. Hallotel markets these cards with promotional offers and calling rates that are particularly attractive for those customers that call Turkey frequently and who are looking for reliability, quality and competitive pricing. All such calling cards are prepaid.
Arvana in Brazil
In August 2005, we completed a transaction whereby we acquired all of the issued and outstanding shares of Arvana Networks Inc. (“Arvana Networks”). Arvana Networks is a company incorporated in Barbados that wholly owns Arvana Participações, a company incorporated in Brazil (“Arvana Par”). Arvana Par’s business activities to date have been directed towards development of an Internet telephone services business to be located in Rio de Janeiro, Sao Paulo and other major cities in Brazil. Later in 2005, we entered into an investment agreement with a local associate for the development of Internet telephone services in Brazil. This business was planned to be carried out by Arvana Comunicações do Brasil S. A. (“Arvana Com”), a Brazilian company intended to be 75% owned by Arvana Par and 25% owned by Gloinfo 500 Soluções EM Telemática Ltda. (“Gloinfo”). Gloinfo was planned to be our local associate in Brazil.
This business did not develop in accord with our plan or expectations and we decided to withdraw from the telecommunications market in Brazil. We have since terminated our agreement with Gloinfo, as discussed below.
In October 2005, Arvana Com applied for a SCM (Serviço de Comunicação Multimídia) license from ANATEL (Agência Nacional de Telecomunicações), the Brazilian government regulatory authority that is responsible for regulating telecommunications activities in Brazil. ANATEL approved the SCM license during 2006 but with the requirement for the Company to submit a technical implementation plan. In accordance with the Company’s decision to withdraw from business activities in Brazil, the SCM license was declined by Arvana Com and the license application process was terminated.
Based on our experience and our analysis of the highly competitive market and the adverse regulatory and tax environment in Brazil, we have decided to end our activities in Brazil for the foreseeable future.
Termination of the Investment Agreement in Brazil
We, Arvana Networks and Arvana Par entered into an investment agreement dated October 6, 2005 (the “Investment Agreement”) with Gloinfo and Paulo Messina, an unrelated party. Arvana Par is a wholly
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owned subsidiary of Arvana Networks. Gloinfo is a Brazilian limited company that is controlled by Mr. Messina.
The Investment Agreement provided for subscription for the capital stock of Arvana Com by each of Arvana Par and Gloinfo. Arvana Com is a Brazilian corporation that was formed to carry out a VOIP business in Brazil as a jointly owned venture between Arvana Par and Gloinfo. As a result of the initial closing under the Investment Agreement on October 6, 2005, Arvana Par owned 75% of Arvana Com and Gloinfo owned 25%.
During the first quarter of fiscal 2006, our management entered into negotiations with the principals of Gloinfo with the intention of terminating the Investment Agreement by mutual agreement. We have completed these negotiations and on October 31, 2006 signed a definitive agreement with Gloinfo pursuant to which the Investment Agreement has been terminated. The main terms of the termination of the Investment Agreement that have been agreed to by Gloinfo are as follows:
(a) | The terms of the Investment Agreement will be cancelled and Gloinfo will transfer its 25% ownership to Arvana Par. |
(b) | The customers that were to be transferred to Arvana Com following the final closing will remain with Gloinfo. |
(c) | The employees that were to be transferred following the final closing will remain with Gloinfo. |
(d) | Employees that were hired into the project were terminated and the termination costs were shared 75% by Arvana Com and 25% by Gloinfo. |
(e) | Arvana Com will obtain the “Televoz” branding and the website associated with this product from Gloinfo. |
(f) | Arvana Com will retain ownership and operating control of the technology platform currently used by Gloinfo to service their customers. Gloinfo will purchase and install a new technology platform prior to February 28, 2007. |
Plan of Operations
Our present plan of operation for the next twelve months is to focus on continuing and expanding the business of Hallotel. Since completion of the acquisition of Hallotel, we have been working with the management of Hallotel in order to develop and define our plan of operations for Hallotel. This process will include the preparation of an annual budget for fiscal 2007 that will be presented to our board of directors for their evaluation and approval
We anticipate that this plan of operations may include the following objectives, subject to our achieving additional financing:
- Arvana Networks plans to complete a current research and development program which is anticipated to include advancements in our SIP-based Internet Telephony Service Provider (ITSP) call platform c/w VOIP Gateways and SS7 signalling translation; a Dedicated Calling Card Platform; a Billing System for the ITSP platform (includes signup, customer bill presentment, and real-time call authorization and balance tracking); and an associated Accounting System into which data is fed from the Calling Card Platform, the Billing System, and other subsystems. These research and development activities will involve Arvana Networks’ technical staff centered in Annapolis, Maryland, working together with the technical staff of Hallotel in Germany.
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We plan to investigate other opportunities for establishing connections with other countries such as Pakistan, the United Arab Emirates etc.
Hallotel will continue to maintain its carrier pre-select business as it is successful. We do not anticipate large growth in this area. The focus will be on an offering of DSL (Digital Subscriber Line) and VOIP.
Hallotel has installed a SIP platform along with the billing system in order to provide VOIP service. We are working on setting the parameters, tariffs and criteria for this service. The VOIP product is expected to be bundled with a DSL service, the provision of which will provided by a third party. Management expects to market this service throughout Germany and Western Europe using the same channels of call centres and agents that it uses for its carrier pre-select business.
As discussed further below, we are presently not able to achieve our plan of operations without additional financing. Our board of directors will also consider how to allocate any new financing that we achieve between our plan of operations for Arvana Networks and expansion of the Hallotel business. The evaluation may result in a determination to significantly scale back our plan of operations for Arvana Networks and our Internet telephony business.
We anticipate spending approximately $3,000,000 to $4,000,000 to proceed with our plan of operations over the next twelve months. We had cash in the amount of $290,523 and a working capital deficit of $1,397,479 as of September 30, 2006. This deficit includes the balance payable for the BCH Beheer transaction. Based on our planned expenditures, we will require a minimum of $3,000,000 in additional financing. Also, we anticipate that we will require additional financing in order to pursue development of partnerships and opportunities in Internet telephony that are over and above our plans for Europe and other countries.
If we achieve less than the full amount of financing that we require, we will scale back our development and expansion plans based on our available financial resources.
We believe that debt financing will not be an alternative for funding additional phases of our business development as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide investors with firm assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our plan of operations.
Additional Acquisitions and New Business Opportunities
We plan to consider and evaluate prospective acquisitions and new business opportunities in the Internet telephony businesses which would offer us the ability to deploy Internet telephone solutions and develop and expand our customer base and business. We anticipate that our determination to pursue any prospective acquisitions or new business opportunities will be contingent upon our achieving additional financing, of which there is no assurance.
Presentation of Financial Information
Our financial statements included the consolidated accounts of our subsidiaries, namely Hallotel, BCH Beheer, Arvana Networks, Arvana Par and Arvana Com.
We completed the acquisition of Hallotel effective August 23, 2006. Our statements of operations and statements of cash flows include the consolidation of BCH Beheer, the holding company for Hallotel, and
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Hallotel effective as of August 23, 2006. Our results of operations presented below for periods prior to August 23, 2006 do not include the results of operations of BCH Beheer or Hallotel.
Results of Operations
Our results of operations for the nine month periods ended September 30, 2006 and 2005 are summarized below. We commenced with our plans to enter into the Internet telephony business in March 2005. As a result, we had limited operating results in the first nine months of 2005. The following table provides a summary of our financial results for the periods indicated:
Three months ended September 30, 2006 | Three months ended September 30, 2005 | Nine months ended September 30, 2006 | Nine months ended September 30, 2005 | Cumulative Amounts from the beginning of the development stage on January 1, 2005 to September 30, 2006 | |
Sales | $751,223 | $Nil | $751,223 | $Nil | $751,223 |
Cost of Sales | $(647,792) | $Nil | $(647,792) | $Nil | $(647,792) |
Gross Profit | $103,431 | $Nil | $103,431 | $Nil | $103,431 |
Selling and promotion | $37,886 | $Nil | $37,886 | $Nil | $37,886 |
Administration | $306,921 | $315,965 | $836,240 | $408,041 | $1,796,815 |
Research and Development | $40,384 | $15,834 | 117,886 | $15,834 | $170,720 |
Depreciation | $5,818 | $35 | $5,968 | $35 | $6,168 |
Stock Based Compensation | $Nil | $1,869,944 | $1,424,000 | $7,569,944 | $9,656,540 |
Loss on acquisition of Arvana Networks and Arvana Com | $Nil | $7,246,459 | $Nil | $7,246,459 | $7,246,459 |
Other Income and Expenses | $30,645 | $Nil | $30,645 | $Nil | $30,645 |
Net Loss for the Period | $2,285,014 | $9,448,237 | $2,285,014 | $15,240,313 | $18,777,622 |
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Revenues and Cost of Sales
With the acquisition of Hallotel on August 23, 2006, we are now in a position to report revenues to the end of the third quarter of 2006. Revenues for the 38 day period were $751,223 and gross profit for the same 38 day period was $103,431. Hallotel receives revenues from its carrier and call by call pre-select customers as well as its wholesale carrier business. At present there are more than 16,000 carrier preselect customers. Cost of sales represents the cost of terminations for the both the pre-select and wholesale carrier business. Cost of sales was $647,792 for the 38 day period or 86% of revenues.
Sales and promotion
Selling and promotional costs were $37,886 and relates to activity in Hallotel for the 38 day period from the acquisition on August 23, 2006. This relates mostly to commissions paid to agents and call centres.
Administration Expenses
During the three-month period ended September 30, 2006, we had administration expenses of $306,921 compared with $315,965 for the same three-month period in 2005. The costs in both quarters were for costs associated with the management, directors fees, legal fees, and consulting services.
Administration expenses for the nine-month period ended September 30 2006, were $836,240 compared to $408,041 for the same period last year. Administration expenses in the nine months ended September 30, 2005 were for investigation and analysis of the Brazilian proposal and operations and were not significant at the beginning of the year. For the nine-month period ended September 30, 2006, these expenses related to directors fees, legal, audit, consulting fees, travel expenses, office services and rent.
Research and Development/Technical Operations
Our research and development expenses and technical operations expenses were attributable to the costs of our chief technology officer and our network architect. These individuals are responsible for specifying and overseeing the implementation and management of our technology and hardware platform.
For the three-month period ending September 30, 2006, research and development expenses were $40,384 and $15,834 for the same three-month period in 2005. Our chief technology officer did not start with us until mid 2005.
Research and development expenses for the nine months ended September 30, 2006 were $117,886 and were $15,834 for the same period last year. Again, our chief technology officer started with us in mid 2005 and the network architect was employed part time until December 2005. His full salary is reflected in the 2006 results.
Stock-based Compensation
On June 5, 2006, our board of directors approved a 2006 Stock Option plan and granted options to various members of our company and certain subsidiaries. The options granted vest over a three-year period and have an exercise price of $1.25. As a result, we recorded a stock based compensation expense for the nine month period ended in September 30, 2006 in the amount of $1,424,000. There were no options granted or stock compensation expense recorded in the third quarter.
We recorded stock compensation expense in the amount of $8,232,540 during fiscal 2005. This stock compensation expense reflects the value of shares issued to that date by us by means of certain private placements at a lower than quoted market price at the time of closing. The difference between the trading price and the cash proceeds has been included in stock-based compensation. Of this amount, $752,400
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was attributable to the issue of 330,000 shares as finders’ fees relating to the Arvana Networks transaction and the introduction to IP Horizons LLC. The balance of the stock compensation expense was attributable to private placements completed by us.
Loss on the acquisition of Arvana Networks
The loss on the acquisition of Arvana Networks expense of $7,013,310, recorded in fiscal 2005, was attributable to the excess of the purchase price over the fair market value of the assets acquired and liabilities assumed. Assets acquired included $5,800 in cash and $131,747 in other assets acquired and liabilities in the amount of $310,857.
Loss on acquisition of Arvana Comunicações
The loss on the acquisition of Arvana Comunicações recorded in fiscal 2005 in the amount of $233,149 was a result of the development costs of our VOIP project in Brazil. This amount represents legal, accounting, consulting and other start-up fees.
Other Income and expenses
We recorded $30,645 in other income for the three and nine-month periods ended September 30, 2006. The other income was a prior period adjustment in Hallotel.
Net Loss for the Period
We incurred a net loss of $254,043 or $0.02 per share for the three-month period ended September 30, 2006 versus a loss of $9,448,237 or $0.86 per share for the same three-month period of fiscal 2005. We incurred a net loss of $2,285,014 or $0.16 per share for the first nine months of fiscal 2006 compared to a loss of $15,240,313 or $1.66 per share for same nine-month period of fiscal 2005. The decline in our losses during fiscal 2006 compared to fiscal 2005 were due to the acquisition costs of Arvana Networks and Arvana Com and stock-based compensation expense that were recorded in fiscal 2005.
Liquidity and Capital Resources
As of September 30, 2006, we had cash of $290,523 and a working capital deficit of $1,397,479. This compares to cash of $836,064 and working capital of $584,626 as of December 31, 2005. The decrease in cash and working capital is a result of expenditures during the nine months of fiscal 2006, as discussed above. We require additional financing in order to carry out our business objectives. Our working capital deficit includes the balance payable for the BCH Beheer transaction.
Plan of Operations
We estimate that our total expenditures over the next twelve months will be at least $3,000,000, as discussed above under the heading “Plan of Operations”, which amount includes projected administration costs. We anticipate that we will require a minimum of approximately $3,000,000 in additional financing to proceed with our plan of operations over the next twelve months. In addition, we anticipate that we will require additional financing in order to pursue the acquisition of any opportunities in the VOIP business beyond the specific opportunities that are outlined above. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on the development of our business opportunities and our administrative expenses in order to be within the amount of capital resources that are available to us.
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Cash Used in Operating Activities
We used cash in operations in the amount of $818,016 during the first nine months of 2006 and $252,915 during the same nine month period in 2005. Cash used in operations was attributable primarily to administration, legal, audit and research and development expenses incurred with the commencement of our business of the development of VOIP telephone services.
Cash Used in Investing Activities
We acquired software in the amount of $100,295 during the first nine months of fiscal 2006. In 2005 for this same period, there were no investing activities. In the first quarter of 2006, we purchased software that allows customers to access VOIP service through their computers and in the second quarter, we purchased a billing system and control software package. In the third quarter, we purchased additional software for the SIP platform.
Cash used in investing activities during the first nine months of fiscal 2006 totalled $634,336 and included $639,700 advanced in connection with our acquisition of BCH Beheer and Hallotel.
Cash Flows from Financing Activities
During the quarter and for the nine-month period ended September 30, 2006, we received proceeds of $731,400 in advance of a private placement that we completed in October 2006. We reclassified a related party loan in the amount of $31,678 during first quarter of fiscal 2006 due to a person who is no longer a shareholder in Arvana Comunicações. This amount is now classified in accounts payable. In the second quarter, we increased our payables due to related parties as we have limited funds and are accruing amounts due to some employees, directors and contractors.
During the first nine months of 2005, we completed private placements of our stock for proceeds of $1,626,000, received stock subscriptions of $200,000 in advance of a private placement and repaid $250,629 to related parties.
Going Concern
We have not attained profitable operations and we are dependent upon obtaining financing to purse our plan of operations. As a result, our auditors have expressed substantial doubt about our Company’s ability to continue as a going concern in their report relating to our audited consolidated financial statements contained in our annual report on Form 10-KSB for the year ended December 31, 2005.
Future Financings
We anticipate continuing to rely on equity sales of our shares of common stock in order to continue to fund our business operations and pursue our plan of operations. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our plan of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
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Development Stage Company
We are presently in the development stage of our business. With the acquisition of Hallotel in August, we are now reporting revenues however we require substantial additional financing in order to continue with our plan of operations. Our ability to continue as a going concern is dependent upon our ability to obtain additional financing.
Critical Accounting Policies
Basis of Presentation
We are currently in the development stage and present our financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”.
Foreign currency translation and transactions
Our functional currency is the United States dollar.
The Company uses the temporal method when translating the Brazilian subsidiary operations. Long-term assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate in effect on the transaction date. Revenue and expenses are translated at the average rates of exchange prevailing during the periods. The cumulative effects of these translation adjustments were included in administration expenses as they were insignificant.
The Company uses the current rate method when translating the German subsidiary operations. All assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate in effect on the balance sheet date. Revenue and expenses are translated at the average rates of exchange prevailing during the periods. The cumulative effects of these translation adjustments are presented as a component of comprehensive income.
Transactions conducted in currencies other than the respective functional currency of the Company are recorded using the exchange rate in effect on the transaction date. At the period end, monetary assets and liabilities are translated to the functional currency of each entity using the exchange rate in effect at the period end date. Transaction gains and losses are recorded in the foreign exchange gain or loss in administration expenses as they were insignificant.
Stock Compensation Expense
Where the fair value of equity instruments issued in connection with the provision of goods or services or the issuance of share capital is more reliably measurable than the fair value of the consideration received, the transaction is accounted for based on the fair value of the equity instruments issued and the difference between the fair value and recorded value of the transaction is recorded as stock-based compensation expense.
Item 3. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2006, being the date of our most recently completed quarter. This evaluation was carried out under the supervision and with the participation of our Chief Executive
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Officer, Mr. Michael Jervis, and our Chief Financial Officer, Mr. Leonard Gordon. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission (the “SEC”).
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the fiscal quarter ended September 30, 2006, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting during the quarter ended September 30, 2006.
The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(a) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; |
(b) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and |
(c) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements. |
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PART II
Item 1. Legal Proceedings.
We currently are not a party to any material legal proceedings and to our knowledge, no such proceedings are threatened or contemplated.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the terms and conditions of the share purchase agreement for the acquisition of BCH Beheer and Hallotel, we issued 3,541,700 shares of our common stock to Brulex–Consultadoria Economica E Marketing Ltda. (“Brulex”) on August 23, 2006. These shares were issued as part of the consideration for the acquisition in reliance on Rule 903 of Regulation S under the Securities Act of 1933, as amended (the “Act”) on the basis that Brulex is not a “U.S. person” and the sale of the shares was completed in an “offshore transaction”, each within the meaning of Regulation S. These shares have not been registered under the Act and may not be offered or sold in the United States absent such registration or exemption therefrom.
Subsequent to September 30, 2006, we completed a private placement with three investors of 2,625,000 shares of our common stock at a price of US$0.40 per share for total proceeds of US$1,050,000 on October 31, 2006. A commission of US$73,500 was paid in connection with the private placement transaction. We completed the offering of the shares pursuant to Rule 903 of Regulation S of the Act on the basis that the sale of the shares was completed in an “offshore transaction”, as defined in Rule 902(h) of Regulation S. We did not engage in any directed selling efforts, as defined in Regulation S, in the United States in connection with the sale of the shares. Each investor represented to us that the investor was not a U.S. person, as defined in Regulation S, and was not acquiring the shares for the account or benefit of a U.S. person. The subscription agreement executed between us and the investor included statements that the securities had not been registered pursuant to the Act and that the securities may not be offered or sold in the United States unless the securities are registered under the Act or pursuant to an exemption from the Act. The investor agreed by execution of the subscription agreement for the shares: (i) to resell the securities purchased only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an exemption from registration under the Act; (ii) that we are required to refuse to register any sale of the securities purchased unless the transfer is in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an exemption from registration under the Act; and (iii) not to engage in hedging transactions with regards to the securities purchased unless in compliance with the Act. All securities issued were endorsed with a restrictive legend confirming that the securities had been issued pursuant to Regulation S of the Act and could not be resold without registration under the Act or an applicable exemption from the registration requirements of the Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the three month period ended September 30, 2006.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are included with this Quarterly Report on Form 10-QSB:
Exhibit Number | Description of Exhibit |
3.1 | Articles of Incorporation(1) |
3.2 | Bylaws, as amended(1) |
10.1 | Agreement and Plan of Reorganization between the Company, Arvana Networks, Inc. and the Shareholders of Arvana Networks, Inc. dated August 18, 2005(2) |
10.2 | Investment Agreement dated October 6, 2006 between the Company, Arvana Networks, Inc., Arvana Participações S.A., Gloinfo 500 Soluções EM Telemática Ltda. and Paulo Messina(3) |
10.3 | Amendment to Investment Agreement signed October 6, 2005 and dated October 4, 2005 between the Company, Arvana Networks, Inc., Arvana Participações S.A., Gloinfo 500 Soluções EM Telemática Ltda. and Paulo Messina(3) |
10.4 | Share Purchase Agreement dated August 9, 2006 among Brulex-Consultadoria Economica E Marketing Ltda, Turinco Inc. and Hallotel Deutschland GmbH(5) |
10.5 | Termination Agreement between Arvana Inc., Gloinfo 500 Soluções EM Telemática Ltda., Paulo Santos Messina and Lucia Sangiacomo Messina, Arvana Participações S.A., Arvana Comunicações do Brasil S. A. and Arvana Networks Inc. dated October 31, 2006.(6) |
14.1 | Code of Ethics(4) |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act (7) |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (7) |
32.1 | |
32.2 |
(1) | Previously filed with the SEC as an exhibit to the Company’s registration statement on Form 10- SB filed with the SEC on May 24, 2000. |
(2) | Previously filed with the SEC as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 19, 2005. |
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(3) | Previously filed with the SEC as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on December 14, 2005. |
(4) | Previously filed with the SEC as an exhibit to the Company’s Annual Report on Form 10-KSB filed with the SEC on March 31, 2006. |
(5) | Previously filed with the SEC as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2006. |
(6) | Previously filed with the SEC as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2006. |
(7) | Filed as an exhibit to this Quarterly Report on Form 10-QSB. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARVANA INC. | ||
By: | /s/ Michael Jervis | |
Michael Jervis, President and Chief Executive Officer | ||
Date: | November 14, 2006 |