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 endedMarch 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 organization) | (IRS Employer Identification No.) |
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]
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest
practicable date:20,702,375 shares of Common Stock as of March 10, 2007
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:
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ARVANA INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
(Audited) | ||||||
March 31, | December 31, | |||||
2007 | 2006 | |||||
ASSETS | ||||||
Current | ||||||
Cash and cash equivalents | $ | 440,664 | $ | 233,452 | ||
Receivables (net of allowance of $18,170, December 31, 2006 $32,355) | 1,735,998 | 1,676,177 | ||||
2,176,662 | 1,909,629 | |||||
Long-term | ||||||
Property and equipment (Note 3) | 679,157 | 730,686 | ||||
Subscriber accounts | 2,605,499 | 2,605,499 | ||||
$ | 5,461,318 | $ | 5,245,814 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current | ||||||
Accounts payable and accrued liabilities | $ | 3,050,115 | $ | 3,018,784 | ||
Note payable | 329,815 | 329,815 | ||||
Amounts due to related parties (Note 4) | 88,973 | 47,551 | ||||
Loan Payable | 200,595 | - | ||||
3,669,498 | 3,396,150 | |||||
Long-term | ||||||
Deferred income taxes | 55,782 | 59,159 | ||||
3,725,280 | 3,455,309 | |||||
Commitments (Note 7) | ||||||
Stockholders' equity | ||||||
Common stock (Note 5) | ||||||
100,000,000 common shares authorized at $0.001 par value; | ||||||
20,702,375 common shares issued and outstanding (December 31, 2006 - 20,718,375) | 20,703 | 20,719 | ||||
Additional paid-in capital | 20,623,801 | 20,160,185 | ||||
Deficit | (18,850,993 | ) | (18,330,869 | ) | ||
Accumulated other comprehensive loss | (57,473 | ) | (59,530 | ) | ||
1,736,038 | 1,790,505 | |||||
$ | 5,461,318 | $ | 5,245,814 |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
For the three months ended | ||||||
March 31, | ||||||
2007 | 2006 | |||||
Sales | $ | 1,716,220 | $ | - | ||
Cost of sales | (1,294,987 | ) | - | |||
Gross profit | 421,233 | - | ||||
Operating expenses | ||||||
Selling and promotion | (4,864 | ) | - | |||
General and administrative | (398,819 | ) | (312,015 | ) | ||
Research and development | - | (38,751 | ) | |||
Depreciation | (50,763 | ) | (75 | ) | ||
Operating loss | (33,213 | ) | (350,841 | ) | ||
Other items | ||||||
Stock-based compensation (Note 5) | (463,600 | ) | - | |||
Loss on write-off of equipment | (10,059 | ) | - | |||
Other income | 38,961 | - | ||||
Net loss before income taxes | (467,911 | ) | (350,841 | ) | ||
Income taxes | (52,213 | ) | - | |||
Net loss for the period | $ | (520,124 | ) | $ | (350,841 | ) |
Other comprehensive gain | 2,057 | - | ||||
Comprehensive loss for the period | $ | (518,067 | ) | $ | (350,841 | ) |
Loss per share - basic and diluted | $ | (0.03 | ) | $ | (0.03 | ) |
Weighted average number of common shares outstanding | 20,705,219 | 13,891,500 |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
For the three months ended | ||||||
March 31, | ||||||
2007 | 2006 | |||||
Cash flows from operating activities | ||||||
Net loss for the period | $ | (520,124 | ) | $ | (350,841 | ) |
Items not involving cash: | ||||||
Depreciation and amortization | 50,763 | 75 | ||||
Stock-based compensation | 463,600 | - | ||||
Loss on write-off of equipment | 10,059 | - | ||||
Deferred income taxes | (3,377 | ) | - | |||
Changes in non-cash working capital: | ||||||
Receivables | (59,821 | ) | (122,394 | ) | ||
Accounts payable and accrued liabilities | 118,255 | (26,481 | ) | |||
Amounts received from (repaid to) related parties | (45,593 | ) | 31,678 | |||
Net cash provided by (used in) operations | 13,762 | (467,963 | ) | |||
Cash flows from investing activities | ||||||
Acquisition of equipment | (9,293 | ) | (28,000 | ) | ||
Net cash used in investing activities | (9,293 | ) | (28,000 | ) | ||
Cash flows from financing activities | ||||||
Proceeds of loan payable | 200,595 | - | ||||
Net cash provided by financing activities | 200,595 | - | ||||
Effect of exchange rate changes on cash and cash equivalents | 2,148 | - | ||||
Increase (decrease) in cash and cash equivalents | 207,212 | (495,963 | ) | |||
Cash and cash equivalents, beginning of period | 233,452 | 836,064 | ||||
Cash and cash equivalents, end of period | $ | 440,664 | $ | 340,101 | ||
Supplementary information | ||||||
Interest paid | $ | 893 | $ | - | ||
Taxes Paid | $ | 161 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Common Stock | Accumlated | ||||||||||||||||
Additional | other | Total | |||||||||||||||
Paid-in | comprehensive | Stockholders' | |||||||||||||||
Shares | Amount | Capital | Deficit | loss | Equity | ||||||||||||
Balance December 31, 2006 | 20,718,375 | $ | 20,719 | $ | 20,160,185 | $ | (18,330,869 | ) | $ | (59,530 | ) | $ | 1,790,505 | ||||
Return and cancellation of common stock | (16,000 | ) | (16 | ) | 16 | - | - | - | |||||||||
Net operating loss for the three months ended March 31, 2007 | - | - | - | (520,124 | ) | - | (520,124 | ) | |||||||||
Foreign currency translation adjustment | - | - | - | - | 2,057 | 2,057 | |||||||||||
Stock-based compensation | - | - | 463,600 | - | - | 463,600 | |||||||||||
Balance March 31, 2007 | 20,702,375 | 20,703 | 20,623,801 | (18,850,993 | ) | (57,473 | ) | 1,736,038 | |||||||||
7,267,660 |
The accompanying notes are an integral part of these consolidated financial statements.
ARVANA INC. |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Three Months Ended March 31, 2007 and 2006 |
(expressed in US dollars) |
(Unaudited) |
1.Nature of Business and Ability to Continue as a Going Concern
Arvana Inc., (the ‘Company’) was incorporated under the laws of the State of Nevada as Turinco, Inc. 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 evaluating potentially profitable business opportunities. In 2005, the Company decided to enter into the business of providing VoIP telephone services. In August 2006 the Company acquired a company in Germany, BCH Beheer and its wholly-owned subsidiary Hallotel Deutschland GmbH, which is in the business of long distance carrier pre-select and wholesale carrier business carrying traffic to Turkey.
These consolidated interim financial statements for the three-month period ended March 31, 2007 include the accounts of the Company, its subsidiary Arvana Networks (including its wholly-owned subsidiaries Arvana Par and 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. For the period ended March 31, 2007, the Company incurred a loss from operations of $520,124 and while it has a positive cash flow from operations for the period ended March 31, 2007 it has incurred significant operating losses and net utilization of cash in operations in all prior periods. At March 31, 2007, the Company had a working capital deficiency of $1,492,836. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis. There is substantial doubt that the Company will be successful at achieving these results. Failure to obtain the ongoing support of its shareholders and creditors may make the going concern basis of accounting inappropriate, in which case the Company’s assets and liabilities would need to be recognized at their liquidation values 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.
2.Summary of Significant Accounting Policies
(a)Basis of presentation
The Company began to generate revenues as a result of the acquisition of its German subsidiary during the final four months of 2006. In 2007 Company commenced its planned principal operations and determined its target market segments and market strategies. Consequently, the Company exited the development stage during the three months ended March 31, 2007. The Company’s fiscal year end is December 31. The accompanying consolidated interim financial statements of Arvana Inc. 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
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ARVANA INC. |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Three Months Ended March 31, 2007 and 2006 |
(expressed in US dollars) |
(Unaudited) |
2. Summary of Significant Accounting Policies con’t
presentation. Results are not necessarily indicative of results which may be achieved in the future. The consolidated financial statements and notes appearing in this report should be read in conjunction with the Company's consolidated audited financial statements and related notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2007 (file no. 000-30695).
(b)Basis of consolidation
The consolidated financial statements include the accounts of the Company, its subsidiary Arvana Networks (including its wholly-owned subsidiary Arvana Par, Arvana Com and BCH Beheer (and its wholly-owned subsidiary Hallotel Deutschland GmbH). All significant inter-company transactions and balances have been eliminated.
(c)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 |
(d)Impairment of long-lived assets and long-lived assets to be disposed of:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell. The Company has reviewed its long-lived assets and has determined that no impairment charges were necessary for the period ended March 31, 2007.
(e)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.
(f)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 at March 31, 2007, the Company had 1,600,000 of potentially dilutive instruments that were excluded from the determination of diluted loss per share as they would be anti-dilutive.
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ARVANA INC. |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Three Months Ended March 31, 2007 and 2006 |
(expressed in US dollars) |
(Unaudited) |
3.Property and Equipment
At March 31, 2007 | ||||||||||
Accumulated | Net | |||||||||
Book | ||||||||||
Cost | Amortization | Value | ||||||||
Equipment | $ | 309,835 | $ | 129,310 | $ | 180,525 | ||||
Computer hardware | 705,198 | 289,950 | 415,248 | |||||||
Software | 108,694 | 25,310 | 83,384 | |||||||
$ | 1,123,727 | $ | 444,570 | $ | 679,157 |
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 $101,037 as of March 31, 2007.
At December 31, 2006 | ||||||||||
Accumulated | Net | |||||||||
Book | ||||||||||
Cost | Amortization | Value | ||||||||
Equipment | $ | 205,099 | $ | 16,284 | $ | 188,815 | ||||
Computer hardware | 502,667 | 52,797 | 449,870 | |||||||
Software | 94,237 | 2,236 | 92,001 | |||||||
$ | 802,003 | $ | 71,317 | $ | 730,686 |
The net carrying amount of equipment not being amortized was $111,096 as at December 31, 2006.
4.Related Parties
On February 20, 2007, the Company received an unsecured, 6% interest per annum loan from Valor Invest Ltd, a shareholder of the Company in the amount of 150,000 Euros ($200,595 USD). This loan will be repaid on closing of any financing arrangement by Arvana Inc., or on or before July 1, 2007, whichever occurs sooner.
At March 31, 2007 Arvana Inc. had amounts due to related parties in the amount of $88,973 (December 31, 2006 $47,551). This amount includes $47,400 (December 31, 2006 $35,000) payable to three directors for services rendered during the quarter. 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 and are unsecured.
For the three-month period ended March 31, 2007, $10,322 (March 31, 2006 $NIL) was incurred by the Company for services rendered by the Acting Chief Financial Officer and Corporate Secretary of the Company. At March 31, 2007, $17,322 (December 31, 2006 $17,200) was owed to the Acting Chief Financial Officer and Corporate Secretary and $24,251 (December 31, 2006 $24,080) was owed to the former President / Chief Executive Officer. The amounts owing bear no interest and are unsecured.
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ARVANA INC. |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Three Months Ended March 31, 2007 and 2006 |
(expressed in US dollars) |
(Unaudited) |
5.Stockholders’ Equity
During the period the Company cancelled and returned to treasury 16,000 common shares at a par value of $0.001 per share.
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.
The Company has a stock option plan in place under which it is authorized to grant options to executive officers and directors, employees and consultants enabling them to acquire up to 10% of the issued and outstanding common stock of the Company. Under the plan, the exercise price of each option equals the market price of the Company's stock as calculated on the date of grant. The options can be granted for a maximum term of 10 years. 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, which will be expensed over the vesting period of the options. The Company recorded an expense of $463,600 in the three months ended March 31, 2007 for the pro-rated portion of the full charge.
As at March 31, 2007, the following incentive stock options are outstanding:
Number | Exercise | |
of options | Price | Expiry Date |
1,600,000 | $ 1.25 | December 31, 2009 |
Stock option transactions and the number of share options outstanding are summarized as follows:
Weighted | ||||||
Average | ||||||
Number | Exercise | |||||
of Options | Price | |||||
Balance, December 31, 2006 | 1,600,000 | $ | 1.25 | |||
Options granted | - | - | ||||
Options expired | - | - | ||||
Options exercised | - | - | ||||
Balance, March 31, 2007 | 1,600,000 | $ | 1.25 | |||
Number of options currently exercisable | 533,333 | $ | 1.25 |
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ARVANA INC. |
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
Three Months Ended March 31, 2007 and 2006 |
(expressed in US dollars) |
(Unaudited) |
6.Segmented Information
The Company has one reportable segment, being the development of the telephone services. This reportable segment was determined based on the nature of the products offered. Of the total property and equipment, $927 (December 31, 2006 $81,262) is located in Canada, $30,837 (December 31, 2006 $30,837) is located in Brazil and $647,392 (December 31, 2006 $618,587) is located in Germany.
7.Commitments
The Company has the following commitments:
2007 | 2008 | 2009 | 2010 | |||||||||
Software platform lease | € | 11,142 | € | 14,856 | € | 10,523 | € | - | ||||
Vehicle leases | 24,480 | 32,640 | 27,410 | 4,860 | ||||||||
Office lease | 13,410 | 1,490 | - | - | ||||||||
Total in euros | € | 49,032 | € | 48,986 | € | 37,933 | € | 4,860 |
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Item 2. Management's Discussion and Analysis or Plan of Operation.
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 which wholly owns 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, 2006 and current reports on Form 8-K.
Forward-Looking Statements
The information in this Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the our planned VoIP business, availability of funds, government regulations, common share prices, operating costs, capital costs, our ability to deploy our planned business and generate revenues and other factors. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors they believe are appropriate in the circumstances. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined below, and, from time to time, in other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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Overview
We are engaged in the telecommunications industry through our Hallotel subsidiary. 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.
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:
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 will market 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.
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Our 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. We are presently not pursuing the Arvana Networks business in Brazil.
We anticipate that this plan of operations may include the following objectives, subject to our achieving additional financing:
VoIP Services
Hallotel intends to launch VoIP services specifically targeted to immigrant communities and small and medium sized enterprises which operate multi-nationally. Hallotel is negotiating agreements with broad band suppliers to provide high speed data services which will then be bundled with voice over internet protocol (VoIP) telephony services. The combined package will be priced at an attractive rate when compared to buying the services separately, and will provide discounted or unlimited calling on a zone basis as selected by the customer e.g. unlimited calling within Germany, or specific groups of countries within the EEC, and Eastern Europe.
Hallotel is now testing the software and equipment to deploy VoIP across Germany and is negotiating agreements with resellers and distributors to launch service in the second quarter of 2007.
Wholesale Carrier Services
This continues to present significant opportunities and Hallotel is expanding capacity through additional equipment purchases. The Company has an ongoing objective to negotiate wholesale termination rates with countries that have large immigrant populations in Germany, and neighbouring countries such as Austria and Switzerland. These include Eastern and Southeastern Europe, the Middle East and Central Asia.
As discussed further below, we are presently not able to achieve our plan of operations without additional financing. Our board of directors has considered 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 resulted 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. Based on our planned expenditures, we will require a minimum of $3,000,000 in additional financing in order to complete this plan of operations. 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.
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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.
Critical Accounting Policies
Critical accounting policies are those that management believes are both most important to the portrayal of the Company’s financial condition and results of operations and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.
We believe that the “critical” accounting policies that we use in the preparation of our financial statements are as follows:
a)Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
b)Foreign currency translation and transactions
Our functional currency is the United States dollar.
We use 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.
We use 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 foreign currencies 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 March 31, 2007, was 2.06, stated in the Brazilian Real per one US dollar. The average exchange rate during the three-month period ended March 31, 2007, was 2.11 stated in the Brazilian Real per one US dollar. For the Euro, the exchange rate prevailing at March 31, 2007, was 1.3373 per one US dollar. The average exchange rate from the BCH Beheer acquisition date of August 23, 2006 to March 31, 2007, was 1.3104 stated in the Euro per one US dollar.
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c)Impairment of long-lived assets and long-lived assets to be disposed of:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell. We have reviewed our long-lived assets and has determined that no impairment charges were necessary for the period ended March 31, 2007.
d)Stock-based compensation
We account 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.
Presentation of Financial Information
Our financial statements for the quarter ended March 31, 2007 include the accounts of:
Arvana Networks;
Arvana Par;
Arvana Com;
BCH Beheer and its wholly-owned subsidiary Hallotel Deutschland GmbH.
The accounts of BCH Beheer and Hallotel are included in our statements of operations and statements of cash flows from August 23, 2006, being the date of closing of our acquisition of BCH Beheer and Hallotel, through December 31, 2006. Our results of operations presented below for periods prior to August 23, 2006, including the three months ended March 31, 2006, do not include the results of operations of BCH Beheer and Hallotel.
Results of Operations
References in the discussion below to 2006 are to our fiscal year ended December 31, 2006. Similarly, references to 2005 are to our fiscal year ended December 31, 2005. References to 2007 are to our current fiscal year that will end December 31, 2007.
Our operations for the quarters ended March 31, 2007 and 2006 are summarized below. Our current activities relating to the development of our planned VOIP telephone services business are reflected in the results of operations for the quarter ended March 31, 2007 and 2006.
Three months ended March 31, 2007 | Three months ended March 31, 2006 | |
Revenues | $1,716,220 | $0 |
Costs of Sales | $1,294,987 | $0 |
Gross profit | $421,233 | $0 |
Operating Expenses: |
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Three months ended March 31, 2007 | Three months ended March 31, 2006 | |
Selling and promotion | $4,864 | $0 |
General and Administration | $398,819 | $312,015 |
Research and Development | $0 | $38,751 |
Depreciation | $50,763 | $75 |
Other Items: | ||
Stock Based Compensation | $463,600 | $0 |
Loss on write-off of equipment | $10,059 | $0 |
Other Income | $38,961 | $0 |
Income taxes | $52,213 | $0 |
Other comprehensive gains | $2,057 | $0 |
Comprehensive Loss for the Period | $518,067 | $350,841 |
Revenues
Our revenues are attributable to the services provided by Hallotel. We did not generate any revenues during the period prior to our acquisition of Hallotel and do not generate any revenues outside of our Hallotel business. The substantial majority of the revenues generated to date are from the Hallotel long distance pre-select and wholesale carrrier business. Calling card revenues have been minimal and the VoIP business did not commence until the second quarter of 2007.
Cost of Sales
Our costs of sales are attributable to costs of sales incurred by Hallotel in connection with providing its services.
Our cost of sales of $1,294,987 for the quarter ended March 31, 2007 represented 75.5% of revenues.
Gross Profits
Our gross profits were $421,233 for the quarter ended March 31, 2007, representing 24.5% of revenues. All of our gross profits were attributable to our Hallotel business.
Sales and Promotion Expenses
Sales and promotion expenses consist primarily of commissions paid to third parties in connection with our Hallotel business.
General and Administration Expenses
General and administrative expenses are comprised of costs associated with management compensation, office overhead including rent, directors fees, legal fees, and consulting services.
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Research and Development
Our research and development team was terminated in November 2006 as a result of our decision to close down our Brazilian operations.
For the three-month period ending March 31, 2007, research and development expenses were $NIL as compared to $38,751 for the same three-month period in 2006.
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 with one-third vesting on January 1, 2007 and one-third vesting on each of January 1, 2008 and 2009. The options have an exercise price of $1.25. The options were valued at $1,424,000 using the Black-Scholes model, which will be expensed over the vesting period of the options. The Company recorded an expense of $463,600 in the three months ended March 31, 2007 for the pro-rated portion of the full charge.
Loss on the write-off of equipment
In the quarter ended March 31, 2007, we recorded a loss on the write-off of equipment in the amount of $10,059 which was attributable to software that was no longer usable for our existing operations.
Net Loss for the Period
We incurred a net loss of $520,124 for the quarter ended March 31, 2007 compared with a net loss of $350,841 in 2006. The majority of the loss in the quarter ended March 31, 2007 related to the increased stock-based compensation expense as well increased administration expenses associated with the development of our VOIP telephone services business.
Liquidity and Capital Resources
As at March 31, 2007, we had cash of $440,664 and a working capital deficit of $1,492,836. This compares to cash of $233,452 and a working capital deficit of $1,486,521 as at December 31, 2006.
Cash Flows from Operating Activities
We received cash from operations in the amount of $13,762 during the quarter ended March 31, 2007. Cash gained from operations was attributable to revenues from Hallotel. The cash provided by operations was used for general operating capital.
Cash Used in Investing Activities
We used cash in investing activities in the amount of $9,293 during the quarter ended March 31, 2007. Of this amount, $2,660 was attributable to our purchase of software and $6,633 was attributable to the purchase of other equipment.
Cash Flows from Financing Activities
We received $200,595 from the proceeds of a short-term loan during the quarter ended March 31, 2007. The loan is to be repaid on the earlier of the closing of any financing completed by us on July 1, 2007.
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Amounts due to IP Horizon LLC
IPH was issued 1,500,000 shares in August 2005 in exchange for a commitment to deliver equipment, software and network hardware for the initial launching of the Company’s VOIP telephone services in Brazil. IPH also agreed to provide termination services to Arvana Networks for these VOIP telephone services at its cost plus an administration fee not to exceed 13 percent. As of December 31, 2006, we had not received the full complement of assets to be acquired in connection with this transaction or other consideration. Accordingly, the 1,500,000 shares were not reflected on our financial statements as having been issued. The following agreement has been reached with IPH with respect to this transaction:
IPH agreed to return to us for cancellation the 1,500,000 common shares issued to IPH in August 2005. These shares were received and cancelled in the second quarter of fiscal 2007.
IPH has contributed certain equipment and has developed certain software, some of which is recorded in Arvana Comunicações general ledger in the amount of $36,309.25. In recognition of the contribution of the aforementioned equipment and software architecture services from IPH to Arvana Inc. and Arvana Networks, Arvana Inc. and IPH have agreed to settle indebtedness of $150,000 to IPH. The balance due to IPH as at December 31, 2006 was $125,283 with an additional amount of $24,717 due as a result of payments in February 2007, providing a total due to IPH of $150,000.
For settlement of this indebtedness, we agreed to issue 500,000 common shares at a deemed price of $0.30 per share. These shares were issued in the second quarter of fiscal 2007.
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 “Description of Business - Plan of Operations”, which amount will include projected administration costs. Accordingly, 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 the Company 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 VOIP business opportunities and our administrative expenses in order to be within the amount of capital resources that are available to us.
During the next twelve month period, we anticipate that our revenues will not exceed our operating expenses. Accordingly, we will be required to obtain additional financing in order to continue our plan of operations. We believe that debt financing will not be an alternative for funding our business. 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 any assurance that we will be able to obtain sufficient funding from the sale of our common stock to fund our plan of operations.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue our plan of operations. For these reasons our auditors stated in their report on our audited financial statements that they have substantial doubt we will be able to continue as a going concern.
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. 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.
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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 are material to stockholders.
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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 March 31, 2007, 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 Officer, Mr. Teyfiq Ozcean, and our Chief Financial Officer, Mr. Wayne Smith. 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 March 31, 2007, 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 March 31, 2007.
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
We did not complete any sales of securities without registration under the Securities Act of 1933 during our first quarter ended March 31, 2007.
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 March 31, 2007.
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. |
(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/ Teyfik Oezcan | |
Teyfik Oezcan, President and Chief Executive Officer | ||
Date: | May 14, 2007 |
By: | /s/ Wayne Smith | |
Wayne Smith, Chief Financial Officer | ||
Date: | May 14, 2007 |