Exhibit 99.1
Consolidated financial statements of
TIMESPRING SOFTWARE
CORPORATION/CORPORATION DE
LOGICIELS TIMESPRING
CORPORATION/CORPORATION DE
LOGICIELS TIMESPRING
December 31, 2006
TIMESPRING SOFTWARE
CORPORATION/CORPORATION DE LOGICIELS
TIMESPRING
Table of contents
CORPORATION/CORPORATION DE LOGICIELS
TIMESPRING
Table of contents
Report of Independent Registered Chartered Accountants | 1 | |||
Consolidated statement of operations | 2 | |||
Consolidated statement of deficit | 3 | |||
Consolidated balance sheet | 4 | |||
Consolidated statement of cash flows | 5 | |||
Notes to the consolidated financial statements | 6-23 |
Deloitte & Touche LLP 1 Place Ville Marie Suite 3000 Montreal QC H3B 4T9 Canada | ||
Tel: 514-393-5194 Fax: 514-390-4104 www.deloitte.ca |
Report of Independent Registered Chartered Accountants
To the Board of Directors of
Timespring Software Corporation/
Corporation de Logiciels Timespring
Timespring Software Corporation/
Corporation de Logiciels Timespring
We have audited the consolidated balance sheets of Timespring Software Corporation/Corporation de Logiciels Timespring and subsidiaries (the “Company”) as at December 31, 2006 and 2005 and the consolidated statements of operations, deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America. These standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Montreal, Canada
March 9, 2007, except Note 21, which is as of July 18, 2007, and Note 22, which is as of January 23, 2008
March 9, 2007, except Note 21, which is as of July 18, 2007, and Note 22, which is as of January 23, 2008
Comments by Independent Registered Chartered Accountants for U.S.readers on Canada-U.S. reporting differences
Generally accepted auditing standards in the United States require the addition of an explanatory paragraph when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements of the Company. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America, our report to the Board of Directors, dated March 9, 2007, except as to Note 21, which is as of July 18, 2007, and Note 22, which is as of January 23, 2008, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such conditions and events in the auditors’ report when these are adequately disclosed in the consolidated financial statements.
/s/ Deloitte & Touche LLP
Independent Chartered Chartered Accountants
Montreal, Canada
March 9, 2007, except Note 21, which is as of July 18, 2007, and Note 22, which is as of January 23, 2008
March 9, 2007, except Note 21, which is as of July 18, 2007, and Note 22, which is as of January 23, 2008
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Consolidated statement of operations
years ended December 31
In Canadian dollars
DE LOGICIELS TIMESPRING
Consolidated statement of operations
years ended December 31
In Canadian dollars
2006 | 2005 | |||||||
$ | $ | |||||||
Revenue | ||||||||
Licences | 453,178 | 174,862 | ||||||
Maintenance | 99,230 | 21,071 | ||||||
Service | 51,648 | 1,884 | ||||||
604,056 | 197,817 | |||||||
Cost of sales | 62,244 | 9,934 | ||||||
541,812 | 187,883 | |||||||
Expenses | ||||||||
Research and development, net (Note 5) | 1,349,159 | 2,133,886 | ||||||
Selling, general and administrative | 4,614,832 | 5,355,012 | ||||||
Financial (Note 17) | 2,078,330 | 1,803,449 | ||||||
Amortization — capital assets | 229,011 | 175,782 | ||||||
8,271,332 | 9,468,129 | |||||||
Operating loss | (7,729,520 | ) | (9,280,246 | ) | ||||
Interest income | 134,100 | 236,497 | ||||||
Net loss | (7,595,420 | ) | (9,043,749 | ) | ||||
Page 2 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Consolidated statement of deficit
years ended December 31
In Canadian dollars
DE LOGICIELS TIMESPRING
Consolidated statement of deficit
years ended December 31
In Canadian dollars
2006 | 2005 | |||||||
$ | $ | |||||||
Balance, beginning of year | (18,266,067 | ) | (9,222,318 | ) | ||||
Net loss | (7,595,420 | ) | (9,043,749 | ) | ||||
Balance, end of year | (25,861,487 | ) | (18,266,067 | ) | ||||
Page 3 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Consolidated balance sheet
as at December 31
In Canadian dollars
DE LOGICIELS TIMESPRING
Consolidated balance sheet
as at December 31
In Canadian dollars
2006 | 2005 | |||||||
$ | $ | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | 152,757 | 435,840 | ||||||
Marketable securities | 3,185,614 | 2,847,392 | ||||||
Accounts receivable, net (Note 4) | 225,927 | 137,214 | ||||||
Research and development tax credits receivable (Note 5) | 1,397,674 | 3,031,192 | ||||||
Prepaid expenses | 49,120 | 26,711 | ||||||
5,011,092 | 6,478,349 | |||||||
Capital assets, net (Note 6) | 616,016 | 679,417 | ||||||
Deferred charges (Note 7) | 76,608 | 132,833 | ||||||
Patents | 1 | 1 | ||||||
5,703,717 | 7,290,600 | |||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Bank loan and overdraft (Note 8) | 724,074 | 720,000 | ||||||
Shareholders credit loan (Note 13) | 4,128,768 | — | ||||||
Accounts payable and accrued liabilities (Note 9) | 295,314 | 276,687 | ||||||
Deferred revenue | 91,443 | 34,439 | ||||||
Current portion of obligation under capital lease (Note 12) | 42,744 | 8,904 | ||||||
Loans payable (Note 11) | 27,045 | 27,045 | ||||||
5,309,388 | 1,067,075 | |||||||
Redeemable preferred shares (Note 10) | 23,399,582 | 21,666,279 | ||||||
Loans payable (Note 11) | 110,160 | 110,160 | ||||||
Long-term portion of obligation under capital lease (Note 12) | 49,985 | 17,064 | ||||||
28,869,115 | 22,860,578 | |||||||
Commitments (Note 14) | ||||||||
Shareholders’ deficiency | ||||||||
Capital stock (Note 15) | 2,696,089 | 2,696,089 | ||||||
Deficit | (25,861,487 | ) | (18,266,067 | ) | ||||
(23,165,398 | ) | (15,569,978 | ) | |||||
5,703,717 | 7,290,600 | |||||||
Approved by the Board
Director | ||
Director |
Page 4 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Consolidated statement of cash flows
years ended December 31
In Canadian dollars
DE LOGICIELS TIMESPRING
Consolidated statement of cash flows
years ended December 31
In Canadian dollars
2006 | 2005 | |||||||
$ | $ | |||||||
Operating activities | ||||||||
Net loss | (7,595,420 | ) | (9,043,749 | ) | ||||
Items not affecting cash: | ||||||||
Amortization | 285,236 | 232,007 | ||||||
Interest accrued on redeemable preferred shares | 1,733,303 | 1,604,909 | ||||||
Interest accrued on Shareholders Credit Loan | 128,768 | — | ||||||
Loss on disposal of capital assets | 1,910 | — | ||||||
Loss on sale of marketable securities | — | 28,390 | ||||||
(5,446,203 | ) | (7,178,443 | ) | |||||
Increase in accounts receivable | (88,713 | ) | (55,653 | ) | ||||
Decrease in interest receivable | — | 117,252 | ||||||
Decrease (increase) in research and development tax credits receivable | 1,633,518 | (1,489,719 | ) | |||||
Increase in prepaid expenses | (22,409 | ) | (12,271 | ) | ||||
Increase (decrease) in other current liabilities | 75,631 | (101,973 | ) | |||||
Cash used in operating activities | (3,848,176 | ) | (8,720,807 | ) | ||||
Investing activities | ||||||||
Increase in marketable securities | (338,222 | ) | — | |||||
Proceeds from disposal of marketable securities | — | 9,613,787 | ||||||
Acquisition of capital assets | (80,680 | ) | (575,430 | ) | ||||
Cash (used in) provided by investing activities | (418,902 | ) | 9,038,357 | |||||
Financing activities | ||||||||
Issuance of bank loan | 1,974,074 | — | ||||||
Repayment of bank loan | (1,970,000 | ) | — | |||||
Issuance of Shareholders Credit Loan | 4,000,000 | — | ||||||
Repayment of obligations under capital lease | (20,079 | ) | (4,404 | ) | ||||
Issuance of capital stock | — | 2,598 | ||||||
Cash provided by (used in) financing activities | 3,983,995 | (1,806 | ) | |||||
(Decrease) increase in cash | (283,083 | ) | 315,744 | |||||
Cash, beginning of year | 435,840 | 120,096 | ||||||
Cash, end of year | 152,757 | 435,840 | ||||||
See Note 18 for supplementary cash flow information.
Page 5 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
1. | Going concern | |
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. Several adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has incurred significant losses during 2006, 2005 and prior years and has incurred significant costs related to developing its general and administrative infrastructure, developing technology, recruiting personnel and establishing a market for the Company’s products and services. The Company has funded such costs with investment capital and related party debt. As of December 31, 2006, the Company has current liabilities of $5,309,388 and a shareholders’ deficiency of $23,165,398. In addition, the Company’s bank loan is subject to various financial covenants which, at December 31, 2006, were not respected. | ||
These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amount and classification of liabilities and the reported revenue and expenses that would be necessary should the Company be unable to continue as a going concern. | ||
The Company’s ability to continue as a going concern is dependent upon, amongst other things, the attainment of a satisfactory sales level, attaining profitable operations, its ability to generate sufficient cash from operations in the future and the continued financial support of its shareholders and creditors. These matters are dependent on a number of items outside the Company’s control and there is significant uncertainty about the Company’s ability to successfully conclude on these matters. As such, the realization of assets and discharge of liabilities in the ordinary course of business is subject to significant uncertainty. | ||
Management’s plans with respect to addressing the going concern uncertainty include the following: |
1. | Restructure the operations in order to reduce the Company’s operating cash requirements; | ||
2. | Renew existing bank loans and seek additional financing to contribute to the funding of its expansion projects; and | ||
3. | Continue financial support of certain current shareholders. |
Management believes that with the above plans and continued financial support of its creditors and shareholders, the Company will be able to continue to operate as a going concern. There can, however, be no assurance that the plans described above will result in sufficient funds being generated. |
Page 6 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
2. | Description of the business | |
Timespring Software Corporation (the “Company”) is incorporated under theCanada Business Corporations Actand is engaged in providing High Data Availability and Disaster Recovery solutions. | ||
3. | Summary of significant accounting policies | |
Financial statement presentation | ||
The accompanying consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) assuming the Company is a going concern (see Note 1). They include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated upon consolidation. | ||
Use of estimates | ||
The presentation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect revenue and expenses during the period reported. The balances that are subject to a high degree of estimation are allowances for doubtful accounts and returns, investment tax credits and fair value of the stock options. Actual results could differ from those estimates. | ||
Marketable securities | ||
Marketable securities are recorded at the lower of cost or market value. | ||
Capital assets | ||
Capital assets are recorded at cost and are amortized over their expected useful lives on a declining balance basis at the following annual rates: |
Furniture and fixtures | 30% | |||
Research and development equipment | 30% | |||
Computer hardware, software and telecom | 20% | |||
Leasehold improvements | until end of lease — September 2008 | |||
Equipment under capital lease | until end of lease — December 2009 |
Income taxes | ||
The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined for each temporary difference based on the substantially enacted tax rates expected to apply when the differences will reverse. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. The effect of the changes in tax rates on future income tax assets and liabilities is recognized in earnings in the year the changes occur. |
Page 7 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
3. | Summary of significant accounting policies (continued) | |
Revenue recognition | ||
The Company generates revenue principally through two sources: (1) software licences and (2) services. Software licence revenue is normally generated from licensing the perpetual use of the Company’s software products. Services revenue is generated from sales of maintenance and services performed for customers that licence the Company’s products. | ||
Revenue from the sale of software license agreements is recognized upon delivery of software if persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable. Fair value is used to allocate the total fee to the different elements of an arrangement. Fair value is typically based on the price charged when an element is sold separately, or, in the case of an element not yet sold separately, the price established by management, if it is probable that the price, once established, will not change before market introduction. | ||
Revenue from maintenance services for licences previously sold and implemented is recognized ratably over the term of the contract. | ||
Revenue is presented net of sales tax | ||
Amounts received in advance of the delivery of products or performance of services are classified as deferred revenue. | ||
Foreign currency translation | ||
The Company’s subsidiary is considered to be integrated and its financial statements are translated following the temporal method. Accordingly, monetary assets and liabilities are translated using the exchange rates in effect at the balance sheet date, whereas non-monetary assets are translated at historical rates. Revenue and expenses are translated at the average exchange rate. Translation gains or losses are included in earnings. | ||
Foreign currency transactions | ||
For transactions in foreign currencies, the Company translates monetary assets and liabilities denominated in foreign currencies into Canadian dollars using exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average exchange rates prevailing during the year. Translation gains or losses are included in earnings. | ||
Research and development | ||
Research and development costs, net of investment tax credits, are expensed as incurred, except for development costs that meet certain criteria. Development costs were not considered deferrable. | ||
Government assistance | ||
Government assistance, in the form of grants and investment and other tax credits, is accrued when earned and, in the case of tax credits, where there is also reasonable assurance that they will be realized. Such assistance is applied to reduce the related asset costs or expenses. |
Page 8 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
3. | Summary of significant accounting policies (continued) | |
Deferred charges | ||
Deferred charges relate to costs incurred in connection with the issuance of the preferred shares and are amortized on a straight-line basis over the term of the financing, to a maximum of five years. | ||
Stock-based compensation plan | ||
The Company has a stock-based compensation plan, which is described in Note 15. The Company accounts for its grants under this plan in accordance with the fair value-based method of accounting for stock-based compensation. The fair value of stock options is determined on their grant date and recorded as compensation expense over the period that the stock options vest, with a corresponding increase to contributed surplus. When stock options are exercised, the proceeds, together with the amount recorded in contributed surplus, are recorded in share capital. | ||
4. | Accounts receivable, net |
2006 | 2005 | |||||||
$ | $ | |||||||
Trade | 200,372 | 103,441 | ||||||
Sales tax receivable | 36,426 | 27,175 | ||||||
Other | 3,946 | 6,598 | ||||||
Allowance for doubtful accounts | (14,817 | ) | — | |||||
225,927 | 137,214 | |||||||
5. | Research and development tax credits receivable | |
Research and development expenses have been reduced by investment tax credits of $1,506,918 in 2006 ($1,599,908 in 2005). The amounts recorded by the Company are subject to review and approval by the tax authorities and the amounts granted may differ from those accounted for by the Company. Should such a difference arise resulting from assessment by the tax authorities, the amount would be recorded in earnings in the year of the assessment. |
Page 9 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
6. Capital assets
2006 | 2005 | |||||||||||||||
Accumulated | Net book | Net book | ||||||||||||||
Cost | amortization | value | value | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Furniture and fixtures | 77,392 | 50,963 | 26,429 | 37,756 | ||||||||||||
Research and development equipment | 803,254 | 456,122 | 347,132 | 457,363 | ||||||||||||
Computer hardware, software and telecom | 113,466 | 46,064 | 67,402 | 72,811 | ||||||||||||
Leasehold improvements | 135,389 | 54,120 | 81,269 | 85,519 | ||||||||||||
Equipment under capital lease | 113,547 | 19,763 | 93,784 | 25,968 | ||||||||||||
1,243,048 | 627,032 | 616,016 | 679,417 | |||||||||||||
7. | Deferred charges |
2006 | 2005 | |||||||
$ | $ | |||||||
Original cost | 281,127 | 281,127 | ||||||
Less: | ||||||||
Accumulated amortization | 204,519 | 148,294 | ||||||
76,608 | 132,833 | |||||||
8. | Bank loan | |
The Company has a credit facility with maximum borrowings of $1,250,000, due on demand, to finance up to 75% of refundable research and development tax credits, bearing interest at a Canadian chartered bank’s prime rate plus 1.75% per annum payable monthly. As at December 31, 2006, $625,000 was unused. The facility is secured by a $1,500,000 movable hypothec, which provides for a charge on the Company’s present and future assets, including intellectual property, and by a certificate of guarantee from Garantie Québec as described below. The credit facility was renewed August 23, 2007 for an amount of $873,000. | ||
The credit facility is subject to various financial covenants of which, at December 31, 2006, the Company was not in compliance with. As a result, the availability of the credit facility is limited. | ||
Garantie Québec has provided a guarantee of 80% of the bank loan to a maximum of $1,000,000. The guarantee expires on June 30, 2008. The agreement contains various covenants that require the Company to maintain certain financial ratios as defined by Garantie Québec. As at December 31, 2006, the Company was not in compliance with these covenants. |
Page 10 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
9. | Accounts payable and accrued liabilities |
2006 | 2005 | |||||||
$ | $ | |||||||
Trade accounts | 198,719 | 139,931 | ||||||
Commissions | 33,453 | 34,353 | ||||||
Capital tax | 17,000 | 29,000 | ||||||
Accrued expenses | 35,672 | 69,957 | ||||||
Other | 10,470 | 3,446 | ||||||
295,314 | 276,687 | |||||||
10. | Redeemable convertible preferred shares | |
In accordance with the accounting recommendations of Section 3860 of the Canadian Institute of Chartered Accountants’ Handbook, “Financial Instruments”, the preferred shares have been presented in these financial statements based on their substance. Although their legal form is that of share capital, in substance these shares are liabilities because they provide for redemption, at the option of the holder, for a fixed amount. | ||
The holders of preferred shares have the option to require the Company to redeem all or part of the preferred shares at any time on or after December 17, 2009 for a consideration equal to the issue price paid for such shares, plus declared, accrued and unpaid dividends, plus an amount equal to 8% of the issue price for such preferred shares per annum on a compounded basis calculated from the original issue date. The increase in the preferred share redemption value has been included in the financial expenses for the year. | ||
Should the Company not pay the redemption amount within 120 days after the demand for redemption, the Company is obligated to pay an additional 20% per annum from the date of issuance of the shares. |
Page 11 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
10. | Redeemable convertible preferred shares (continued) |
2006 | 2005 | |||||||
$ | $ | |||||||
6,900,261 (6,900,261 in 2005) Class A preferred shares | 20,000,000 | 20,000,000 | ||||||
Increase in redemption value | 3,399,582 | 1,666,279 | ||||||
23,399,582 | 21,666,279 | |||||||
See Note 15 for additional characteristics of the preferred shares. | ||
On March 31, 2006, the Company consolidated its shares on a 42-to-1 basis. All share information is presented as if the share consolidation took place on January 1, 2005. | ||
11. | Loans payable | |
The loans payable include an amount of $110,160 ($110,160 in 2005) from a beneficial shareholder of the Company, which bears interest at a Canadian chartered bank’s prime rate plus 1% and is subrogated in favour of the Company’s bank, carrying a maximum term of five years to June 30, 2008 with any prior repayments to be made out of “First Available Funds”, which has been defined as the funds generated from the revenue of the Company available for the payment of its indebtedness after operating expenses, capital expenditures, debt service and taxes. | ||
The balance of the loans payable, in the amount of $27,045, is due to a former employee, is non-interest bearing and without specific terms of repayment. | ||
12. | Obligation under capital lease |
2006 | 2005 | |||||||
$ | $ | |||||||
Equipment lease contracts, repayable in monthly installments of $4,112, including interest calculated at 10.9% to December 31, 2009 | 92,729 | 25,968 | ||||||
Current portion | 42,744 | 8,904 | ||||||
49,985 | 17,064 | |||||||
Future minimum payments under the capital lease for subsequent years are as follows: |
$ | ||||
2007 | 49,350 | |||
2008 | 41,015 | |||
2009 | 16,253 |
Page 12 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
13. | Shareholders credit loan | |
The loan is due on demand, upon the agreement of the majority of the lenders, bears interest at 20% per annum compounded monthly and is secured by a movable hypothec covering the universality of the Company’s assets. The loan is also convertible into Class A preferred shares at $2.89842 per share at the option of the lenders at any time. The fair value of the conversion option at the date of issue was not considered significant. Upon agreement of the majority of the lenders, all of the outstanding loans will be converted at the then applicable loan conversion price. | ||
14. | Commitments | |
The minimum rents payable to non-related parties and to a beneficial shareholder of the Company (Note 19) under long-term operating leases exclusive of certain operating costs for which the Company is responsible are approximately as follows: |
Non-related | Beneficial | |||||||
parties | shareholders | |||||||
$ | $ | |||||||
2007 | 85,593 | 130,755 | ||||||
2008 | 64,195 | 98,066 |
15. | Capital stock | |
On March 31, 2006, the Company consolidated is shares on a 42-to-1 basis. All share information is presented as if the share consolidation took place on January 1, 2005. | ||
Authorized |
The following authorized classes of shares are unlimited in number and without par value:
a) | Class A preferred shares |
Voting, providing for a non-cumulative dividend to be determined at the discretion of the directors, convertible into common shares at the option of the holder at a price that could vary depending upon future events and financings, see Note 10.
b) | Common shares |
Voting and providing for a non-cumulative dividend to be determined by the directors
2006 | 2005 | |||||||
$ | $ | |||||||
Issued and fully paid 1,794,902 common shares (1,794,902 in 2005) | 2,696,089 | 2,696,089 |
The Class A preferred shares are recorded as long-term debt as described in Note 10. | ||
Stock-based compensation plan | ||
The Company adopted a stock option plan for officers, directors, key employees and service providers of the Company. Options granted under this plan generally expire ten years after the date of the grant and vest over a period of four years. The plan provides that a maximum of 1,393,774 common shares may be optioned under the stock option plan. |
Page 13 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
15. | Capital stock (continued) | |
Stock-based compensation plan (continued) | ||
The fair value of the stock options granted during the years ended December 31, 2006 and 2005 had nominal value and has been determined using the Black-Scholes option pricing model, with the following assumptions: |
2006 | 2005 | |||||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Expected volatility | 100.0 | % | 0.0 | % | ||||
Risk-free interest rate | 4.0 | % | 4.7 | % | ||||
Weighted average expected life | 10years | 10years |
The Black-Scholes option pricing model requires the input of subjective assumptions, including the changes in the subjective input assumptions that can materially affect the fair value estimate, and, therefore, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of the Company’s share purchase options. |
2006 | 2005 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
exercise | exercise | |||||||||||||||
Number | price | Number | price | |||||||||||||
$ | $ | |||||||||||||||
Options outstanding, beginning of year | 1,257,359 | 0.84 | 1,152,189 | 0.84 | ||||||||||||
Granted during the year | 57,390 | 0.84 | 129,942 | 0.84 | ||||||||||||
Cancelled | (23,918 | ) | 0.84 | (21,679 | ) | 0.84 | ||||||||||
Exercised | — | 0.84 | (3,093 | ) | 0.84 | |||||||||||
Options outstanding, end of year | 1,290,831 | 0.84 | 1,257,359 | 0.84 | ||||||||||||
The Company has 1,290,831 options outstanding as at December 31, 2006 with a weighted average remaining life of 7.39 years, of which 820,967 were exercisable at year end at a price of $0.84. |
Page 14 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
16. | Future income taxes | |
The Company’s income tax provision has been determined as follows: |
Federal | Provincial | |||||||
$ | $ | |||||||
Net loss for the year for accounting purposes | 7,595,420 | 7,595,420 | ||||||
Temporary differences arising from: | ||||||||
Amortization | 236,924 | 236,924 | ||||||
Research and development | 828,107 | 1,103,858 | ||||||
Permanent differences arising from: | ||||||||
Non-deductible items | 1,758,646 | 1,776,467 | ||||||
4,771,743 | 4,478,171 | |||||||
Combined basic federal and provincial income tax recovery at 11% and 8%, respectively | 524,892 | 358,254 | ||||||
Net operating loss and temporary differences for which no benefit was recognized, excluding the effect of investment tax credits in accordance with the Company’s accounting policy | (524,892 | ) | (358,254 | ) | ||||
— | — | |||||||
Page 15 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
16. | Future income taxes (continued) | |
The Company has non-capital losses and research and development expenses available, in excess of amounts taken for book purposes, for income tax purposes, which may be carried forward and applied against future years’ taxable income. The potential benefits relating to the available losses and expenses have not been recorded in the financial statements. These losses expire approximately as follows: |
Federal | Provincial | |||||||
$ | $ | |||||||
2008 | 427,533 | 661,000 | ||||||
2009 | 863,188 | 577,106 | ||||||
2010 | 3,133,288 | 2,704,470 | ||||||
2014 | 4,369,827 | 3,918,356 | ||||||
2015 | 4,168,575 | 3,738,940 | ||||||
2016 | 2,890,012 | 2,596,440 | ||||||
15,852,423 | 14,196,312 | |||||||
Unused research and development expenses, not subject to expiry | 3,112,385 | 8,466,106 | ||||||
The Company has earned non-refundable investment tax credits that can be applied to reduce future federal income taxes payable. These credits expire as follows: |
$ | ||||
2010 | 25,552 | |||
2011 | 15,070 | |||
2012 | 9,966 | |||
2013 | 24,498 | |||
2014 | 23,819 | |||
2015 | 181,916 | |||
2016 | 77,605 | |||
358,426 | ||||
The significant components of future income tax assets and liabilities are summarized approximately as follows: |
2006 | 2005 | |||||||
$ | $ | |||||||
Non-capital loss carry-forwards | 2,879,471 | 3,144,563 | ||||||
Pool of unused research and development expenses | 1,019,651 | 970,713 | ||||||
Benefit of investment tax credits | 290,325 | 212,166 | ||||||
Valuation allowance | (4,189,447 | ) | (4,327,442 | ) | ||||
Net tax asset | — | — | ||||||
The Company has recorded a valuation allowance against its future tax assets. The benefits will be recorded when their realization is reasonably assured. |
Page 16 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
17. | Financial expenses |
2006 | 2005 | |||||||
$ | $ | |||||||
Interest and bank charges | 160,034 | 142,315 | ||||||
Interest on preferred shares | 1,733,303 | 1,604,909 | ||||||
Interest on Shareholders Credit Loan | 128,768 | — | ||||||
Amortization — deferred charges | 56,225 | 56,225 | ||||||
2,078,330 | 1,803,449 | |||||||
18. | Supplementary cash flow information |
2006 | 2005 | |||||||
$ | $ | |||||||
Cash paid for interest | 92,899 | 25,672 | ||||||
Capital assets acquired through capital leases | 86,840 | 26,708 |
19. | Related party transactions | |
During the year, the Company had transactions with related parties in the normal course of operations. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the parties. |
a) | Consulting fees were charged approximately as follows: |
2006 | 2005 | |||||||
$ | $ | |||||||
i) Beneficial shareholders and companies owned | ||||||||
by beneficial shareholders(owning between 1 and 8%) | 39,833 | 180,925 | ||||||
ii) Shareholders’ director | 35,106 | 76,276 |
b) | Rent of approximately $131,168 ($130,755 in 2005) was charged by a beneficial shareholder of the Company as a sublet of property at the same price the shareholder is paying to an arm’s length party. |
Page 17 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
20. | Financial instruments | |
Credit risk | ||
The Company’s exposure to credit risk at December 31, 2006 is equal to the carrying amount of its accounts receivable. | ||
Concentration of credit risk | ||
The Company is exposed to a concentration of credit risk, with respect to accounts receivable, due to the small number of customers. As at December 31, 2006, five customers represented 58% of the total accounts receivable. | ||
Currency risk | ||
The Company is exposed to market risk principally from foreign exchange fluctuations. The Company does not actively manage this risk. Accounts receivable and accounts payable and accrued liabilities include amounts denominated in foreign currency of $161,798 and $55,192, respectively. | ||
Interest rate risk | ||
The Company is subject to interest rate risk due to changes to the prime rate since its borrowings bear variable interest rates. | ||
Fair value | ||
The carrying amounts of the Company’s financial assets and liabilities, included in the current and non-current assets and liabilities, other than the redeemable preferred shares, approximate their fair values at December 31, 2006 and 2005, given their short-term maturities or variable interest rates. Due to the nature of the preferred shares and the status of the Company, the quantification of the fair value of the redeemable preferred shares is not determinable at a reasonable cost. | ||
21. | Subsequent event | |
On July 18, 2007, the Company entered into an amendment to the shareholder credit loan (Note 13) for an additional $650,000 and subject to the same conditions as the original loan. |
Page 18 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
22. | Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP | |
These consolidated financial statements are prepared in accordance with Canadian GAAP, which differ in certain material respects from United States GAAP (US GAAP). Material differences between Canadian and US GAAP and the effect on net loss and balance sheet amounts are presented in the following tables with an explanation of the adjustments. | ||
Reconciliation of consolidated net loss and comprehensive loss |
2006 | 2005 | |||||||
$ | $ | |||||||
Net loss — Canadian GAAP | (7,595,420 | ) | (9,043,749 | ) | ||||
Adjustments | ||||||||
Increase in redemption value of Preferred shares (a) | 1,733,303 | 1,604,909 | ||||||
Amortization of deferred charges (a) | 56,225 | 56,225 | ||||||
Net loss — US GAAP | (5,805,892 | ) | (7,382,615 | ) | ||||
Statement of comprehensive loss | ||
Comprehensive loss is the same as net loss and accordingly, a statement of comprehensive loss is not presented. |
Page 19 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
22. | Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP (continued) | |
Reconciliation of reported amounts on consolidated balance sheets | ||
Reconciliation of material selected balance sheet accounts between Canadian and US GAAP are as follows: |
Canadian | US | |||||||||||
GAAP | Adjustments | GAAP | ||||||||||
$ | $ | $ | ||||||||||
As at December 31, 2006 | ||||||||||||
Liabilities | ||||||||||||
Preferred shares (a) | 23,399,582 | (23,399,582 | ) | — | ||||||||
Redeemable preferred shares (a) | — | 23,118,455 | 23,118,455 | |||||||||
Shareholders deficiency (a) | (23,165,398 | ) | 204,519 | (22,960,879 | ) | |||||||
As at December 31, 2005 | ||||||||||||
Liabilities | ||||||||||||
Preferred shares (a) | 21,666,279 | (21,666,279 | ) | — | ||||||||
Redeemable preferred shares (a) | — | 21,385,152 | 21,385,152 | |||||||||
Shareholders deficiency (a) | (15,569,978 | ) | 148,294 | (15,421,684 | ) |
Page 20 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
22. | Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP (continued) | |
Reconciliation of reported amounts on consolidated balance sheets (continued) |
(a) | Convertible redeemable preferred shares |
Under Canadian GAAP, the convertible redeemable preferred shares are accounted for as described in Note 10. Under US GAAP, the convertible redeemable preferred shares are accounted for in accordance with FAS 150, “Accounting for certain financial instruments with characteristics of both liabilities and equity”,and are not classified as a liability, but, instead, are presented as a category between liabilities and equity.
The redemption terms of the Preferred shares include an amount equal to 8% of the issue price per annum on a compounded basis calculated from the original issue date. Under Canadian GAAP, the increase in the preferred share redemption value has been included in the financial expenses of the year. Under US GAAP, in accordance with EITF Topic D-98, “Classification and Measurement of Redeemable Securities”, the increase in redemption value is charged to the deficit and a corresponding amount added to the redeemable preferred shares at each balance sheet date. The amounts charged to deficit amounted to $1,733,303 in 2006 and $1,604,909 in 2005.
The terms of the convertible redeemable preferred shares were examined to determine if any of the terms created a beneficial conversion feature at the date of issuance. The terms did not result in the recognition of any such beneficial conversion feature.
In addition, under Canadian GAAP, costs incurred in connection with the issuance of the preferred shares were deferred and amortized as a charge to earnings, using the straight-line method over a period of five years. Under US GAAP, such costs are recorded as a reduction of the share issuance proceeds.
(b) | Marketable securities |
Under SFAS 115,Accounting for Certain Investments in Debt and Equity Securities, the Company’s investments in securities would be classified as available-for-sale securities and are carried at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings under US GAAP and reported as a net amount in accumulated other comprehensive income (loss), which is a separate component of shareholders’ equity on the balance sheet, until realized. Upon realization, comprehensive income (loss) would be adjusted to reflect the reclassification of the gains or losses into income (loss). As at December 31, 2006 and 2005, the difference between the carrying value and fair value of the securities was nominal.
Page 21 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
22. | Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP (continued) | |
Reconciliation of reported amounts on consolidated balance sheets (continued) |
(c) | Shareholder credit loan |
Under Canadian GAAP, the convertible term loan is accounted for as described in Note 13, Under US GAAP the terms and conditions of the convertible term loan were examined to determine if a beneficial conversion feature was created at the date of issuance. These terms and conditions did not result in the recognition of any such beneficial conversion feature.
(d) | Research and development |
Under Canadian GAAP, investment tax credits on research and development are deducted from research and development expense. Under US GAAP, non-refundable Canadian federal investment tax credits are included in the provision for income taxes. The Company does not recognize benefits of federal investment tax credits carry forwards and, as such, no reconciling item between Canadian and US GAAP is required for the 2005 and 2006 periods.
(e) | Stock-based compensation |
Under Canadian GAAP, the Company accounts for Stock-based compensation to employees and directors as described in Note 15. Under US GAAP, the Company had elected, as permitted, to account for stock-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for employee stock options, rather than the alternative fair value accounting as allowed by Statement of Financial Accounting Standards (SFAS”) No. 123, “Accounting for Stock-Based Compensation”.
On January 1, 2006, the Company adopted SFAS 123R, “Share-Based Payment”, using the modified prospective basis approach and using the calculated value method allowed for certain non-public entities. As the Company had previously used the minimum value method under the provisions of APB No. 25, the Company is now required to adopt the provisions of SFAS 123R prospectively for any newly issued, modified or settled awards after the date of initial adoption whereby the Company recognizes a compensation expense for these options. The Company is also required to continue to provide proforma disclosure on any portion of awards outstanding at the date of initial application of the new standard. As the compensation expense was nominal, no proforma disclosure is made.
Page 22 of 23
TIMESPRING SOFTWARE CORPORATION/CORPORATION
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
DE LOGICIELS TIMESPRING
Notes to the consolidated financial statements
years ended December 31, 2006 and 2005
In Canadian dollars
22. | Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP (continued) | |
Reconciliation of reported amounts on consolidated balance sheets (continued) |
(e) | Stock-based compensation (continued) |
The fair value of the stock options granted during the years ended December 31, 2006 and 2005 had nominal values and has been determined using the Black-Scholes option pricing model, with the following assumptions:
2006 | 2005 | ||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | |||||
Expected volatility | 100.0 | % | 0.0 | % | |||||
Risk-free interest rate | 4.0 | % | 4.7 | % | |||||
Weighted average expected life | 10years | 10years |
The weighted average fair value per option granted for all options as of December 31, 2006 and 2005 is nominal.
Page 23 of 23