Registration No.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
Diversinet Corp.
(Exact name of registrant as specified in its charter)
Ontario, Canada
(State or other jurisdiction of incorporation or
organization)
N/A
(I.R.S. Employer Identification Number)
2225 Sheppard Avenue East, Suite 1801, Toronto, ON M2J
5C2 Canada (416) 756-2324
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
David Hackett c/o Diversinet Corp.
2225 Sheppard Avenue East, Suite 1801, Toronto, ON M2J
5C2 Canada (416) 756-2324
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the
Registration Statement is declared effective.
If the only securities being registered on this Form
are being offered pursuant to dividend or interest
reinvestment plans, please check the following box: ?
If any of the securities being registered on this Form
are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933,
as amended, other than securities offered only in
connection with dividend or interest reinvestment
plans, please check the following box: ?
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, please
check the following box and list the Securities Act of
1933, as amended registration statement number of the
earlier effective registration statement for the same
offering. ?
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act of
1933, as amended, please check the following box and
list the Securities Act of 1933, as amended
registration statement number of the earlier effective
registration statement for the same offering. ?
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box.
?
CALCULATION OF REGISTRATION FEE
(In U.S. $)
Title of each
class of
securities to
be registered
Amount to
be
registere
d
Proposed
maximum
offering
price per
share
Proposed
maximum
aggregate
offering
price
Amount of
registrat
ion fee
Common shares
2,402,000
(1) (3)
$1.81 (2)
$4,347,620
$ 351.76
(1) Includes of 1,202,000 common shares issuable upon
the exercise of outstanding warrants.
(2) Estimated pursuant to Rule 457(c) and 457(o) solely
for the purpose of computing the amount of the
registration fee on the basis of the average of the
low bid and high ask prices ($1.81 and $1.80) of a
common share as reported on the Over the Counter
Bulletin Board on March 12, 2004. Includes 500,000
shares issuable upon exercise of warrants at $2.00,
720,000 shares issuable upon exercise of warrants at
$2.05 per share and 102,000 shares issuable upon
exercise of warrants at $2.50.
(3) Pursuant to Rule 416, also includes such
indeterminate number of ordinary shares as may
become issuable upon stock splits, stock dividends
and other changes affecting the ordinary shares as
described herein.
The registrant hereby amends this Registration
Statement on such date or dates as may be necessary to
delay its effective date until the registrant shall
file a further amendment which specifically states
that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such
date as the Commission, acting pursuant to said
Section 8(a), may determine.
Subject to completion, dated March 15, 2004
The holder of these may not sell these securities
until the registration statement filed with the
Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities
and it is not a solicitation of an offer to buy these
securities in any state where the offer or sale is not
permitted.
PROSPECTUS
2,402,000 Common Shares
DIVERSINET CORP.
Certain selling securityholders are offering up to
2,402,000 of our common shares for sale under this
prospectus. We will not receive the proceeds of any
shares sold under this prospectus.
Our common shares are quoted on the Over-the-Counter
Bulletin Board ("OTC BB") under the symbol "DVNT.OB".
On March 12, 2004, the average of the closing bid and
asked prices of our common shares on the OTC BB was
$1.80 per share.
An investment in our common shares involves a high
degree of risk and only people who can afford the loss
of their entire investment should consider investing.
See "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or
disapproved of these securities or determined if this
prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
INFORMATION SUMMARY
This summary highlights important information about
our business and about this offering. Because this is
a summary, it does not contain all of the information
you should consider before investing in our common
shares or warrants. You should read the entire
prospectus before making an investment decision.
About Diversinet
Diversinet Corp. (formerly The Instant Publisher Inc.)
was formed on December 8, 1993 through the
amalgamation of The Instant Publisher Inc. with
Lombard Consolidated Resources Inc., an Ontario
corporation. We are regulated in accordance with the
Business Corporation Act (Ontario).
Our company was formed under the laws of Ontario,
Canada. Our principal executive offices are located
at 2225 Sheppard Avenue East, Suite 1801, Toronto,
Ontario, M2J 5C2, Canada. Our telephone number is
(416) 756-2324.
We are a security software product company that
develops, markets and distributes wireless security
infrastructure solutions that provide for the secure
transmission of data over wireless networks and
devices. Our solution encompasses all aspects of
commercial transaction security requirements, covering
the authentication and authorization of individuals
involved, the integrity of the information being sent
and the non-repudiation or legalization of the
transaction.
We believe we are a pioneer in providing security
products for mobile commerce over wireless networks
and are striving to become the leading provider of
wireless security solutions. Our strategy to achieve
this objective involves: targeting emerging m-commerce
markets, expanding strategic partnerships and sales
channel relationships, maintaining a leadership
position in terms of products and research and
development and building awareness of the Diversinet
brand.
We develop and license the Passport Certificate
Serverr, Passport ONET, Passport Authorization
ProductT and Passport VPN computer software products,
which provide for the secure transmission of data over
wireless networks as well as various other kinds of
networks, including corporate networks,
telecommunications systems and the Internet. The
transmission of data over these networks is known as
"e-commerce".
The Passport Certificate Serverr software verifies the
identities of the parties to an e-commerce
transmission through the use of digital certificates
so that unauthorized persons cannot intercept its
contents.
The Passport ONET software product provides a single
point of contact to enable the security tools embedded
in mobile devices. By providing application providers,
enterprises, and operators a single security
infrastructure solution for all mobile devices,
Passport avoids the development time and
infrastructure costs normally associated with multiple
device coverage.
The Passport Authorization Product software issues
digital permits that are linked to the holder's
digital certificate. The Diversinet digital permit is
designed to allow digital certificates to serve
additional functions such as authorizing users to
perform specific tasks once they have accessed a given
network.
Virtual private network ("VPN") software uses
encryption to provide a secure connection through the
Internet, establishing a "secure tunnel" through which
any enterprise data can travel. VPNs are less
expensive than true private networks using dedicated
connections and can use digital certificates to
securely identify and authenticate the enterprise
server and remote user. Diversinet's Passport
Wireless VPN combines the strength of public key
infrastructure (PKI) digital certificates with a
robust, wireless-optimized VPN solution.
We believe that the Passport products offer a unique
approach to facilitating and securing commercial
transactions and data transmissions over these
networks.
Acquisition of DSS Software Technologies
In early January, 2003, we acquired all of the capital
stock of DSS Software Technologies ("DSS"), a systems
integration provider headquartered in Fremont,
California. DSS provides technical consulting
services to tier one customers including financial,
enterprise and technology companies such as Cisco
Systems, Lucent, Oracle, Sun Microsystems and Wells
Fargo in the areas of systems integration, software
development, and Enterprise Resource Planning "ERP"
and Customer Relationship Management "CRM"
implementation. Consideration for the DSS acquisition
was provided through a combination of cash payments
and an earn-out position, plus warrants, provided over
a three-year term.
We expect that the addition of DSS' services suite
will enhance our ongoing strategy to provide greater
depth and breadth in our product and service offering.
Combined, DSS and our technical and industry expertise
can offer integrated solutions and full services
offerings. We believe our acquisition of DSS will
strengthen our position in the U.S. through expanded
access to key customers and the addition of a
comprehensive line of services that will help us to
better address rapidly growing demands for security in
telecommunication services.
The synergy between the two companies is expected to
provide the infrastructure and capability to expand
into new markets and convey a unique opportunity to
deliver products and services that will meet the
specific needs of enterprise customers.
With DSS's professional services focus on high profile
customers in our target markets (enterprise,
financial, et cetera) our complementary skill sets
(application development and wireless), and a U.S.
sales force, the combined company can provide
technical consulting services to companies in the
areas of system integration, software development, and
ERP and CRM implementation, which are all natural
extensions of wireless and require enhanced security.
DSS's operations have been integrated with ours as a
wholly owned subsidiary of Diversinet. The purchase
of DSS was accounted for using the purchase method and
consolidated financial statements have been prepared.
Acquisition of Caradas, Inc.
In September 2003, we acquired all of the capital
stock of Caradas, Inc. ("Caradas"), a systems
integration provider headquartered in Braintree,
Massachusetts. Caradas provides 'smart card
enablement' to the financial, retail, enterprise,
government and other markets looking for open, secure,
multi-application solutions. Caradas technology
answers the increasing and urgent need for multi-
application smart card technology, essential for
managing critical business processes. For customers
that want to manage security processes in both the
physical and digital environments, Caradas offers an
identity and authentication that connects with
continuously updated, smart card-aware applications.
Caradas focuses on smart card-based application
security systems within the financial services
industry, particularly as a vehicle for managing
relationships between issuers and cardholders.
Caradas offers a suite of solutions and services to
define and implement secure application
infrastructures.
? The Caradas ConnexusT Platform Caradas provides
turnkey solutions for smart card-based
application security systems using a suite of
Caradas developed and third-party technology
components.
? Visa and MasterCard Issuer Solutions: Caradas
adds value to Visa and MasterCard issuer
projects, by working closely on architecture and
design, providing integration services, followed
by test and operational transfer as the
deployment occurs. The smart Visa and MasterCard
oneSmart Solutions are based upon established
methodologies, third-party technologies and the
Caradas ConnexusT Platform technology.
? Caradas Services: Caradas provides a set of
professional integration services for the
strategy and support behind the technology. The
Caradas team has developed a methodology for
implementing application security systems.
? Caradas LabsT: Caradas provides benchmarking and
evaluation of core technologies through the
testing center.
We expect that the addition of Caradas will enhance
our ongoing strategy to provide greater depth and
breadth in our product and service offering, namely in
the financial services and government verticals.
Combined, Caradas and our technical and industry
expertise can offer integrated solutions and full
services offerings. We believe our acquisition of
Caradas will strengthen our position in the U.S.
through expanded access to key customers and the
addition of a comprehensive line of services that will
help us to better address rapidly growing demands for
security in telecommunication services.
The synergy between the two companies is expected to
provide the infrastructure and capability to expand
into new markets and convey a unique opportunity to
deliver products and services that will meet the
specific needs of financial service and government
customers.
With Caradas' focus on smart card technology in our
target markets (financial, government) our
complementary skill sets (application development and
wireless), and a U.S. sales force, the combined
company can provide technical consulting services to
companies in the areas of smart card-based application
security systems and software development, which are
natural extensions of wireless and require enhanced
security.
Caradas' operations will be integrated with ours as a
wholly owned subsidiary of Diversinet. The purchase
of Caradas was accounted for using the purchase method
and consolidated financial statements will be
prepared.
The Offering
Certain of our shareholders are offering the following
securities for sale under this prospectus:
? 1,200,000 common shares, and
? 1,202,000 common shares issuable upon the
exercise of the warrants.
There are a total of 2,402,000 common shares issued
and common shares issuable pursuant to this
registration statement.
We are not offering or selling any securities under
this prospectus and will not receive any proceeds from
the sale of the selling shareholder's securities. We
may receive up to $2,731,000 upon the exercise of the
warrants. However, we will pay all costs associated
with this prospectus.
RISK FACTORS
The common shares offered by this prospectus are
speculative, involve a high degree of risk and should
only be purchased by persons who can afford to lose
their entire investment. You should therefore
carefully review the following risk factors, as well
as all of the other information in this prospectus,
before investing in the securities offered by this
prospectus.
Risks Relating to Our Business
We have lost money in the past, we have realized
minimal revenues from continuing operations and we
expect to continue to sustain losses in the future.
We have generated minimal revenue to date from the
sales of our solutions and licensing of our products.
For the fourteen months ended December 31, 2003, we
posted a net loss of $5,618,000. For the year ended
October 31, 2003, we posted a net loss of $4,834,000,
for October 31, 2002, we posted a net loss of
$4,065,000 and for October 31, 2001, we posted a net
loss of $12,272,000. For the years ended October 31,
2000 and October 31, 1999, we had net losses of
$10,189,000 and $9,421,000, respectively. We
generated revenue of $8,563,000 for the fourteen
months ended December 31, 2003, $7,108,000 in the
twelve months ended October 31, 2003, $710,000 in the
year ended October 31, 2002, $793,000 in the year
ended October 31, 2001, $1,787,000 in the year ended
October 31, 2000 and $164,000 in the year ended
October 31, 1999. The revenue represents the sales of
our secured wireless and identity management solutions
and professional services including the initial
licensing of our Passport Certificate Serverr, Passport
Authorization ProductT and Connexus product together
with related professional services and consulting
revenue. During fiscal 2001, 40% of our revenue was
generated from one customer. During fiscal 2002, 28%
of revenue was generated from one customer although
not the same customer as in fiscal 2002, and 54% of
revenue was generated from three customers. During
fiscal 2003, 30% of revenue was generated from one
customer although not the same customer as in fiscal
2001, and 50% of revenue was generated from two
customers. To date, the sales of our solutions,
including related consulting services and licensing
our products to various customers and providing them
with related professional services has generated our
revenues. We cannot provide assurance that recurring
revenues will arise from these agreements. The
auditors' reports on our December 31, 2003 and October
31, 2002 consolidated financial statements included
additional comments for U.S. readers that states that
conditions and events exist that cast substantial
doubt on our ability to continue as a going concern.
The consolidated financial statements do not include
any adjustments that might result from the outcome of
that uncertainty.
Our business plan is dependent upon customer adoption
and commercial deployment of our products. Our
ability to continue operations is also dependent on
the acceptance of our security solutions and the
adoption of transaction-based applications using
public key infrastructure-based security (also known
in the industry as PKI-based security) over wireless
networks as an accepted method of commerce in
sufficient volume for us to generate enough revenues
to fund our expenses and capital requirements. The
wireless mobile commerce market is in a very early
stage, and it may not develop to a sufficient level to
support our business.
Our solutions are marketed to large companies and
government agencies. The implementation of our
solutions by these entities typically involves a
lengthy education process and a significant technical
evaluation and commitment of capital and other
resources. This process is also subject to the risk
of delays associated with customers' internal
budgeting and other procedures for approving large
capital expenditures, deploying new technologies
within their networks and testing and accepting new
technologies that affect key operations. As a result,
the associated sales and implementation cycles can be
lengthy. Our quarterly and annual operating results
could be materially harmed if orders forecasted for a
specific customer for a particular quarter are not
realized.
Many of our early licensing agreements permitted our
customers to examine and test our products with no
initial up-front payments to us. These customers are
not required to make payments to us until they begin
to use our solutions for commercial purposes. In
certain cases, we also enter into evaluation
agreements, whereby potential customers may examine
our solutions for a specified period of time with no
payment to us. Our current licensing agreements
typically require the customer to pay a license fee
attributable to the software components and the
solution and upon shipment of these items to the
customer, although we have sometimes waived the up-
front fee.
Product and Market conditions. General economic
conditions may have a significant impact on our
ability to generate sales for our solutions. During
fiscal 2002 and 2001, we experienced decreased
activity from our potential customers, and generally
the adoption of wireless services has not proceeded as
rapidly as previously expected. During 2003, with the
acquisitions of DSS and Caradas, we were able to
increase revenues, however there is no guarantee that
future sales will not decline in the near future.
Foreign exchange. Our functional currency is the U.S.
dollar. Sales generated outside Canada are generally
denominated in U.S. dollars. During fiscal 2003, we
incurred a large portion of our expenses in U.S.
dollars, but we also incurred a smaller portion of our
expenses in other currencies including Canadian
dollars, Pound Sterling and Hong Kong dollars.
Changes in the value of these currencies relative to
the U.S. dollar may result in currency losses that may
have an adverse effect on our operating results. With
the completion of our financings in June 2003 and
January 2004, we have a portion of our cash resources
in U.S. dollar short-term investments and in Canadian
dollars. During fiscal 2003 we maintained a portion
of our cash resources in both U.S. and Canadian dollar
term deposits. During 2003 we with the acquisitions
of DSS and Caradas, we switched our reporting currency
from Canadian dollars to U.S. dollars.
Sales generated outside Canada are generally
denominated in U.S. dollars. Furthermore the majority
of Caradas' and DSS's revenues and costs from
operations are denominated in U.S. dollars. During
fiscal 2002, we incurred most of our expenses in
Canadian dollars, but we also incurred a portion of
our expenses in foreign currencies including U.S.
dollars, Pound Sterling and Hong Kong dollars.
Changes in the value of these currencies relative to
the U.S. dollar may result in currency losses that may
have an adverse effect on our operating results. With
the completion of our recent financing in June 2003,
we have a portion of our cash resources in U.S. dollar
term deposits. To date we have not entered into any
foreign currency hedging activities.
We may not be successful if we fail to retain our key
technical personnel. During 2003, in order to reduce
our largest single expenditure, salaries and benefits,
we reduced our headcount of employees in the Toronto
office. During September 2001, we substantially
reduced our headcount and curtailed certain sales and
marketing activities, particularly in the U.S. During
2002 and 2003, we continued to review our cost
structure and have continued to reduce our headcount.
Workforce reductions may have a detrimental effect on
the morale of remaining employees, impeding their
performance levels. In addition, our ability to
attract potential new employees in the future may
suffer if our reputation was hurt by this staff
reduction.
We currently have seven senior officers and 124
employees and contractors. We may not be able to
improve our solutions and products or create new
products if we lose any of our key employees or
contractors. The contract with our CEO, Mr. Nagy
Moustafa, had a term of five years, commencing
September 29, 1997, and has been renewed on a year to
year basis. None of our other employment agreements
has a specified term. We do not maintain key person
life insurance policies on any of our employees.
Skilled technical personnel can be difficult to
attract depending on the strength of the economy and
competitive opportunities. We may not be able to
retain our current employees if they receive better
job offers from other employers. The weakened
economy through 2002 and 2003 may not alleviate this
risk in the future.
We are involved in litigation which could result in
judgments against us which, in the aggregate, could
total more than our combined current assets, working
capital and net assets. There are currently four
material claims pending against us. If we lose any of
these suits or enter into settlements requiring us to
pay cash or issue any of our common shares, our
liquidity and financial position will be adversely
affected and our shareholders' ownership may be
diluted.
We have been sued, along with other individuals and
corporations, by Silva Run Worldwide Ltd. in
connection with Silva Run's purchase of 212,500 common
shares (850,000 common shares prior to a one for four
reverse split in May 1997) in 1995 for a purchase
price of $3,700,000. Silva Run is seeking to cancel
the stock purchase and reimbursement of the $3,700,000
purchase price, plus interest, attorneys' fees and
costs. Silva Run has alleged that we, directly or as
the control person of other defendants, violated
certain provisions of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as
amended.
In May 2000 we were sued, along with our wholly-owned
Barbados subsidiary, Instant Publisher Ltd. The
plaintiff is seeking damages of $1,533,950 for breach
of an October 25, 1995 dealer agreement with our
previous printing business regarding the distribution
of printing equipment, and damages of $25,000,000 for
loss of reputation and loss of opportunity, pre-
judgment and post-judgment interest, and costs.
In July 2003, we were sued in the Ontario Superior
Court of Justice by two former employees who claim,
inter alia, that each was terminated, while on short
term disability, in a manner that exhibited bad faith
and unfair dealings. One is seeking against
Diversinet $125,000 in special, general, punitive and
exemplary damages. The other is seeking against
Diversinet $350,000 in special, general, punitive and
exemplary damages.
In January 2004, we and an officer of the Company were
sued in the Ontario Superior Court of Justice by a
former employee who claims, inter alia, that he was
wrongfully terminated in a manner that exhibited bad
faith and unfair dealings. He is seeking a total of
Cdn$450,000 against us and our officer in aggravated,
general, punitive and exemplary damages.
We have limited experience in the wireless Internet
security software and identity management solutions
field, and we are therefore subject to risks inherent
in establishing a new business. We have been in the
wireless Internet security software field since fiscal
1997 and the identity management solutions field since
2001, and we have only generated minimal revenues from
this business. We are not sufficiently established to
fully evaluate or forecast our prospects, and we are
subject to the risks inherent in establishing a new
business enterprise.
We are dependent on the adoption of transaction-based
applications over wireless networks as an accepted
method of commerce. In order for us to be successful,
transaction-based applications using wireless security
infrastructure over wireless networks must be adopted
as a means of trusted and secure communications and
commerce to a sufficient extent and within a
reasonable time frame, particularly considering our
existing financial resources and future capital needs.
Since trusted and secure communications and commerce
over these networks is new and evolving, it is
difficult to predict with any assurance the size of
this market and its growth rate, if any.
If the market for trusted and secure communications
and commerce utilizing wireless solutions over these
networks fails to develop or develops more slowly than
expected, we may have difficulty selling solutions or
generating sufficient revenues to support our
business.
Our ability to keep pace with the rapid technological
changes and frequent new product introductions common
in the electronic commerce industry will determine our
ability to remain competitive and affect the viability
of our products. To succeed in the mobile e-commerce
and the identity management solutions business, we
believe that we will have to continuously improve the
performance, features and reliability of our products
and be the first to the market with new products or
enhancements to existing products. We cannot provide
assurance that we will be able to improve our products
in a timely manner. The emerging market for security
solutions for mobile e-commerce and the identity
management is characterized by rapid technological
developments, frequent new product introductions and
evolving industry standards. We anticipate this
evolution will also occur in the mobile e-commerce and
the identity management solutions market in which we
focus our technological developments. The adoption of
new standards, or the informal adoption of certain
standards by a significant percentage of the computer
security and related industries, could require us to
reconfigure our products. We may not be able to
counter challenges to our current products or to
introduce product offerings that keep pace with the
technological changes introduced by competitors or
persons seeking to breach information security. We
are not currently aware of any significant new
technologies either under development or about to be
introduced in the mobile e-commerce or the identity
management solutions security field.
The highly competitive nature of the electronic
commerce field could prevent us from achieving
success. Our solutions are targeted at the new and
rapidly evolving market for authentication and
authorization products for wireless electronic
commerce, telecommunications and identity management.
This market is not mature. We anticipate that it will
be intensely competitive, subject to rapid change and
significantly affected by new solution, product and
service introductions and other market activities of
industry participants. Many of our competitors and
potential competitors have a longer operating history,
greater name recognition, larger installed customer
base and significantly greater financial, technical
and marketing resources than we have. As a result,
they may be able to adapt more quickly to new or
emerging technologies and changes in customer
requirements, and they could therefore render our
technologies and products obsolete.
Because of the broad potential application of our
authentication and authorization software and identity
management solutions, we compete with vendors offering
a wide range of computer security products. These
competitors include Entrust Technologies, VeriSign,
Certicom, Baltimore Technologies and RSA Security.
There also may be other potential entrants to the
market of whom we are not yet aware.
Our licensing revenues are dependent on our customers'
acceptance and use of our software products, and we
expect our sales cycle to be lengthy. Many of our
early licensing agreements permitted our customers to
examine and test our products with no initial up-front
payments to us. These customers are not required to
make payments to us until they begin to use our
product for commercial purposes. We also enter into
evaluation agreements in certain cases, whereby
potential customers may examine our solutions for a
specified period of time with no payment to us. Our
current licensing agreements typically require the
customer to pay a license fee attributable to the
software components and the application solution and
upon shipment of these items to the customer, although
we have sometimes waived the up-front fee.
Customers cannot simply license our solutions and
begin using them immediately in their businesses.
Making our solutions work with a particular customer's
application may be a complex, expensive and, in
certain cases, an ultimately unsuccessful process.
This process may also require the customer to make
significant commitments of time and money. Based on
discussions with our customers, we believe that a
customer's required cycle of testing, internal
approval and network modifications can reasonably take
between six and nine months or longer. Therefore, we
expect our sales cycle, or the time between entering
into an agreement and when we begin to receive
revenue, to be six to nine months or longer. Also,
the amount of revenue can be very limited until the
customer's product is made generally available and
adopted. Our sales are also subject to significant
risks over which we have little or no control,
including customers' budgetary constraints and
internal acceptance procedures regarding security-
related matters.
Two major encryption technology vendors service our
area of business, and if we are unable to license
encryption technology from at least one of them, it
would cause a significant disruption to our business.
Our current product offerings include encryption
technology that we source from a third-party vendor,
RSA Security, an encryption technology vendor who
services the wireless and the e-commerce security
market. The term of each licensing arrangement is
open-ended. Encryption technology is currently
available from other vendors; however, if this
agreement is terminated for any reason, we would have
to license encryption technology from an alternative
vendor, and there might be a significant disruption to
our business.
Our success will depend in part on our continued
ability to have access to these and other technologies
that are important to our existing products and may
become important to products we may develop in the
future. We cannot be certain that we will be able to
procure or use any necessary technology on terms
similar to existing licenses.
We lack experience in sales and marketing, and depend
on our relationships with more established
corporations to assist in selling and marketing our
products. We have limited sales and marketing
experience and limited money to fund marketing. A
significant part of our business strategy is to form
strategic relationships with more established
companies to expose our solutions to a larger customer
base than we could reach through direct sales and
marketing force. Our existing relationships have not
resulted in any significant revenues to date and may
not result in any revenues in the future.
As a result of our emphasis on these relationships,
our success will partially depend on both the ultimate
success of the third parties with which we have these
relationships and the ability of these third parties
to market our products and services successfully.
In the past, we have concentrated our sales and
marketing efforts on application service providers.
This strategy has lead to no commercial deployments.
As a result and due to some success experienced by us
in Hong Kong, we are focussing our efforts on working
to establish the necessary infrastructure first. We
have jointly developed Mobile e-Cert with Hongkong
Post. Hongkong Post will support the Mobile e-Certs
through its Mobile Certification Authority and mobile
operators will act as the Registration Authorities for
the authentication of the identity of Mobile e-Cert
subscribers. Hongkong Post is the first recognized
public Certification Authority in Hong Kong.
Hutchinson, the largest and the leading mobile
operator in Hong Kong, has been appointed the first
certified Registration Authority for the registration
of Hongkong Post Mobile e-Cert digital certificates to
mobile users. This appointment also marks the first
time worldwide a mobile operator is acting as a
Registration Authority for the issuance of wireless
digital certificates. After this was successfully
accomplished, we have been working with application
service providers who will develop applications that
will have our software embedded and will utilize
Mobile e-Cert. Furthermore, with our recent
acquisitions of DSS and Caradas, we believe that we
have mitigated our risk by diversifying our solution
offering.
We cannot provide assurance that we will be able to
enter into additional, or maintain our existing,
strategic relationships on commercially reasonable
terms, if at all. Our failure to do so would require
us to devote substantially more resources to the
distribution, sales and marketing of our products and
services. Also, these strategic relationships do not
afford us any exclusive marketing or distribution
rights. The third parties may reduce their
commitments to us in the future or pursue alternative
technologies.
The nature of our products subjects us to product
liability risks, potential lost revenues and adverse
publicity in the event of product failure. Our
customers may rely on our products to prevent
unauthorized access to computer networks.
Malfunctions or design defects of our products could:
? cause interruptions, delays or cessation of
services to our customers;
? result in product returns;
? result in liability for damages;
? adversely affect the market's perception of the
security offered by our product, resulting in a
lack of demand for our products; or,
? require us to make significant expenditures of
capital or other resources to alleviate the
problem.
Our license agreements may not be adequate to limit
our liability. A large number of claims by our
customers could subject us to significant liability as
well as limit the demand for our solutions and
products. In most cases our license and support
agreements attempt to limit our liability to the total
amount of the licensing and support fees paid during
the twelve-month period preceding an alleged error in
or failure of our software. This contractual
provision may not always be enforceable. Courts have
held that contractual limitations on liability of this
type, or the "shrink-wrap licenses" in which they are
sometimes embodied, are unenforceable because the
licensee does not sign them. If these contract
provisions limiting our liability are not enforceable,
we could be obligated to pay significant damages
resulting from customer claims.
If computer hackers find ways to circumvent our
products, our products would not perform their
essential function. Any compromise of the security
offered by our products, in a single incident or a
series of incidents, would make our products less
attractive to our customers. Software error or
failure may result from a hacker seeking unauthorized
access to a computer network. The methods used by
hackers are evolving rapidly and generally are not
recognized until they are launched against one or more
systems. We are unable to anticipate hackers'
tactics. The publicity surrounding any security
breaches could adversely affect the public perception
of the security offered by our authentication and
authorization products and make it more difficult for
us to sell our products.
Technical advances in the information security market
may make our products obsolete. Our products are
based on PKI and identity management technology and
depend in part on the application of certain
mathematical principles forming the basis of the
encryption technology that we license and embed in our
products. Any significant advance in techniques for
decoding or cracking encrypted computer information
could render our products obsolete or unmarketable.
Our PKI products use algorithms, or mathematical
formulae, to encrypt and secure information. The
security afforded by our products is predicated on the
assumption that these mathematical formulae are very
difficult to solve. This assumption is based on the
fact that years of theoretical and empirical research
by leading mathematicians have not resulted in any
efficient solutions to these problems. There can be
no assurance, however, that future research will not
uncover efficient solutions to these problems.
Also, even if no breakthrough in solving these
problems is discovered, they may eventually be solved
by computer systems having sufficient speed and power.
If improved techniques for decoding encrypted
information are developed or made possible by the
increased availability of powerful computing
resources, our products could be rendered obsolete.
We might not be able to enforce our intellectual
property rights. Our success depends significantly
upon our proprietary technology, and our means of
protecting our proprietary and intellectual property
rights may not be adequate. We rely on a combination
of patent and trademark laws, trade secrets,
confidentiality agreements and contractual provisions
to protect our proprietary rights. We have two U.S.
patents, which will be in effect until August 22,
2017, and three patents granted in Israel in effect
until 2017 and 2021, as well as 13 applications
pending in Israel, U.S. and Canada. We cannot provide
assurance that any of our applications will be
approved, that any new patents will be issued, that we
will develop proprietary products or technologies that
are subject to patent protection, that any issued
patent will provide us with any competitive advantages
or will not be challenged by third parties.
Furthermore, we cannot provide assurance that the
patents of others will not have a material adverse
effect on our business and operating results. There
is also a risk that our competitors will independently
develop similar technology, duplicate our products or
design around our patents or other intellectual
property rights.
If our technology or products were determined to
infringe upon the rights of others, we would be
required to obtain licenses to use that technology.
If we are not able to obtain a license in a timely
manner on acceptable terms or at all, we may have to
stop producing our product until we can develop an
alternative that does not infringe the rights of
others.
Patent disputes are common in technology-related
industries. We cannot provide any assurance that we
will have the financial resources to enforce or defend
a patent infringement or proprietary rights action.
As the number of products and competitors in our
target markets grows, the likelihood of infringement
claims also increases. Any claims or litigation may
be time-consuming and costly, cause product shipment
delays or require us to redesign our product or
require us to enter into royalty or licensing
agreements. Any of these events could have a material
adverse effect on our business and operating results.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of
our products or to use our proprietary information and
software. In addition, the laws of some foreign
countries do not protect proprietary and intellectual
property rights to as great an extent as do the laws
of Canada and the U.S.
We have focused our sales and marketing efforts in
Asia and Hong Kong. In 2003, several economies in
Asia, including Hong Kong, have been negatively
affected by the outbreak of severe acute respiratory
syndrome, or SARS. Some industries in Hong Kong were
been hit hard by the SARS outbreak. The dramatic
decline in the business has had a negative effect on
the economy of Hong Kong for 2003. The Government of
Hong Kong and business communities have taken various
measures to stimulate the economic recovery of Hong
Kong. While the ultimate impact of SARS is unclear at
this time, the effects of these measures are crucial
to Hong Kong's future financial condition and economic
developments, which would in turn affect our financial
condition and results of operations.
Changes in the export regulation of encryption-based
technologies may restrict our ability to sell or
license our products. Our products are subject to
export controls under Canadian and U.S. laws and
regulations. These laws and regulations may be
revised from time to time in ways that may materially
and adversely affect our ability to sell our products
abroad or to make products available for sale or
license via international computer networks such as
the Internet, although pursuant to an international
treaty, a number of countries have relaxed, or are in
the process of relaxing, their export rules as
applicable to products of the type licensed by us.
Canadian and U.S. government controls on the export of
encryption technologies which we license from third
parties and which are embedded in our products may, if
subject to revision, be amended and subsequently
restrict our ability to freely export our products.
As a result, foreign competitors subject to less
stringent export controls on their products may be
able to compete more effectively than we can in the
global information and computer security market.
Our articles of incorporation authorize us to issue an
unlimited number of common shares, which could result
in dilution to our shareholders. subject to regulatory
and/or shareholder approval, shareholders may
experience dilution or limitations in takeover
attempts because our articles of incorporation allow
us to issue an unlimited number of common shares. Our
shareholders have no right to purchase additional
common shares when we issue new shares. As of
February 15, 2004, we had 12,043,027 common shares
issued and outstanding.
We have limited financial resources. Our ability to
continue operations during the next fiscal year may be
dependent on our ability to obtain additional
financing. Although we have made progress in
developing our solutions and have completed initial
consumer deployments, our revenue from operations is
not sufficient to cover our operating expenses at
present and is unlikely to be sufficient within fiscal
2004. We have obtained funding for operations from
private equity placements in the past, raising
approximately $49,835,000 through selling a total of
10,421,132 common shares, but there is no assurance we
will be able to do so again in the near future despite
the progress of the business. In January 2004 we
completed a private placement through the issuance of
1,000,000 common shares and 1,100,000 common share
purchase warrants. We received gross proceeds of
$2,000,000 in the transaction. The warrants were
comprised of 500,000 warrants exercisable at $2.00 and
600,000 at $2.05. Each warrant entitles the holder
thereof to acquire one common share for a period of
three years. In June 2003 we completed a private
placement with the issuance of 5,000,000 common shares
at a price of $0.62 per common share for gross
proceeds of $3,100,000 to us. In April 2002, we
completed a private placement with the issuance of
518,671 units at a price of $6.00 per unit for gross
proceeds of $3,112,022 to the Company. Each unit is
comprised of one (1) common share and three-quarters
(3/4) of one common share purchase warrant (each whole
warrant, a "Warrant"). Each Warrant will entitle the
holder thereof to acquire one (1) common share at a
price of $7.20 per common share for a period of up to
three years from April 4, 2002. There is no assurance
we will be able to obtain further placements in the
near future despite the progress of the business. As
well, the terms of new capital, if any, may materially
dilute existing shareholders. Our failure to either
raise capital when needed or to generate revenues
would leave us with insufficient resources to continue
our business.
If our common shares should become ineligible for
continued quotation on the OTC BB or a public trading
market does not continue for any reason, holders of
our common shares may have difficulty selling their
shares. Our common shares became ineligible for
continued quotation on the NASDAQ SmallCap Market and
are now trading on the Over the Counter Bulletin
Board; therefore holders of our common shares may have
difficulty selling their shares. Our common shares
were quoted on the NASDAQ SmallCap Market from June
1995 through late April 2003.
Our common shares may continue to be penny stock,
which may adversely affect the liquidity of our common
shares. The United States Securities and Exchange
Commission has adopted regulations that define a penny
stock to be any equity security that has a market
price, as defined in those regulations, of less than
$5.00 per share, subject to certain exceptions. Our
common shares are currently penny stock.
Generally, for any transaction involving a penny
stock, a broker-dealer is required to deliver, prior
to the transaction, a disclosure schedule relating to
the penny stock market as well as disclosure
concerning, among other things, the commissions
payable, current quotations for the securities and
information on the limited market in penny stocks.
The liquidity of our common shares may be materially
and adversely affected if our common shares continue
to be penny stock due to the administration
requirements imposed by these rules.
It may be difficult for our shareholders to enforce
civil liabilities under the U.S. federal securities
laws because we are incorporated in Canada. We are
incorporated under Canadian law and the majority of
our directors and executive officers are Canadian
citizens or residents. All, or a substantial portion,
of these persons' assets and substantially all of our
assets are located outside the U.S. As a result, it
may not be possible for investors to effect service of
process within the U.S. upon those persons or
Diversinet or to enforce against them judgments of
U.S. courts predicated upon civil liabilities under
U.S. federal or state securities laws. Also, there is
uncertainty as to the enforceability in Canada, in
original actions or in actions for enforcement of
judgments of the U.S. courts, of civil liabilities
predicated upon U.S. federal or state securities laws.
We may be treated as a passive foreign investment
company, which would have adverse tax consequences for
our U.S. shareholders. We may be treated as a passive
foreign investment company, or a PFIC. While we do
not believe that we should be treated as a PFIC,
whether we are treated as a PFIC depends on questions
of fact concerning our assets and revenues.
Accordingly, we cannot assure you that we will not be
treated as a PFIC. If we were to be treated as a
PFIC, there could be material adverse tax consequences
to U.S. holders of our common shares. See "United
States Federal Income Tax Consequences" beginning on
page 23.
NOTICE REGARDING FORWARD-LOOKING INFORMATION
This prospectus and the documents incorporated in it
by reference contain forward-looking statements which
involve known and unknown risks and uncertainties. We
include this notice for the express purpose of
permitting us to obtain the protections of the safe
harbor provided by the Private Securities Litigation
Reform Act of 1995 with respect to all such forward-
looking statements. Examples of forward-looking
statements include: projections of capital
expenditures, competitive pressures, revenues, growth
prospects, product development, financial resources
and other financial matters. You can identify these
and other forward-looking statements by the use of
words such as "may", "will", "should", "plans",
"anticipates", "believes", "estimates", "predicts",
"intends", "potential" or the negative of such terms,
or other comparable terminology.
Our ability to predict the results of our operations
or the effects of various events on our operating
results is inherently uncertain. Therefore, we
caution you to consider carefully the matters
described under the caption "Risk Factors: and certain
other matters discussed in this prospectus, the
documents incorporated by reference in this
prospectus, and other publicly available sources.
Such factors and many other factors beyond the control
of our management could cause our actual results,
performance or achievements to be materially different
from any future results, performance or achievements
that may be expressed or implied by the forward-
looking statements.
USE OF PROCEEDS
We will not receive any proceeds when the selling
shareholders sell their common shares. The $2,731,000
in gross proceeds that we may receive upon the
exercise of 1,202,000 warrants will be used for
continued sales efforts, general operations and
general working capital purposes. We will pay all
costs of this prospectus.
DIVIDEND POLICY
We have not paid any cash dividends on our common
shares to date and do not anticipate paying cash
dividends in the foreseeable future.
SELECTED FINANCIAL DATA
Our selected financial data for the fourteen month
year ended December 31, 2003 and the years ended
October 31, 2003, 2002, 2001, 2000, and 1999 are
derived from our financial statements and should be
read in conjunction with our consolidated financial
statements and the accompanying notes. Our financial
statements are expressed in U.S. dollars. All
financial information contained in the prospectus is
presented in U.S. dollars except where otherwise
indicated. On January 28, 2003, the Company
implemented a 1 for 10 reverse stock split that was
approved by its shareholders at the Company's Annual
and Special Meeting of Shareholders on January 22,
2003. The share data has been adjusted for this
reverse stock split.
Our financial statements have been prepared in
accordance with Canadian GAAP. These principles
conform in all material respects with U.S. GAAP except
as described in Note 15 to our 2003 consolidated
financial statements.
Selected Financial Data
(in 000's, except per share data)
Fourte
en
Months
Ended
Decemb
er 31
Twelv
e
Month
s
Ended
Octob
er 31
Fiscal Year Ended October 31
2003
2003
2002
2001
2000
1999
1998
Consolidated Statement
of Loss Data
Revenue
$8,5
63
$7,1
08
$710
$793
$1,7
87
$164
$0
Loss from Continuing
Operations
(5,6
18)
(4,8
40)
(4,0
65)
(12,
272)
(10,
019)
(9,2
30)
(5,2
73)
Net loss from
Discontinued
Operations
0
0
0
0
(170
)
(190
)
(470
)
Net Loss
(5,6
18)
(4,8
40)
(4,0
65)
(12,
272)
(10,
189)
(9,4
20)
(5,7
43)
Weighted Average no.
of shares (000's)
6,47
8
5,71
5
2,97
2
2,63
8
2,35
3
1,67
4
1,53
3
Loss Per Share -
Continuing Operations
(0.8
7)
(0.8
5)
(1.3
7)
(4.6
5)
(4.2
7)
(5.4
7)
(3.4
2)
Net Loss Per Share
(0.8
7)
(0.8
5)
(1.3
7)
(4.6
5)
(4.3
4)
(5.6
1)
(3.7
6)
Dividends Per Share
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Consolidated Balance
Sheet Data
Working Capital
(Deficit)
452
1,11
4
1,75
2
2,25
3
14,1
35
3,38
9
1,70
9
Long-term Investment
0
0
0
0
0
0
65
Long-term Liabilities
300
300
0
0
0
966
1,32
9
Shareholders' Equity
7,64
7
8,46
2
2,95
0
3,83
5
16,2
23
5,33
8
2,42
8
Total Assets
986
1,05
4
1,19
9
6,09
3
18,7
86
8,31
1
4,76
8
Share Capital
49,1
91
49,2
02
40,6
78
34,2
12
35,1
86
14,2
20
28,3
30
US GAAP
Loss from Continuing
Operations
(5,6
18)
(4,8
40)
(4,1
00)
(12,
309)
(11,
002)
(9,1
10)
(2,4
50)
Net Loss from
Discontinued
Operations
0
0
0
0
(170
)
(190
)
(470
)
Net Loss
(5,6
18)
(4,8
40)
(4,1
00)
(12,
309)
(11,
171)
(9,3
01)
(2,9
20)
Loss Per Share -
Continuing Operations
(0.8
7)
(0.8
5)
(1.3
8)
(4.6
7)
(4.6
8)
(5.4
7)
(1.5
7)
Net Loss Per Share
(0.8
7)
(0.8
5)
(1.3
8)
(4.6
7)
(4.7
5)
(5.5
4)
(1.9
1)
Long-term Liabilities
300
300
0
0
0
1,15
8
1,71
9
Shareholders' Equity
6,65
5
7,47
1
1,95
8
2,88
1
15,2
77
5,14
7
2,01
0
Total Assets
986
1,05
4
1,19
9
6,09
3
18,7
86
8,31
1
4,73
8
Share Capital
79,2
81
79,2
91
70,7
67
60,3
48
62,1
19
42,2
61
28,8
93
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Our financial statements have been prepared in
accordance with Canadian GAAP. These principles
conform in all material respects with U.S. GAAP except
as described in Note 15 to our 2002 consolidated
financial statements.
Critical Accounting Policies
The nature of our business is not highly complex, as
we operate in one primary business. We develop,
market and sell wireless security and identity
management solutions and professional services to the
enterprise, financial services, government and gaming
and wagering marketplace. As part of providing these
solutions we perform professional services to install,
support and integrate our solutions with other
applications. We operate globally in a functional
organization. We do not have any off-balance sheet
financing, other than operating leases entered into in
the normal course of business and we do not actively
engage in derivative or hedging transactions. During
2003 with the acquisitions of DSS and Caradas, the
majority of our revenues and expenses are now in U.S.
dollars. Therefore during the year we switched our
functional currency from Canadian to U.S. dollars. A
significant portion of our cash balance is denoted in
U.S. dollars.
In 2003, our most complex accounting judgments were
made in the areas of revenue recognition. Revenue
recognition is expected to continue to be an on-going
element of our accounting processes and judgments. In
2002, our most complex accounting judgments were made
in the areas of software revenue recognition.
Software revenue recognition is expected to continue
to be an on-going element of our accounting processes
and judgments.
Revenue Recognition
We derive our revenue primarily from two sources:
sales of products, including hardware and software
licenses, and services, including maintenance, support
and professional services. Significant management
judgments and estimates must be made and used in
connection with the revenue recognized in any
reporting period. Material differences may affect the
amount and timing of our revenue for any period if our
management made different judgments.
Consulting revenues are recognized on a time and
materials basis, or on a percentage of completion
basis, depending on the contract, as employees and
subcontractors provide services. Revenue from time
and materials service contracts are recognized as the
services are provided. Revenue from fixed price long-
term contracts is recognized over the contract term
based on the percentage of services provided during
the period compared to the total estimated services to
be provided over the entire contract. Losses on
contracts are recognized during the period in which
the loss first becomes probable and reasonably
estimable. Contract losses are determined to be the
amount by which the estimated direct and indirect
costs of the contract exceed the estimated total
revenues that will be generated by the contract.
Revenue recognized in excess of billings is recorded
as unbilled services. Billings in excess of revenue
recognized are recorded as deferred revenue until the
above revenue recognition criteria are met.
Reimbursements, including those relating to travel and
other out-of-pocket expenses, and other similar third-
party costs, are included in revenues.
Revenue from software license agreements is recognized
upon execution of a license agreement and the shipment
of the software, as long as all vendor obligations
have been satisfied, the license fee is fixed and
determinable and collection of the license fees is
probable. Revenue from the sale of additional
software products is recognized as software is
delivered.
Revenue earned on software arrangements involving
multiple elements (i.e., software products,
upgrades/enhancements, post contract customer support,
installation, training, et cetera) is allocated to
each element based on vendor specific objective
evidence of relative fair value of the elements. When
arrangements contain multiple elements and vendor
specific objective evidence only exists for all
undelivered elements, the Company recognizes revenue
for the delivered elements using the residual method,
whereby the total arrangement fee is assigned to the
undelivered elements based on their fair value, with
the residual assigned to the delivered elements and
recognized. For arrangements containing multiple
elements where vendor specific objective evidence does
not exist for all undelivered elements, revenue for
the delivered and undelivered elements is deferred
until either vendor specific objective evidence exists
for the remaining undelivered elements or all elements
have been delivered. The revenue allocated to post
contract customer support is recognized ratably over
the term of the support and revenue allocated to
service elements (such as training and installation)
is recognized as the services are performed.
With respect to software revenue recognition, we
recognize revenues in accordance with the provisions
of the American Institute of Certified Public
Accountants' Statement of Position No. 97-2, "Software
Revenue Recognition" and SOP No. 98-9, "Modifications
of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions".
For all sales, we use a binding contract, purchase
order or another form of documented agreement as
evidence of an arrangement with the customer.
Revenues from software license agreements are
recognized upon receipt of an executed license
agreement and shipment of the software, if there are
no significant remaining vendor obligations,
collection of the receivable is probable and payment
is due in accordance with our normal payment terms.
We consider delivery to occur when we ship the
product, so long as title and risk of loss have passed
to the customer.
At the time of a transaction, we assess whether the
sale amount is fixed or determinable and whether
collection is probable. If we determine the fee is
not fixed or determinable, we recognize revenue when
payment becomes due. We assess collectibility based
on a number of factors, including the creditworthiness
of the customer. If we determine that collectibility
is not probable, we do not record revenue until such
time when collectibility becomes probable, which is
generally upon the receipt of cash.
When arrangements contain multiple elements and vendor
specific objective evidence ("VSOE") of fair value
exists for all undelivered elements, we recognize
revenue for the delivered elements using the residual
method. Our determination of fair value of each of
the undelivered elements in multi-element arrangements
is based on VSOE of fair value. VSOE of fair value for
each element is either the price charged when the same
element is sold separately or the price established by
management, having the relevant authority to do so,
for an element not yet sold separately. For
arrangements containing multiple elements wherein VSOE
of fair value does not exist for all undelivered
elements, revenue for the delivered and undelivered
elements is deferred until VSOE of fair value exists
or all elements have been delivered.
Maintenance service revenue, whether sold separately
or as part of a multiple element arrangement, is
deferred and recognized ratably over the term of the
maintenance contract, generally twelve months.
Revenue allocated to professional service elements is
recognized as the services are performed.
Due to the complexity of some software license
agreements, we routinely apply judgment to the
application of software revenue recognition accounting
principles to specific agreements and transactions.
Different judgments and/or different contract
structures could have led to different accounting
conclusions, which could have had a material effect on
our reported quarterly earnings.
Capital Assets
We record our capital assets at their cost less
accumulated depreciation. On a periodic basis,
management reviews the carrying values of these assets
and compares it to their estimated net recoverable
amount. The determination of net recoverable amount
necessitates various assumptions, many of which are
forward looking and which are based on management's
best estimate of future revenues, expenses and cash
flows. To the extent that actual financial
performance adversely differs from the results
projected by these assumptions, an impairment charge
in the value of these assets would be necessary.
Goodwill and Other Intangible Assets
We record our goodwill in accordance with CICA
Handbook section 3062 "Goodwill and Other Intangible
Assets", that requires that goodwill no longer be
amortized but instead be tested for impairment at
least annually by comparing the carrying value of a
reporting unit with its fair value. If any potential
impairment is indicated, then it is quantified by
comparing the carrying value of goodwill to its fair
value. During the fourth quarter of 2003 the Company
completed its goodwill impairment test. The Company
determined that the fair values of its reporting units
are in excess of their respective carrying amounts.
Stock Based Compensation
Effective November 1, 2002 we record our stock based
compensation in accordance with the new CICA Handbook
section 3870, "Stock-Based Compensation and Other
Stock-Based Payments", which requires that a fair
value based method of accounting be applied to all
stock-based payments to non-employees and to direct
awards of stock to employees. However, the standard
permits the Company to continue its existing policy of
recording no compensation cost on the grant of stock
options and warrants to employees with the addition of
pro-forma information as if the fair value method has
been applied.
Results of Operations
Fourteen month period ended December 31, 2003 and year
ended October 31, 2003 compared to year ended October
31, 2002
During fiscal 2003, the Company purchased 100% of the
common shares of two companies, the DSS acquisition
occurred on January 2, 2003 resulting in the inclusion
of twelve month's activities in the consolidated
financial results for December 31, 2003 and the
Caradas acquisition occurred on September 1, 2003
resulting in the inclusion of four month's activity in
the consolidated financial results for December 31,
2003. The common shares of DSS were purchased through
the issuance of shares, common share purchase
warrants, cash and a promissory note. The common
shares of Caradas were purchased through the issuance
of shares and common share purchase warrants. As a
result of a number of circumstances, including the
current year financing activities, the acquisition of
DSS and Caradas and the U.S. dollar becoming the
measurement currency in which most of the Company's
business is transacted, effective October 1, 2003, the
Company adopted the U.S. dollar as its measurement and
reporting currency for preparation of its consolidated
financial statements.
For the periods ending December 31, 2003 and October
31, 2003, we reported revenue of $8,563,000 and
$7,108,000 respectively compared to revenue of
$710,000 for the year ended October 31, 2002. We
generated 96% (2% in 2002) of our revenues from the
United States, 3% (63% for 2002) from the Asia Pacific
region, 0% (29% in 2002) from Canada and 1% (6% in
2002) from other areas during the period ended
December 31, 2003 and the period ended October 31,
2003. The increase in revenue is the result of the
acquisition of DSS and Caradas during the year, both
companies are located in the United States, leading to
the high percentage of U.S. based revenue.
Furthermore, we changed our year end to December 31st,
leading to a fourteen month reporting period. We are
operating in an evolving and unpredictable market and
accordingly have and may continue to experience wide
fluctuations in our revenues.
During the two periods ending in 2003, 30% (28% in
2002) of our revenue came from one customer. These
customers are not related to each other. While we are
endeavoring to increase our customer base, as the
market that we operate in is still in an evolving
stage and our revenue is still quite small, it is
reasonable to expect that our revenue may continue to
be concentrated among relatively few customers for the
near future.
We reported a net loss of $5,618,000 for the period
ended December 31, 2003 and $4,834,000 for the year
ended October 31, 2003 compared to a net loss of
$4,065,000 in the prior year. This net loss includes
stock-based compensation expense relating to the
issuance of options and warrants of $825,000 and
$772,000 respectively and nil for 2002. During the
year the Company started to report a fair value for
stock-based compensation and including this as an
expense.
Research and development expenses were $1,513,000 in
the period ended December 31, 2003 and $1,244,000 at
October 31, 2003 compared to $1,479,000 in 2002. The
annualized decrease is due to further cost reduction
measures carried out in the second quarter of 2003.
During the year we received a net amount of $289,000
relating to investment tax credits for R&D work done
in 2002 and 2001 and a rebate of retail sales taxes
paid in excess in 2001.
Sales and marketing expenses were $2,656,000 in the
period ended December 31, 2003 and $2,271,000 at
October 31, 2003 compared to 1,104,000 in 2002. The
increase in sales and marketing is largely due to the
two acquisitions that were done during the year and
the increase is consistent with the increase in sales
activity to generate the revenues during the period.
While the Asia Pacific market place continues to be a
focal point for the Company, with the addition of DSS
and Caradas, we have increased our U.S. presence and
increased sales and marketing in the U.S. accordingly.
Included in the December 31, 2003 sales and marketing
expenses is $300,000 relating to stock-based
compensation expenses.
General and administrative expenses were $2,654,000 at
December 31, 2003 and $2,369,000 at October 31, 2003
compared to $1,899,000 in 2002. These figures include
foreign exchange losses of $309,000 for December 31,
2003 and $230,000 in October 31, 2003 and a loss of
$145,000 for 2002. Until October 1, 2003 the Company
has historically prepared its consolidated financial
statements in Canadian dollars and used the Canadian
dollar as its measurement currency. Included in the
December 31, 2003 G&A expenses is $525,000 relating to
stock-based compensation expenses.
Depreciation and amortization expense was $740,000 in
the period ended December 31, 2003 and $574,000 for
the year ended October 31, 2003. These figures
include amortization of intangible assets acquired on
September 1, 2003 in the amount of $173,000 and
$87,000, respectively. Depreciation and amortization
expense in fiscal 2002 was $404,000.
We earned interest and other income of $26,000 during
the period ended December 31, 2003 and the year ended
October 31, 2003 and $111,000 in fiscal 2002 through
investing our excess cash.
Interest expenses were $21,000 during the period ended
December 31, 2003 and $20,000 for the year ended
October 31, 2003 compared to $nil in 2002. This
interest relates to notes payable on capital assets
acquired during the year.
Year ended October 31, 2002 compared to year ended
October 31, 2001
For the year ended October 31, 2002, we reported
revenue of $710,000 compared to revenue of $793,000
for the year ended October 31, 2001. We are operating
in an evolving and unpredictable market and
accordingly have and may continue to experience wide
fluctuations in our revenues. We generated 63% (55%
for 2001) of our revenues from the Asian region, 2%
(24% in 2001) from the United States, 29% (17% in
2001) from Canada and 6% (4% in 2001) from other areas
during fiscal year 2002.
During fiscal 2002, 28% (40% in 2001) of our revenue
came from one customer. These customers are not
related to each other. As the market that we operate
in is still in an early stage of development and our
revenue is still quite small, it is reasonable to
expect that our revenue may continue to be
concentrated among relatively few customers for the
near future.
We reported an improved net loss of $4,065,000 for the
year ended October 31, 2002 compared to a net loss of
$12,272,000 in the prior year. We completed operating
cost reductions in the fourth quarter of 2001 that
resulted in a decline in expenses from operations
during fiscal 2002 compared to fiscal 2001. These
reductions included workforce reductions in the United
States and Canada, closure of offices in the United
States and the discontinuance of non-core programs
particularly in the marketing area. The restructuring
was aimed at refocusing our efforts on the most
significant market opportunities in Asia and Europe.
Research and development expenses decreased to
$1,479,000 in 2002 from $4,485,000 in 2001 resulting
primarily as a result of continued efforts to reduce
costs as started in the last quarter of fiscal 2001.
During the year we received a net amount of $182,000
relating to investment tax credits for R&D work done
in 2000 and 1999.
Sales and marketing expenses were $1,104,000 in 2002
compared to $4,712,000 in 2001. The Company continues
to focus a significant portion of its efforts in the
Austral Asian markets where we derived 63% of our 2002
revenues. During 2002 we implemented a pilot project
for Hong Kong's six local mobile operators, the Hong
Kong m-Cert Implementation Forum to develop and
implement a single mobile digital certificate (m-Cert)
standard to promote mobile commerce in Hong Kong. We
continue to make progress in this region and expect to
increase our presence in 2003.
General and administrative expenses were $1,899,000 in
2002 compared to $2,616,000 in 2001. These figures
include foreign exchange losses of $145,000 for 2002
and a gain of $403,000 for 2001.
Depreciation and amortization expense in fiscal 2002
decreased to $404,000 from $1,226,000 in fiscal 2001.
The Company's deferred development and purchased
technology costs were fully amortized in 2001 and the
reduction in additions to capital assets has resulted
in reduced amortization for the 2002 fiscal year.
During fiscal 2001, we entered into a joint venture to
conduct certain of our Asian activities, as detailed
in note 8 to our audited financial statements. We own
50% of this joint venture and our financial statements
reflect our proportionate interest in its assets,
liabilities, revenue and expenses.
We earned interest and other income of $111,000 and
$448,000 in fiscal 2002 and 2001, respectively. The
decrease is primarily due to our lower average cash
and cash equivalents in 2002 and due to lower interest
rates than we received during 2001.
Liquidity and Capital Resources
Fourteen month period ended December 31, 2003 and year
ended October 31, 2003 compared to year ended October
31, 2002 and October 31, 2001
Cash used in operating activities was $1,677,000 in
the period ended December 31, 2003. Cash used in
operating activities during the year was comprised of
the net loss of $5,618,000, less net depreciation and
amortization of $740,000, stock-based compensation
expense of $825,000 and unrealized foreign exchange
loss of $416,000. Changes in other non-cash items
include a decrease in accounts payable and accrued
liabilities of $140,000, a decrease in receivables of
$2,356,000, a decrease in deferred revenue of $156,000
and an increase in prepaid expenses of $99,000. With
the addition of DSS and Caradas in 2003, we
incorporated the fair value of their balance sheets
into the Company's on the acquisition dates. The
inclusion of these balance sheets have affected the
calculation of non-cash operating working capital.
Cash used in operating activities was $954,000 in the
year ended October 31, 2003. Cash used in operating
activities during the year was comprised of the net
loss of $4,834,000, less net depreciation and
amortization of $574,000, stock-based compensation
expense of $772,000 and unrealized foreign exchange
loss of $491,000. Changes in other non-cash items
include a decrease in accounts payable and accrued
liabilities of $41,000, a decrease in receivables of
$2,023,000, an increase in deferred revenue of $20,000
and an decrease in prepaid expenses of $43,000.
Cash used in operating activities was $4,532,000 in
the year ended October 31, 2002, a decline of 55% from
the amount used in the same period of the prior year.
Cash used in operating activities during the year was
comprised of the net loss of $4,065,000, less net
depreciation and amortization of $404,000 and
unrealized foreign exchange loss of $72,000. Changes
in other non-cash items include a decrease in accounts
payable and accrued liabilities of $1,180,000, an
increase in receivables of $45,000, a decrease in
deferred revenue of $19,000 and a decrease in prepaid
expenses of $301,000.
Cash used in operating activities was $10,596,000 in
the year ended October 31, 2001, attributable to the
net loss of $12,272,000 less net depreciation and
amortization of $1,226,000 and unrealized foreign
exchange gain of $185,000. Changes in other non-cash
items include a decrease in accounts payable and
accrued liabilities of $278,000, a decrease in
receivables of $946,000, a decrease in deferred
revenue of $27,000 and an increase in prepaid expenses
of $7,000.
Cash provided by financing activities in the period
ended December 31, 2003 was $1,806,000 and $1,822,000
in the year ended October 31, 2003. In June 2003 the
Company completed the issue and sale of 5,000,000
common shares in the capital of the Company at $0.62
per unit for gross proceeds of $3,100,000. This was
offset by repayments of bank indebtedness of $241,000
and notes payable of $873,000 at December 31, 2003 and
$868,000 at October 31, 2003.
Cash provided by financing activities in the year
ended October 31, 2002 was $3,108,000. In April 2002,
we completed a private placement for net proceeds of
$3,108,000. The Company completed the issue and sale
of 518,671 units in the capital of the Company at
$6.00 per unit for gross proceeds of $3,112,022.
Cash provided by financing activities in the year
ended October 31, 2001, was $69,000 as a result of
proceeds received from issuing common shares under an
employee stock option exercise.
Cash used in investing activities in the period ended
December 31, 2003 was $16,000. Cash was provided by
the maturity of a short-term investment in the amount
of $600,000. Cash in the amount of $541,000 was
utilized in the acquisitions that occurred during the
year. As well, the Company purchased capital assets
in the amount of $75,000 during this period.
Cash used in investing activities in the year ended
October 31, 2003 was $613,000. Additional funds of
$10,000 were invested in a short-term investment.
Cash in the amount of $541,000 was utilized in the
acquisitions that occurred during the year. As well,
the Company purchased capital assets in the amount of
$62,000 during this year.
Cash provided by investing activities in the year
ended October 31, 2002 was $92,000 consisting of
$113,000 received from proceeds of a short-term
investment offset by $21,000 spent on capital assets.
Cash used in investing activities in the year ended
October 31, 2001 was $2,676,000 consisting of $719,000
spent on capital asset additions and the purchase of a
$1,956,000 short-term investment.
As of December 31, 2003 we had commitments under non-
cancelable operating leases for our facilities and
equipment through 2006 in amounts ranging from
$620,000 in fiscal 2004 declining to $308,000 in
fiscal 2006.
On January 20, 2004, the Company completed a private
placement through the issuance of 1,000,000 common
shares and 1,100,000 common share purchase warrants.
The Company received gross proceeds of $2,000,000 in
the transaction. The warrants were comprised of
500,000 warrants exercisable at $2.00 and 600,000 at
$2.05. Each warrant entitles the holder thereof to
acquire one common share for a period of three years.
The common shares cannot be re-sold in the public
markets until a registration statement has been filed
and declared effective by the U.S. Securities and
Exchange Commission.
We believe that our cash and cash equivalents and
short-term investments as at December 31, 2003 of
$1,967,000 together with the additional funds raised
subsequent to our year end will be sufficient to meet
our short-term working capital requirements for the
next fiscal year. We may need to raise additional
amounts to meet our working capital requirements
through private or public financings, strategic
relationships or other arrangements. However,
additional funding may not be available on terms
attractive to us, or at all. If we enter into
strategic relationships to raise additional funds, we
may be required to relinquish rights to certain of our
technologies. Our failure to either raise capital
when needed or to generate revenues would leave us
with insufficient resources to continue our business.
The following table presents unaudited selected
financial data for each of the last eight quarters
ending October 31, 2003 and the two months ended
December 31, 2003:
Revenue for
the period
Loss for the
period
Basic and
diluted loss
per share
December 31, 2003
$ 1,455,000
$ 784,000
$ 0.14
October 31, 2003
2,687,000
1,882,000
0.33
July 31, 2003
1,742,000
738,000
0.13
April 31, 2003
1,835,000
1,443,000
0.45
January 31, 2003
843,000
772,000
2.39
October 31, 2002
261,000
657,000
0.22
July 31, 2002
140,000
1,001,000
0.31
April 31, 2002
198,000
1,311,000
0.47
January 31, 2002
111,000
1,096,000
0.41
SELLING SECURITYHOLDERS
The Registration Statement filed with the Securities
and Exchange Commission of which this prospectus forms
a part covers the registration of the following
securities:
? 1,200,000 common shares;
? 1,202,000 common shares issuable upon the
exercise of the warrants.
SELLING SHAREHOLDERS
The table below sets forth the names of the selling
shareholders; the number of common shares beneficially
owned by the selling shareholders, as of March 3,
2004, the percentage of our outstanding common shares
beneficially owned by each of the selling shareholders
as of March 3, 2004, the number of common shares that
each selling shareholder may offer under this
prospectus, are the number of common shares that each
selling shareholder will beneficially own assuming the
sale of all of the common shares covered by this
prospectus.
Except as noted below, none of these selling
shareholders has held any position or office or had a
material relationship with us or any of our affiliates
within the past three years, other than as a result of
the ownership of our ordinary shares.
TRANSACTION
SHARES
SHARES ISSUABLE UPON
WARRANT EXERCISE
Lakefront Wigdale
Placement
1,000,000
1,100,000
DSS Acquisition Shares
and Warrants
200,000
- -
Howard Schmidt
- -
25,000
Corman Communications,
LLC
- -
72,000
Asymmetri Incorporation
- -
5,000
Shares subject to this
registration statement
1,200,000
1,202,000
Common shares
beneficially
owned prior to
this offering
Common
shares
offered
Common shares
beneficially
owned after this
offering
Name of Beneficial
Owner
Number
Percent
of
total
shares
outstan
ding
Pursuan
t to
this
prospec
tus
Number
Percent
of
total
shares
outstan
ding
Lakefront Partners,
LLC (1)
205 E. Wisconsin
Avenue, Suite 220
Milwaukee, WI 53202
1,098,
750
9%
1,000,00
0
98,750
*
James Wigdale, Jr.
(2)
205 E. Wisconsin
Avenue, Suite 220
Milwaukee, WI 53202
1,100,
000
9%
1,100,00
0
- -0-
- -0-
Greg Sutyak (3)
1196 Vacation Drive
Lafayette, CA 94549
8,000
*
5,000
3,000
*
Mukesh Shah (4)
#212, 1500 White
Birch Ter
Fremont, CA 94536
13,000
*
10,000
3,000
*
Michael Lamb (5)
10153 Parkwood Drive
#6
Cupertino, CA 95014
16,000
*
10,000
6,000
*
Patrick Corman (6)
1015 Hobart Street
Menlo Park, CA 94025
72,000
*
72,000
- -0-
- -0-
Howard Schmidt (7)
2145 Hamilton Avenue
San Jose, CA 95125
25,000
*
25,000
- -0-
- -0-
Asymmetri
Incorporation (8)
6200 Stoneridge Mall
Road, 3rd Floor,
Pleasanton, CA
94588
5,000
*
5,000
- -0-
- -0-
Parul Atul Parikh
(9)
44081 Linda Vista
Road
Fremont, CA 94539
327,32
3
4%
175,000
152,323
1%
2,402,00
0
* indicates less than one percent (1%)
We will not receive any proceeds from the sale of the
securities by the selling securityholders.
(1) Mr. James Wigdale, Jr. has voting or investment
control. Includes 18,750 shares subject to
outstanding warrants.
(2) Includes 1,100,000 shares subject to outstanding
warrants. Exckudes shares owned by Lakefront
Partners, LLC.
(3) Includes 3,000 shares subject to outstanding
warrants.
(4) Includes 3,000 shares subject to outstanding
warrants.
(5) Includes 6,000 shares subject to outstanding
warrants.
(6) Includes 72,000 shares subject to outstanding
warrants.
(7) Includes 25,000 shares subject to outstanding
warrants.
(8) Includes 5,000 shares subject to outstanding
warrants. Mr. Joseph Bentzel has voting or
investment control
(9) Includes 106,000 shares subject to outstanding
warrants.
PLAN OF DISTRIBUTION
We are registering the common shares offered hereby on
behalf of the selling shareholders. As used herein,
"selling shareholders" includes donees, pledgees,
transferees or other successors-in-interest selling
shares received after the date of this prospectus from
a named selling shareholder as a gift, pledge,
partnership distribution or other transfer. All
costs, expenses and fees in connection with the
registration of the shares offered by this prospectus
will be borne by the Company, other than brokerage
commissions and similar selling expenses, if any,
attributable to the sale of shares offered hereby
which will be borne by the selling shareholders.
Sales of the shares offered hereby may be effected by
selling shareholders from time to time in one or more
types of transactions (which may include block
transactions) on the Over the Counter Bulletin Board
at prevailing market prices, in the over-the-counter
market, in negotiated transactions, through publicly
or privately negotiated put or call options
transactions relating to the shares offered hereby,
through short sales of the shares offered hereby
(including the closing of any open short position), or
a combination of such methods of sale, at market
prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not
involve brokers or dealers. The selling shareholders
have advised us that they have not entered into any
agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of
their securities, nor is there an underwriter or
coordinating broker acting in connection with the
proposed sale of the shares offered hereby by the
selling shareholders.
The selling shareholders may enter into hedging
transactions with regard to the shares offered hereby.
In connection with such transactions the counter
parties to such transactions may engage in short sales
of the shares offered hereby or of securities
convertible into or exchangeable for such shares in
the course of hedging positions they assume with
selling shareholders. The selling shareholders may
also enter into other transactions which require the
delivery of the shares offered by this prospectus,
which shares such counter parties may resell pursuant
to this prospectus (as amended or supplemented, if
necessary, to reflect such transaction).
The selling shareholders may effect these transactions
by selling the shares offered hereby directly to
purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts,
concessions or commissions from the selling
shareholders and/or the purchasers of the shares
offered hereby for whom such broker-dealers may act as
agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer
might be in excess of customary brokerage
commissions).
The selling shareholders and any broker-dealers that
act in connection with the sale of the shares offered
herein might may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act,
and any commissions received by such broker-dealers
and any profit on the resale of the shares offered
herein sold by them while acting as principals might
be deemed to be underwriting discounts or commissions
under the Securities Act. We have agreed to indemnify
each selling shareholder against certain liabilities,
including liabilities arising under the Securities
Act. The selling shareholders may agree to indemnify
any agent, dealer or broker-dealer that participates
in transactions involving sales of the shares offered
hereby against certain liabilities, including
liabilities arising under the Securities Act.
Because selling shareholders may be deemed to be
"underwriters" within the meaning of Section 2(11) of
the Securities Act, the selling shareholders will be
subject to the prospectus delivery requirements of the
Securities Act. We have informed the selling
shareholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may
apply to their sales in the market.
Selling shareholders also may resell all or a portion
of the shares offered hereby in open market
transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and
conform to the requirements of Rule 144 or another
exemption under the Securities Act.
Upon our being notified by a selling shareholder that
any material arrangement has been entered into with a
broker-dealer for the sale of shares offered hereby
through a block trade, special offering, exchange
distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus
will be filed, if required, pursuant to Rule 424(b)
under the Securities Act, disclosing:
? the name of each such selling shareholder and of
the participating broker-dealer(s);
? the number of shares involved;
? the initial price at which such shares were sold;
? the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where
applicable;
? that such broker-dealer(s) did not conduct any
investigation to verify the information set out
or incorporated by reference in this prospectus;
and
? other facts material to the transaction.
We will pay all of the costs of qualifying these
securities under federal and state securities laws,
including legal and accounting fees, as well as
printing and other related costs.
DESCRIPTION OF PRIVATE PLACEMENTS
2004 Private Placement
Issuance of 1,000,000 common shares and 1,100,000
common share purchase warrants for gross proceeds of
$2,000,000.
On January 20, 2004, we completed a private placement
of 1,000,000 common shares and 1,100,000 common share
purchase warrants for gross proceeds of $2,000,000.
All the warrants expire on January 15, 2007 with
500,000 vesting immediately and exercisable at $2.00
per share, 350,000 vesting on January 15 2005 and
exercisable at a price of $2.05 and the remaining
250,000 warrants vesting on July 15, 2004 and
exercisable at a price of $2.05 per share. The later
two vestings will become immediate if any one of a
number of significant changes occurs within the
Company. This transaction was effected as a private
placement in accordance with Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as
amended. We will use the net proceeds of that private
placement for ongoing sales operations, working
capital purposes, to continue our research and
development activities and for general corporate
purposes. We also entered into a consultation
agreement and advisory board agreement with Mr.
Wigdale for which no compensation is payable by us
other than a commission on sales of products generated
by Mr. Wigdale.
We agreed to file the registration statement to
register the shares and the shares underlying the
warrants issued pursuant to this private placement
within 60 days of the closing of the private
placement.
Lakefront Partners, LLC acquired 80,000 common shares
and 18,750 common share purchase warrants as part of
our April 2002 private placement.
DSS acquisition shares and share purchase warrants
Issuance of 200,000 common shares and 120,000 common
shares purchase warrants.
In January 2003, we acquired 100% of the outstanding
shares of DSS Software Technologies, a consulting
services provider. The aggregate purchase price was
$1,301,038 consisting of $300,000 in cash, $26,998 in
the costs associated with the acquisition, $600,000 of
promissory note payable in instalments of $300,000 on
January 2, 2004 and $300,000 on January 2, 2005 and
120,000 share purchase warrants with a value of
$374,040. The share purchase warrants vest equally on
January 2, 2003, 2004 and 2005 and are exercisable at
$3.75 per share for five years. Additional future
cash consideration in the amount of $800,000 is
payable based on the achievement of certain financial
targets over the next two years and will be recorded
with an increase to goodwill if and when the targets
have been met.
In February 2004, we renegotiated the purchase price
whereby the $600,000 of promissory note payable in
installments of $300,000 on January 2, 2004 and
$300,000 on January 2, 2005 and 120,000 share purchase
warrants with a fair value of Cdn $589,824 ($374,040)
were exchanged for $50,000 paid on February 15, 2004,
$50,000 to be paid on April 15, 2004, $100,000 to be
paid on January 15, 2005 and by issuance of 200,000
common shares with a fair value of $400,000 and
120,000 share purchase warrants. The share purchase
warrants vest on January 2, 2005 and are exercisable
at $2.05 per share for two years.
Advisory board consultant agreement
Issuance of 25,000 common share purchase warrants
issuable upon the exercise of warrants.
On July 1, 2003, we entered into an agreement with
Howard Schmidt to provide advisory board consulting
services. In consideration for the services to be
rendered in accordance with the agreement, we issued a
three-year warrant terminating on January 31, 2006 to
purchase up to 25,000 of our common shares at $2.50
per share in regards to the compensation payable by us
for these services.
Consultant agreement
Issuance of 72,000 common share purchase warrants
issuable upon the exercise of warrants.
On January 31, 2004, we entered into an agreement with
Corman Communications, LLC. to provide public
relations services. In consideration for the services
to be rendered in accordance with the agreement, we
issued a two-year warrant terminating on January 31,
2006 to purchase up to 72,000 of our common shares at
$2.50 per share in regards to partial compensation
payable by us for these services.
Consultant agreement
Issuance of 5,000 common share purchase warrants
issuable upon the exercise of warrants.
During October 2004, we entered into an agreement with
Asymmetri Incorporated to provide marketing services.
In consideration for the services to be rendered in
accordance with the agreement, we issued a one-year
warrant terminating on October 20, 2004 to purchase up
to 5,000 of our common shares at $2.50 per share in
regards to partial compensation payable by us for
these services.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of material United
States Federal income tax consequences generally
applicable to a U.S. Holder (as defined below) of our
common shares as well as certain Canadian federal
income tax requirements applicable to shareholders who
are not resident of Canada. This discussion does not
address all potentially relevant Federal income tax
matters and it does not address consequences peculiar
to persons subject to special provisions of Federal
income tax law, such as, for example, tax-exempt
organizations, qualified retirement plans, persons
subject to alternative minimum tax, financial
institutions, insurance companies, real estate
investment trusts, regulated investment companies,
broker-dealers, non-resident alien individuals or
foreign corporations whose ownership of our common
shares is not effectively connected with the conduct
of a trade or business in the United States and
shareholders who acquired their shares through the
exercise of employee share options or otherwise as
compensation. In addition, this discussion only
applies to common shares held by U.S. Holders as
capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended, and
does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of
the Internal Revenue Code, Treasury Regulations,
published Internal Revenue Service rulings, published
administrative positions of the Internal Revenue
Service and court decisions that are currently
applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive
basis, at any time. The following discussion is for
general information only and is not intended to be,
nor should it be construed to be, legal or tax advice
to any holder or prospective holder of our common
shares and no opinion or representation with respect
to the United States Federal income tax consequences
to any such holder or prospective holder is made.
Accordingly, holders and prospective holders of our
common shares should consult their own tax advisors
about the federal, state, local, and foreign tax
consequences of purchasing, owning and disposing of
our common shares.
U.S. Holders
As used herein, a "U.S. Holder" includes any person,
with the exception of those subject to special
provisions of Federal income tax law, who holds our
common shares who is a citizen or resident of the
United States, a partnership or corporation organized
under the laws of the United States, an estate, the
income of which is subject to United States federal
income tax without regard to its source and a trust if
a United States court is able to exercise primary
supervision over administration of the trust and one
or more United States persons have authority to
control all substantial decisions of the trust or if
the trust was in existence on August 20, 1996 and has
elected to continue to be treated as a United States
person, and any other person or entity whose ownership
of our common shares is effectively connected with the
conduct of a trade or business in the United States.
Distributions on Our Common Shares
U.S. Holders receiving dividend distributions
(including constructive dividends) with respect to our
common shares are required to include in gross income
for United States Federal income tax purposes the
gross amount of such distributions to the extent that
we have current or accumulated earnings and profits,
without reduction for any Canadian income tax withheld
from such distributions. Such Canadian tax withheld
may be credited, subject to certain limitations,
against the U.S. Holder's United States Federal Income
tax liability or, alternatively, may be deducted in
computing the U.S. Holder's United States Federal
taxable income by those who itemize deductions (see
more detailed discussion at "Foreign Tax Credit"
below). To the extent that distributions exceed our
current or accumulated earnings and profits, they will
be treated first as a return of capital up to the U.S.
Holder's adjusted basis in the common shares and
thereafter as gain from the sale or exchange of the
common shares. Preferential tax rates for long-term
capital gains are applicable to an U.S. Holder, which
is an individual, estate or trust. There are
currently no preferential tax rates for long-term
capital gains for an U.S. Holder, which is a
corporation. Dividends paid in Canadian dollars will
be included in income in an U.S. dollar amount based
on the exchange rate at the time of their receipt.
U.S. Holders should consult their own tax advisors
regarding the treatment of any foreign currency gain
or loss on any Canadian dollars received as a dividend
which are converted into U.S. dollars on a date
subsequent to receipt.
Dividends paid on our common shares will not generally
be eligible for the dividends received deduction
provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder
which is a corporation may, under certain
circumstances, be entitled to a 70% deduction of the
United States source portion of dividends received
from us (unless we qualify as a "foreign personal
holding company" or a "passive foreign investment
company", as defined below) if such U.S. Holder owns
shares representing at least 10% of the voting power
and value of Diversinet. The availability of this
deduction is subject to several complex limitations,
which are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from
distributions) Canadian income tax with respect to the
ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a
tax credit for such foreign tax paid or withheld.
Generally, it will be more advantageous to claim a
credit because a credit reduces United States Federal
income taxes on a dollar-for-dollar basis, while a
deduction merely reduces the taxpayer's income subject
to tax. This election is made on an annual basis and
applies to all foreign income taxes (or taxes in lieu
of income tax) paid by (or withheld from) the U.S.
Holder during the year. There are significant and
complex limitations which apply to the credit, among
which is the general limitation that the credit cannot
exceed the proportionate share of the U.S. Holders
United States income tax liability that the U.S.
Holder's foreign source income bears to his/her or its
worldwide taxable income.
In the determination of the application of this
limitation, the various items of income and deduction
must be classified into foreign and domestic sources.
Complex rules govern this classification process.
There are further limitations on the foreign tax
credit for certain types of income such as "passive
income", "high withholding tax interest", "financial
services income", "shipping income", and certain other
classifications of income. In certain circumstances,
recently enacted legislation and other guidance issued
by the United States Treasury may deny a United States
holder foreign tax credits (and instead may allow
deductions) for foreign taxes imposed on a dividend if
the United States holder (i) has not held the common
shares for at least 16 days in the 30-day period
beginning 15 days before the ex-dividend date, during
which it is not protected from risk of loss; (ii) is
obligated to make payments related to the dividends;
or (iii) holds the common shares in arrangements in
which the United States holder's expected economic
profit, after non-US taxes, is insubstantial.
The availability of the foreign tax credit and the
application of the limitations on the credit are fact
specific and holders and prospective holders of our
common shares should consult their own tax advisors
regarding their individual circumstances.
Disposition of Our Common Shares
A U.S. Holder will recognize gain or loss upon the
sale of our common shares equal to the difference, if
any, between (i) the amount of cash plus the fair
market value of any property received, and (ii) the
shareholder's tax basis in the our common shares. Any
gain recognized on the sale or other disposition of
common shares will generally be U.S. source income.
Any loss recognized on the sale or other disposition
of common shares will generally be U.S. source.
However, such loss will be foreign source to the
extent certain dividends were received by the U.S.
Holder within the 24-month period proceeding the date
on which the loss was recognized. This gain or loss
will be capital gain or loss if the common shares are
capital asset in the hands of the U.S. Holder, which
will be a short-term or long-term capital gain or loss
depending upon the holding period of the U.S. Holder.
Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain
or loss for a particular tax year. Deductions for net
capital losses are subject to significant limitations.
For U.S. Holders who are individuals, a capital loss
is deductible only to the extent of capital gains,
plus ordinary income of up to $3,000; any unused
portion of such net capital loss may be carried over
to be used in later tax years until such net capital
loss is thereby exhausted. For U.S. Holders which are
corporations (other than corporations subject to
Subchapter S of the Internal Revenue Code), any unused
net capital loss may be carried back three years from
the loss year and carried forward five years from the
loss year to be offset against capital gains until
such net capital loss is thereby exhausted. If the
amount realized on a sale or exchange is not
denominated in U.S. dollars, the amount realized will
be equal to the U.S. dollar value thereof, determined
at the spot rate on the date of the sale or exchange.
Until such time as our common shares are listed on a
stock exchange prescribed for the purposes of the
Income Tax Act (Canada) (which includes NASDAQ, but
not the OTC BB) our common shares will be taxable
Canadian property for the purposes of the Income Tax
Act (Canada).
Under section 116 of the Income Tax Act (Canada), non-
resident vendors who dispose of certain types of
taxable Canadian property (including our common shares
for as long as they are not listed on a prescribed
stock exchange), have to notify Canada Customs and
Revenue Agency (CCRA) about the disposition either
before they dispose of the property or after they
dispose of it. This notification (the "Notice of
Disposition") is due not later than ten (10) days
after the date the property was disposed of. The
vendor may be able to claim an exemption under an
applicable tax treaty at the time the Notice of
Disposition is filed. If no exemption is available
under an applicable treaty, before CCRA can issue a
certificate of compliance to the vendor, CCRA must
receive either an amount to cover the tax owing, or
appropriate security for the tax on any gain the
vendor may realize at the time the property is
disposed of. Such payments or security the vendor
provides will be credited to the vendor's account. If
the vendor does not comply with the section 116
requirements, which the vendor must do so before
receiving the certificate of compliance, the purchaser
of the property may deduct or withhold a specified
amount from the proceeds of the disposition to cover
any tax which the vendor owes.
When filing a Notice of Disposition and claiming an
exemption under a specific tax treaty, necessary
documentation to support the claim should be submitted
along with the request. The documentation which is
acceptable must be based on the particular tax treaty
under which the exemption is claimed, such as proof of
residency, or that the gain has or will be reported in
the vendor's country. Tax officials, in some
countries, will supply the necessary certification
required to claim the exemption. The United States
Department of the Treasury, Internal Revenue Service
will provide certification for corporations, exempt
organizations and individuals. Requests for
certification should be sent to the appropriate
service centre. The Department of the Treasury,
Publication 686, Certification for Reduced Tax Rates
in Tax Treaty Countries, outlines the certification
process.
If the vendor does not obtain a certificate pursuant
to section 116, the purchaser becomes liable to pay as
tax, on behalf of the vendor, an amount equal to 25%
of the proceeds of disposition. The purchaser of
the property is then entitled to withhold that amount
from the proceeds of the disposition to cover any tax
which the vendor owes or may owe.
The required amount must be remitted to the Receiver
General for Canada 30 days after the end of the month
is which the property was acquired.
Other Considerations
In the following three circumstances, the above
sections of the discussion may not describe the United
States Federal income tax consequences resulting from
the holding and disposition of our common shares.
Based on (a) the number of shareholders of our common
shares, and (b) our shareholder profile, we do not
believe that we are either a "Foreign Personal Holding
Company" or a "Controlled Foreign Corporation".
However, we do not believe that we are likely to be
treated as a "Passive Foreign Investment Company" for
the taxable years 1999, 2000 and 2001.
Foreign Personal Holding Company
If, at any time during a taxable year, more than 50%
of the total combined voting power or the total value
of our outstanding shares are owned, actually or
constructively, by five or fewer individuals who are
citizens or residents of the United States and 60% or
more of our gross income for such year was derived
from certain passive sources (e.g. from dividends
received from unrelated persons), we would be treated
as a "foreign personal holding company." In that
event, U.S. Holders that hold our common shares would
be required to include in gross income for such year
their allowable portions of such foreign personal
holding company income to the extent that we do not
actually distribute such income.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of
shares or the total value of our shares is owned,
directly or indirectly, by U.S. shareholders, each of
whom own 10% or more of our voting shares ("U.S.
Shareholders"), we could be treated as a "controlled
foreign corporation" (a "CFC") under SubPart F of the
Internal Revenue Code. If we were classified as a CFC
and as a PFIC, CFC treatment would prevail with
respect to U.S. Shareholders. CFC classification
would affect many complex results including the
required inclusion by such United States shareholders
in income of their pro rata share: of "SubPart F
Income" (as specially defined by the Internal Revenue
Code) of Diversinet; and of our earnings invested in
U.S. property. In addition, under Section 1248 of the
Internal Revenue Code, gain from the sale or exchange
of our common shares by a U.S. person who is or was a
United States shareholder (as defined in the Internal
Revenue Code) at any time during the five years period
ending with the sale or exchange is generally treated
as ordinary dividend income to the extent of our
earnings and profits attributable to the shares sold
or exchanged. Because of the complexity of SubPart F,
and because it is not clear that we are a controlled
foreign corporation, a more detailed review of these
rules is outside of the scope of this discussion.
Passive Foreign Investment Company
As stated above, we believe that we will not be
treated as a passive foreign investment company
("PFIC"), as defined in Section 1297 of the Internal
Revenue Code, for our fiscal years 2002 or 2003.
United States income tax legislation contains rules
governing PFIC's, that can have significant tax
effects on U.S. Holders of foreign corporations. These
rules do not apply to non-U.S. Holders. Section 1297
of the Internal Revenue Code defines a PFIC as a
corporation that is not formed in the United States
and, for any taxable year, either (i) 75% or more of
its gross income is "passive income", which includes
interest, dividends and some types of rents and
royalties or (ii) the average percentage, by fair
market value (or, if the company is a controlled
foreign corporation or makes an election, by adjusted
tax basis), of its assets that produce or are held for
the production of "passive income" is 50% or more.
Based on these tests we do not meet the definition of
a PFIC in 1999, 2000 or 2001.
An U.S. Holder who holds shares in a foreign
corporation during any year in which such corporation
qualifies as a PFIC is subject to U.S. Federal income
taxation under alternative tax regimes, depending upon
whether such U.S. Holder makes elections. The
following is a discussion of these alternative tax
regimes as applicable to our U.S. Holders.
A U.S. Holder of a PFIC who does not make either of
the elections described below (a "Non-electing U.S.
Holder") is subject to special taxation rules under
Section 1291 of the Internal Revenue Code with respect
to (i) gains realized on the disposition (or deemed to
be realized by reason of a pledge) of his/her common
shares and (ii) excess distributions by us, defined as
any distribution received by a U.S. Holder from a PFIC
in a taxable year that is greater than 125% of the
average distributions received by the U.S. Holder in
the three preceding taxable years, or, if shorter, the
U.S. Holder's holding period for the shares.
A Non-electing U.S. Holder generally would be required
to include in income pro rata all gains realized on
the disposition of his/her common shares and all
excess distributions over the entire holding period
for the PFIC common shares. All gains or excess
distributions allocated to prior years of the U.S.
Holder (other than years prior to the first taxable
year of the company during such U.S. Holder's holding
period and beginning after January 1, 1987 for which
it was a PFIC) would be taxed at the highest tax rate
for each such prior year applicable to ordinary
income. The Non-electing U.S. Holder also would be
liable for interest on the foregoing tax liability for
each such prior year calculated as if such liability
had been due with respect to each such prior year. A
Non-electing U.S. Holder that is not a corporation
must treat this interest charge as "personal interest"
which, as discussed above, is partially or wholly non-
deductible. The balance of the gain or the excess
distribution will be treated as ordinary income in the
year of the disposition or distribution, and no
interest charge will be incurred with respect to such
balance.
If we are a PFIC for any taxable year during which a
Non-electing U.S. Holder holds common shares, then we
will continue to be treated as a PFIC with respect to
such common shares, even if we are no longer a PFIC as
defined above. A Non-electing U.S. Holder may
terminate this deemed PFIC status by electing to
recognize a gain (which will be taxed under the rules
discussed above for Non-electing U.S. Holders) as if
such common shares had been sold on the last day of
the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Internal Revenue Code,
the Department of the Treasury has issued proposed
regulations that would treat as taxable transfers of
PFIC shares by Non-electing U.S. Holders that are
generally not otherwise taxed, such as gifts,
exchanges pursuant to corporate reorganizations, and
transfers at death. Special, generally adverse, rules
will apply with respect to the common shares while the
company is a PFIC. For example under Section
1298(b)(6) of the Internal Revenue Code, a U.S. Holder
who uses PFIC shares as security for a loan (including
a margin loan) will, except as may be provided in
regulations, be treated as having made a taxable
disposition of such shares.
Alternatively, if we are a PFIC, an U.S. Holder (an
"Electing U.S. Holder") who owns common shares is
permitted generally to elect out of the tax treatment
discussed above, if an U.S. Holder makes a mark-to-
market election with respect to common shares. Under
such election, an Electing U.S. Holder would generally
recognize as ordinary income for each taxable year an
amount equal to the excess, if any, of the fair market
value of common shares as of the close of the taxable
year over the Electing U.S. Holder's adjusted tax
basis in such shares. An Electing U.S. Holder would
generally be allowed an ordinary deduction (to the
extent of any net mark-to-market gains recognized for
prior taxable years) for the excess, if any, of the
adjusted tax basis of the common shares over their
fair market value as of the close of the taxable year.
An Electing U.S. Holder's adjusted tax basis of the
common shares would generally be adjusted to reflect
the amounts included or deducted under the mark-to-
market election. Additionally, any gain on the actual
sale or other disposition of the common shares
generally will be treated as ordinary income.
Ordinary loss treatment also would generally apply to
any loss realized on the actual sale or other
disposition of the common shares to the extent that
the amount of such loss did not exceed the net mark-
to-market gains previously included with respect to
such shares. An election to mark to market would
generally apply to the taxable year made and all
subsequent taxable years. A mark-to-market election
is subject to complex and specific rules and
requirements, and U.S. Holders are strongly urged to
consult their tax advisors concerning such election if
the company is classified as a PFIC.
Finally, an U.S. Holder who elects in a timely manner
to treat us as a "qualified electing fund" (a "QEF")
as defined in the Internal Revenue Code would be
subject to another set of special rules different from
those described above. Although a QEF election may be
beneficial to some U.S. Holders depending upon their
particular tax situations, it requires us to make
information available to such holders, and we do not
intend to make such information available even if it
is classified as a PFIC. Accordingly, the QEF
election will not be available to U.S. Holders.
The foregoing discussion is based on existing
provisions of the Internal Revenue Code, existing and
proposed regulations thereunder, and current
administrative ruling and court decisions, all of
which are subject to change. Any such change could
affect the validity of this discussion. In addition,
the implementation of aspects of the PFIC rules
requires the issuance of regulations which in many
instances have not been promulgated and which may have
retroactive effect. There can be no certainty that any
of these proposed regulations will be enacted or
promulgated and if so, the form they will take or the
effect that they may have on this discussion.
Accordingly, and due to the complexity of the PFIC
rules, U.S. Holders who are shareholders of Diversinet
are strongly urged to consult their own tax advisors
concerning the impact of these rules on their
investment in us.
EXPERTS
Our consolidated financial statements for the fourteen
months ended December 31, 2003 and the twelve months
ended October 31, 2003 and 2002 and for each of the
years in the three-year period ended October 31, 2003,
have been incorporated by reference herein and in the
Registration Statement in reliance on the report of
KPMG LLP, independent accountants, also incorporated
by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The audit
report of KPMG LLP concerning the December 31, 2003
consolidated financial statements included additional
comments for U.S. readers that states that conditions
and events exist that cast substantial doubt on our
ability to continue as a going concern. The
consolidated financial statements do not include any
adjustments that might result from the outcome of that
uncertainty.
Certain legal matters in connection with the
registration of the common shares hereunder with
respect to Canadian law will be passed upon for us by
Lang Michener of Toronto, Ontario, our Canadian
counsel.
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
This prospectus is a part of a registration statement
on Form F-3, which we filed with the Securities and
Exchange Commission under the Securities Act of 1933.
As permitted by the rules and regulations of the SEC,
this prospectus does not contain all of the
information contained in the registration statement
and the exhibits and schedules thereto. As such we
make reference in this prospectus to the registration
statement and to the exhibits and schedules thereto.
For further information about us and about the
securities we hereby offer, you should consult the
registration statement and the exhibits and schedules
thereto. You should be aware that statements
contained in this prospectus concerning the provisions
of any documents filed as an exhibit to the
registration statement or otherwise filed with the SEC
are not necessarily complete, and in each instance
reference is made to the copy of such document so
filed. Each such statement is qualified in its
entirety by such reference.
We file annual and special reports and other
information with the Securities and Exchange
Commission (Commission File Number 0000918387). These
filings contain important information which does not
appear in this prospectus. For further information
about us, you may read and copy these filings at the
SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on
the operation of the public reference room by calling
the SEC at 1-800-SEC-0330, and may obtain copies of
our filings from the public reference room by calling
(202) 942-8090.
The SEC allows us to "incorporate by reference"
information into this prospectus, which means that we
can disclose important information to you by referring
you to other documents which we have filed or will
file with the SEC. We are incorporating by reference
in this prospectus the documents listed below:
(a) Our Report on Form 6-K dated March 11, 2004
(b) Our Report on Form 6-K dated January 29, 2004
(c) Our Report on Form 6-K dated December 24, 2003
(d) Our Annual Report on Form 20-F dated April 29,
2003
(e) Our Report on Form 6-K dated September 16, 2003
(f) Our Report on Form 6-K dated September 12, 2003
(g) Our Report on Form 6-K dated July 21, 2003;
(h) Our Report on Form 6-K dated June 24, 2003;
(i) Our Report on Form 6-K dated March 14, 2003;
(j) Our Report on Form S-8 dated February 20, 2003;
(k) Our Report on Form 6-K dated December 31, 2002;
(l) Our Report on Form 6-K dated December 20, 2002;
and,
(m) The description of our securities contained in
our Registration Statement under Section 12 of
the Securities Exchange Act of 1934, as
amended, of which this prospectus is a part and
any and all amendments and reports filed for
the purpose of updating such description.
All documents which we file with the SEC pursuant to
Section 13(a), 13(c) or 15(d) of the Securities
Exchange Act after the date of this prospectus and
before the expiration or termination of this
prospectus shall be deemed to be incorporated by
reference in this prospectus and to be a part of it
from the filing dates of such documents. Certain
statements in and portions of this prospectus update
and replace information in the above listed documents
incorporated by reference. Likewise, statements in or
portions of a future document incorporated by
reference in this prospectus may update and replace
statements in and portions of this prospectus or the
above listed documents.
We shall provide you without charge, upon your written
or oral request, a copy of any of the documents
incorporated by reference in this prospectus, other
than exhibits to such documents which are not
specifically incorporated by reference into such
documents. Please direct your written or telephone
requests to Diversinet Corp., 2225 Sheppard Avenue
East, Suite 1801, Toronto, Ontario, M2J 5C2 Canada,
Attn: David Hackett, Chief Financial Officer,
telephone number (416) 756-2324. You may also obtain
information about us by visiting our website at
www.diversinet.com. Information contained in our
website is not part of this prospectus.
We are a Canadian company and are a "foreign private
issuer" as defined in Rule 3b-4 under the Securities
Exchange Act of 1934. As a result, (1) our proxy
solicitations are not subject to the disclosure and
procedural requirements of Regulation 14A under the
Exchange Act, (2) transactions in our equity
securities by our officers and directors are exempt
from Section 16 of the Exchange Act, and (3) until
November 4, 2002, we were not required to make, and
did not make, its SEC filings electronically, so that
those filings are not available on the SEC's Web site.
However, since that date, we have been making all
filings with the SEC electronically, and these filings
are available over the Internet at the SEC's Web site
at www.sec.gov.
ENFORCEABILITY OF CIVIL LIABILITIES
Service of process upon us and upon our directors and
officers and the Canadian experts named in this
prospectus, most of whom reside outside the U.S., may
be difficult to obtain within the U.S. Furthermore,
because substantially all of our assets and
substantially all of our directors and officers are
located outside the U.S., any judgment obtained in the
U.S. against us or any of our directors and officers
may not be collectible within the U.S.
___________
You should rely only on the information contained in
this prospectus or that to which we have referred you.
We have not authorized anyone to provide you with
information that is different. This prospectus does
not constitute an offer to sell, or the solicitation
of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such
offer or solicitation would be unlawful. Our business
may change after the date of this prospectus.
Delivery of this document and any sale of securities
made hereunder does not mean otherwise.
TABLE OF CONTENTS
Page
FORWARD-LOOKING INFORMATION 13
INFORMATION SUMMARY 2
RISK FACTORS 5
USE OF PROCEEDS 13
DIVIDEND POLICY 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
SELLING SECURITYHOLDERS 22
PLAN OF DISTRIBUTION 25
DESCRIPTION OF PRIVATE PLACEMENTS 25
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES 29
EXPERTS 33
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE 33
___________
DIVERSINET CORP.
2,402,000 common shares
PROSPECTUS
References in this prospectus to "Diversinet" mean
Diversinet Corp., and references to "we", "us", and
"our" refer to Diversinet Corp. unless the context
otherwise indicates.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses of this offering which will be borne by
Diversinet are estimated, in U.S. dollars, to be as
follows:
SEC Registration
Fee
Legal Services
Accounting
Miscellaneous
Total
352
40,000
10,000
15,000
$65,352
All of the above expenses except the registration fee
and miscellaneous are estimated.
Item 15. Indemnification of Directors and Officers
Under the Business Corporations Act (Ontario) (the
"Act"), Diversinet may indemnify a present or former
director or officer or a person who acts or acted at
Diversinet's request as a director or officer of
another corporation of which Diversinet is or was a
shareholder or creditor and his heirs and legal
representatives against all costs, charges and
expenses, including an amount paid to settle an action
or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative
action or proceeding to which he is made a party by
reason of being or having been such a director or
officer if the director or officer acted honestly and
in good faith with a view to the best interests of
Diversinet and, in the case of a criminal or
administrative action or proceeding that is enforced
by a monetary penalty, had reasonable grounds for
believing that his conduct was lawful. Such
indemnification may be made in connection with an
action by or on behalf of Diversinet or such other
corporation only with court approval. A director or
officer is entitled to indemnification from Diversinet
as a matter of right in respects of all costs, charges
and expenses reasonably incurred by him in connection
with the defense of any civil, criminal or
administrative proceeding to which he is a party by
reason of being or having been a director or officer
of such corporation if he was substantially successful
on the merits and fulfilled the conditions set forth
above.
The by-laws of Diversinet provide that each director,
each officer, each former director, each former
officer and each person who acts or acted at
Diversinet's request as a director or officer of a
body corporate of which Diversinet is or was a
shareholder or creditor, and his heirs and legal
representatives shall be indemnified and saved
harmless by Diversinet from and against all costs,
charges and expenses, including without limitation,
each amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding
to which his is made a party by reason or being or
having been a director or officer of Diversinet or
such body corporation, if he acted honestly and in
good faith with a view to Diversinet's best interests
and in the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty
he had reasonable grounds for believing his conduct
was lawful. In certain circumstances Diversinet has
provided its Directors or its subsidiaries' Directors
with a written indemnification confirming the
indemnification available under its by-laws.
Diversinet currently maintains directors' and
officers' liability insurance, which, subject to the
provisions contained in the policy, protects the
directors and officers, as such, against all claims
during the term of their office provided they acted
honestly and in good faith with a view to the best
interests of Diversinet. Such insurance provides for
an aggregate of $5,000,000 annual protection against
liability for and reimbursement of amounts paid.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended may be
permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that, in
the opinion of the U.S. Securities and Exchange
Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933, as
amended and is therefore unenforceable.
Item 16. Exhibits
Exhi
bit
No.
Exhibits
4.1
Form of Stock Purchase Agreement for the January 20,
2004 private placement
4.2
Form of Stock Purchase Agreement for the June 23, 2003
private placement.
4.3
Form of Warrant for purchase of shares for the April 4,
2002 private placement.1
4.4
Form of Warrant for purchase of shares for the June 23,
2003 private placement. 1
Item 17. Undertakings
Paragraph designations correspond to designations in
Regulation S-K, Item 512.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment
to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as
amended;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set
forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if
the total dollar value of securities offered
would not exceed that which was registered)
and any deviation from the low or high end of
the estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than 20 percent change in
the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table
in the effective registration statement; and;
(iii) To include any material information
with respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, as
amended, each such post-effective amendment
shall be deemed to be a new registration
statement relating to the securities offered
therein, and the offering of such securities at
that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-
effective amendment any of the securities being
registered which remain unsold at the
termination of the offering;
(4) To file a post-effective amendment to the
registration statement to include any financial
statements required by Rule 3-19 of Regulation
S-X at the start of any delayed offering or
throughout a continuous offering. Financial
statements and information otherwise required by
Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant
includes in the prospectus, by means of a post-
effective amendment, financial statements
required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all
other information in the prospectus is at least
as current as the date of those financial
statements. Notwithstanding the foregoing, with
respect to registration statements on Form F-3,
a post-effective amendment need not be filed to
include financial statements and information
required by Section 10(a)(3) of the Act or Rule
3-19 of Regulation S-X if such financial
statements and information are contained in
periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended that are incorporated by
reference in the Form F-3.
(b) The undersigned registrant hereby undertakes that,
for purposes of determining any liability under
the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant
to section 13(a) of section 15(d) of the
Securities Exchange Act of 1934, as amended (and
where applicable, each filing of an employee
benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934, as
amended) that is incorporated by reference in the
registration statement relating to the securities
offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended may
be permitted to directors, officers and
controlling persons of the registrant, the
registrant has been advised that in the opinion of
the Securities and Exchange Commission such
indemnification is against public policy as
expressed in the act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other
than the payment by the registrant of expense
incurred or paid by a director, officer, or
controlling person of the registrant in the
successful defense of any such action, suit or
proceeding) is asserted by such director, officer
or controlling person in connection with the
securities being registered, the registrant will,
unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the
question whether such indemnification by it is
against public policy as expressed in the Act and
will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, the registrant certifies that it has
reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly
caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized,
in the City of Toronto, Province of Ontario, Canada on
March 15, 2004.
DIVERSINET CORP.
By: /s/ David Hackett
David Hackett, Chief
Financial Officer
Pursuant to the requirements of the Securities Act of
1933, as amended, this Registration Statement has been
signed by the following persons in the capacities and
on the dates indicated.
Signature
Title
Date
/s/ Stanley Beck
Stanley Beck
Director
March 15, 2004
/s/ Derek Buntain
Derek Buntain
Director
March 15, 2004
/s/ Keith Powell
Keith Powell
Director
March 15, 2004
/s/ Nagy Moustafa
Nagy Moustafa
President, Chief
Executive Officer
and Director
March 15, 2004
/s/ Charles Shiu
Charles Shiu
Director
March 15, 2004
/s/ Mark Steinman
Mark Steinman
Director
March 15, 2004
/s/ Charles Walton
Charles Walton
Director
March 15, 2004
/s/ Nagy Moustafa
Nagy Moustafa
Authorized United
States
Representative, CEO
of Diversinet
Corporation of
America, a Delaware
corporation and
wholly owned
subsidiary of the
Registrant
March 15, 2004
EXHIBIT INDEX
Exhibit
No.
Exhibit
4.1
Form of Stock Purchase Agreement for the January 20,
2004 private placement
4.2
Form of Stock Purchase Agreement for the June 23, 2003
private placement.
4.3
Form of Warrant for purchase of shares for the April
4, 2002 private placement. 1
4.4
Form of Warrant for purchase of shares for the June
23, 2003 private placement. 1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the
15th day of January 2004, by and between Diversinet
Corp. (the "Company"), a corporation organized under
the laws of the province of Ontario, Canada, with its
principal offices at 2225 Sheppard Avenue East, Suite
1801, Toronto, Ontario, M2J 5C2, Canada, and the
purchasers whose names and addresses are set forth on
the signature page hereof (collectively the
"Purchaser").
IN CONSIDERATION of the mutual covenants
contained in this Agreement, the Company and the
Purchaser agree as follows:
SECTION 1. Authorization of Issuance of Securities.
The Company has authorized the issuance to the
Purchaser of one million (1,000,000) common shares of
the Company (the "Shares"), no par value (a "Common
Share") and one million and one hundred thousand
(1,100,000) purchase warrants of the Company (a
"Warrant"), set forth on the signature page hereof.
The Warrants will be substantially in the form of
Appendix III to this Agreement.
SECTION 2. Consideration. At the Closing (as defined
in Section 3), the Company will issue the Shares and
the Warrants to the Purchaser as set forth on the
signature page hereof, and the Purchaser will enter
into a consulting agreement with the Company and pay
U.S.$2,000,000 to the Company, upon the terms and
conditions hereinafter set forth.
SECTION 3. Delivery of Securities at the Closing.
The completion of the transaction (the "Closing")
shall occur simultaneously with the execution hereof
and the consulting agreement (the "Closing Date"). At
the Closing, the Company will issue to the Purchaser
(i) one or more stock certificates representing the
Shares and (ii) one or more warrant certificates (in
the form of Appendix III) representing the Warrants,
in each case registered in the name of the Purchaser,
or in such nominee name(s) as designated by the
Purchaser in writing, representing the Shares. The
name(s) in which the stock certificates and warrant
certificates are to be registered are set forth in the
Stock Certificate Questionnaire attached hereto as
Appendix I. The Company's obligation to complete the
transaction herein contemplated at the Closing shall
be subject to the following conditions, any one or
more of which may be waived by the Company: (a)
receipt by the Company of same-day funds in the full
amount of U.S. $2,000,000; (b) the accuracy in all
material respects of the representations and
warranties made by the Purchaser and the fulfillment
of those undertakings of the Purchaser to be fulfilled
prior to or at the Closing, and (c) the Company
agreeing to accept the Purchaser's subscription prior
to or at the Closing. The Purchaser's obligation to
complete the transaction herein contemplated at the
Closing shall be subject to the accuracy in all
material respects of the representations and
warranties made by the Company herein and the
fulfillment of those undertakings of the Company to be
fulfilled prior to or at the Closing.
SECTION 4. Representations, Warranties and Covenants
of the Company. The Company hereby represents and
warrants to, and covenants with, the Purchaser as
follows:
4.1 Organization and Qualification. The Company
is a corporation duly organized, validly existing and
in good standing under the laws of Ontario, Canada.
4.2 Authorized Capital Stock. The authorized
capital stock of the Company consists of an unlimited
number of Common Shares. The number of Common Shares
and all subscriptions, warrants, options, convertible
securities, and other rights to purchase or otherwise
acquire equity securities of the Company issued and
outstanding as at December 31, 2003, are 11,042,944
common shares, purchase warrants to acquire 965,404
common shares and stock options to acquire up to
1,800,000 common shares.
4.3 Issuance, Sale and Delivery of the Shares.
The Shares and Warrants have been duly authorized, and
when issued, delivered and paid for in the manner set
forth in this Agreement, will be duly authorized,
validly issued, fully paid and non-assessable.
4.4 Due Execution, Delivery and Performance of
the Agreements. The Company has full legal right,
corporate power and authority to enter into this
Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized,
executed and delivered by the Company. The
consummation by the Company of the transactions herein
contemplated will not violate any provision of the
organizational documents of the Company. The
execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of
the transactions herein contemplated will not result
in the creation of any lien, charge, security interest
or encumbrance upon any assets of the Company pursuant
to the terms or provisions of, or conflict with,
result in the breach or violation of, or constitute,
either by itself or upon notice or the passage of time
or both, a default under any material agreement,
mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the
Company is a party or by which the Company or any of
its properties may be bound or affected and in each
case which individually or in the aggregate would have
a material adverse effect on the condition (financial
or otherwise), properties, business, prospects, or
results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse
Effect"), or any statute or any authorization,
judgement, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or
other governmental body applicable to the Company or
any of its respective properties. Upon its execution
and delivery, and assuming the valid execution thereof
by the Purchaser, this Agreement will constitute a
valid and binding obligation of the Company,
enforceable against the Company in accordance with its
terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' and
contracting parties' rights generally and except as
enforceability may be subject to general principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.5. Integration, etc. The Company has not in
the past nor will it hereafter take any action to
sell, offer for sale or solicit offers to buy any
securities of the Company which would bring the offer,
issuance or sale of the Shares and Warrants, as
contemplated by this Agreement, within the provisions
of Section 5 of the Securities Act. Neither the
Company nor any of its Affiliates (as defined in Rule
501(b) of Regulation D under the Securities Act) has
directly, or through any agent, (i) sold, offered for
sale, solicited offers to buy or otherwise negotiated
in respect of, any "security" (as defined in the
Securities Act) which is or could be integrated with
the sale of the Shares and Warrants in a manner that
would require the registration under the Securities
Act of the Shares or Warrants or (ii) engaged in any
form of general solicitation or general advertising
(as those terms are used in Regulation D under the
Securities Act) in connection with the offering of the
Shares and Warrants or in any manner involving a
public offering within the meaning of Section 4(2) of
the Act.
4.6 Compliance with Securities Laws. Subject to
the accuracy of the representations and warranties of
the Purchaser contained herein, the issuance of the
Shares and Warrants to the Purchaser hereunder is
exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended
(the "Securities Act").
4.7 Additional Information. The Company has
made available to the Purchaser a true and complete
copy of each report, schedule, and definitive proxy
statement filed by the Company with the Commission
under the Securities Exchange Act of 1934 (the
"Exchange Act") since November 1, 2001 (as such
documents have since the time of their filing been
amended, the "Information Documents").
As of their respective dates, the Information
Documents complied in all material respects with the
requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder
applicable to the Information Documents, and none of
the Information Documents, at the time they were filed
with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact
required to be stated therein or necessary in order to
make the statements therein, in light of the
circumstances under which they were made, not
misleading. None of the statements made in any such
Information Documents is, or has been, required to be
amended or updated under applicable law (except for
such statements as have been amended or updated in
subsequent filings prior to the date hereof). As of
their respective dates, the financial statements of
the Company included in the Information Documents
complied as to form in all material aspects with
applicable accounting requirements and the published
rules and regulations of the SEC and Canadian
regulatory authorities with respect thereto. Such
financial statements have been prepared in accordance
with Canadian generally accepted accounting
principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be
condensed or summary statements) and fairly present in
all material respects the consolidated financial
position of the Company and its consolidated
subsidiaries as of the dates thereof and the
consolidated results of their operations and cash
flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the Information
Documents, the Company has no liabilities, contingent
or otherwise, other than (i) liabilities incurred in
the ordinary course of business and (ii) liabilities
not required under generally accepted accounting
principles to be reflected or disclosed in such
financial statements.
4.8 Absence of Certain Changes. Since October
31, 2003, there have been no known changes or
developments in the Company, its business or any of
its subsidiaries that may have a Material Adverse
Effect.
4.9 Absence of Litigation. Except as disclosed
in the Information Documents, there is no known
action, suit, claim, proceeding, inquiry or
investigation before or by any court, public board,
government agency, self-regulatory organization or
body pending or, to the knowledge of the Company or
any of its subsidiaries, threatened against or
affecting the Company or any of its subsidiaries, or
their officers or directors in their capacity as such,
that could have a Material Adverse Effect.
4.10 Compliance with Law. The Company and its
subsidiaries are in compliance with all applicable
laws, rules and regulations, other than such
noncompliance which would not have a Material Adverse
Effect.
4.11 Disclosure. All information relating to the
Information Document provided to the Purchasers in
connection with the transactions contemplated hereby
is true and correct in all material respects and the
Company has not knowingly omitted to state any
material fact necessary in order to make the
statements made herein or therein, in light of the
circumstances under which they were made, not
misleading. No known event or circumstance has
occurred or exists with respect to the Company or any
of its subsidiaries or its or their business,
properties, prospects, operations or financial
conditions, which has not been publicly announced or
disclosed but under Canadian or United States law,
rule or regulation, requires public disclosure or
announcement by the Company.
SECTION 5. Representations, Warranties and Covenants
of the Purchaser.
5.1 The Purchaser represents and warrants to,
and covenants with, the Company that: (i) the
Purchaser is knowledgeable, sophisticated and
experienced in making, and is qualified to make,
decisions with respect to investments in securities
representing an investment decision like that involved
hereunder, including investments in securities issued
by the Company, and has requested, received, reviewed
and understood all information it deems relevant in
making an informed decision to purchase the securities
hereunder, including, without limitation, the
information contained in the Information Documents;
(ii) it acknowledges that the offering of the
securities pursuant to this Agreement has not been
reviewed by the Commission or any state or Canadian
regulatory authority; (iii) the Purchaser is acquiring
the securities set forth in the signature page hereto,
for its own account for investment only and with no
present intention of distributing any of the Shares or
Warrants or any arrangement or understanding with any
other persons regarding the distribution thereof; (iv)
the Purchaser will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or
solicit any offers to buy, purchase or otherwise
acquire or take a pledge of) any of the Shares or
Warrants except in compliance with the Securities Act,
the Securities Act Rules and Regulations and any
applicable state securities or blue sky laws; (v) the
Purchaser has completed or caused to be completed the
Registration Statement Questionnaire and the Stock
Certificate Questionnaire, attached hereto as Appendix
I and Appendix II, for use in preparation of the
Registration Statement, and the answers thereto are
true and correct as of the date hereof and will be
true and correct as of the effective date of the
Registration Statement; (vi) the Purchaser has, in
connection with its decision enter into this Agreement
not relied upon any representations or other
information (whether oral or written) other than as
set forth in the Information Documents and the
representations and warranties of the Company
contained herein; (vii) the Purchaser has had an
opportunity to discuss this investment with
representatives of the Company and ask questions of
them and such questions have been answered to the full
satisfaction of the Purchaser; and (viii) the
Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under
the Securities Act.
5.2 The Purchaser hereby covenants with the
Company not to make any sale of the Shares or
Warrants, or of the Common Shares issuable upon
exercise of such Warrants (the "Warrant Shares)
without satisfying the prospectus delivery
requirements under the Securities Act, if any.
5.3 The Purchaser further represents and
warrants to, and covenants with, the Company that (i)
the Purchaser has full right, power, authority and
capacity to enter into this Agreement and to
consummate the transactions contemplated hereby and
has taken all necessary action to authorize the
execution, delivery and performance of this Agreement,
(ii) the Purchaser is duly organized, validly existing
and in good standing under the laws of the its
jurisdiction of organization, and (iii) upon the
execution and delivery of this Agreement, this
Agreement shall constitute a valid and binding
obligation of the Purchaser enforceable in accordance
with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally
and except as enforceability may be subject to general
principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity
or at law).
5.4 The Purchaser recognizes that an investment
in the Company's securities is speculative and
involves a high degree of risk, including a risk of
total loss of the Purchaser's investment.
5.5 All of the information provided to the
Company or its agents or representatives concerning
the Purchaser's suitability to invest in the Company
and the representations and warranties contained
herein, are complete, true and correct as of the date
hereof. The Purchaser understands that the Company is
relying on the statements contained herein to
establish an exemption from registration under U.S.
federal and state securities laws.
5.6 The address set forth in the signature page
hereto is the Purchaser's true and correct domicile.
5.7 The Purchaser covenants to provide the
Company an updated, accurate and complete plan of
distribution at all times during which the Company is
required to keep the Registration Statement in effect.
5.8 The Purchaser understands and agrees that
each certificate or other document evidencing any of
the Shares or Warrant Shares shall be endorsed with
the legend in substantially the form set forth below
and the certificate evidencing the Warrants shall be
endorsed with the legend in substantially the form set
forth in Appendix III, as well as any other legends
required by applicable law, and the Purchaser
covenants that the Purchaser shall not transfer the
Shares, Warrants or Warrant Shares represented by any
such certificate without complying with the
restrictions on transfer described in the legends
endorsed on such certificates:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED ("SECURITIES ACT"), OR REGISTERED
OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES
LAWS OR CANADIAN SECURITIES LAWS. THESE SECURITIES
MAY NOT BE TRANSFERRED UNLESS (A) COVERED BY AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER
APPLICABLE STATE LAW AND, IF APPLICABLE, CANADIAN
SECURITIES LAWS OR (B) EXEMPTIONS FROM SUCH
REGISTRATION OR QUALIFICATION REQUIREMENTS ARE
AVAILABLE. AS A CONDITION TO PERMITTING ANY
TRANSFER OF THESE SECURITIES, THE COMPANY MAY
REQUIRE THAT IT BE FURNISHED WITH AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT
NO REGISTRATION OR QUALIFICATIONS IS LEGALLY
REQUIRED FOR SUCH TRANSFER.
5.9 The Purchaser acknowledges the reporting
requirements under US and Canadian securities laws
which may be applicable to it in connection with the
acquisition of the securities hereunder, including
those of (i) section 13(d) of the Securities and
Exchange Act of 1934, (ii) section 101 of the
Securities Act (Ontario) and section 111 of the
Securities Act (British Columbia), and (iii) section
107 of the Securities Act (Ontario) and section 87 of
the Securities Act (British Columbia) (the provisions
referred to in sections (ii) and (iii) relate to early
warning requirements and insider reporting
requirements applicable in connection with the
acquisition by the Purchaser of common shares
resulting in the Purchaser and persons acting jointly
or in concert holding 10% or more of the common shares
of the Company).
SECTION 6. Survival of Representatives, Warranties
and Agreements. Notwithstanding any investigation
made by any party to this Agreement, all covenants,
agreements, representations and warranties made by the
Company and the Purchaser herein and in any
certificates or documents delivered pursuant hereto or
in connection herewith shall survive following the
delivery to the Purchaser of the Shares and Warrants
being purchased and the payment therefor.
Each party shall indemnify the others for all losses,
claims, damages, liabilities or expenses actually
incurred ("Losses") (including reasonable attorneys'
fees and cost of enforcement) arising out of any
breach of that party's covenants, agreements,
representations or warranties in this Agreement;
provided that in no event shall any party be
responsible for Losses exceeding, individually or in
the aggregate, the purchase price set out in section 2
of this Agreement.
SECTION 7. Registration of the Shares: Compliance
with the Securities Act.
7.1 Registration Statement on Form F-3. The
Company represents and warrants that the Company
currently meets the requirements for use of Form F-3
under the Securities Act. The Company shall file all
reports required to be filed by the Company with the
Commission in a timely manner and take such other
actions as shall be necessary for the Company to
maintain such eligibility for the use of Form F-3.
7.2 Registration Procedures and Expenses. The
Company shall:
(a) use its best efforts, but in no event
later than 60 days following the date of Closing, to
prepare and file, with the Commission a Registration
Statement under the Securities Act following the date
of Closing, and use its reasonable best efforts to
cause the Registration Statement to become effective
as soon as practicable thereafter, relating to the
resale pursuant to Rule 415 under the Securities Act
of the Registrable Stock by the Holders from time to
time through the automated quotation system of Nasdaq
or the facilities of any national securities exchange
on which the Common Shares are then traded or in
privately-negotiated transactions, and otherwise as
described in the "Plan of Distribution" section of the
Company's Form F-3 Registration Statement filed on
July 22, 2003;
(b) Each time the Company shall determine to
file a Registration Statement in connection with the
proposed offer and sale for money of any of its
securities by it or any of its security holders, the
Company will give written notice of its determination
to all Holders. Upon the written request of a Holder
given within twenty (20) days after the giving of any
such notice by the Company, the Company will use its
best efforts to cause all such shares of Registrable
Stock, the Holders of which have so requested
registration thereof, to be included in such
Registration Statement, all to the extent requisite to
permit the sale or other disposition by the
prospective seller or sellers of the Registrable Stock
to be so registered. If the Registration Statement is
to cover an underwritten distribution, the Company
shall use its best efforts to cause the Registrable
Stock requested for inclusion pursuant to this
paragraph to be included in the underwriting on the
same terms and conditions as the securities otherwise
being sold through the underwriters. If, in the good
faith judgment of the managing underwriter of such
public offering, the inclusion of any or all of the
Registrable Stock requested for inclusion pursuant to
this paragraph and other securities would interfere
with the successful marketing of a smaller number of
shares to be offered, then the number of shares of
Registrable Stock and other securities to be included
in the offering (except for shares to be issued by the
Company in an offering initiated by the Company) shall
be reduced accordingly on a prorata basis with the
other security holders.
(c) promptly and in good faith respond to
all Commission's comments on the Registration
Statement, and within two (2) business days of receipt
of an indication from the Commission that it has no
further comments, request acceleration of the
effectiveness of the registration at the earliest
practicable time;
(d) prepare and file with the Commission
such amendments and supplements to the Registration
Statement and the prospectus used in connection
therewith as may be necessary to keep the Registration
Statement effective until the earlier of (i) the third
anniversary of the Closing Date, (ii) the date
following exercise of the Warrants on which the Holder
may sell all the Shares then held by the Holder within
a three-month period in accordance with Rule 144 under
the Securities Act ("Rule 144"), or (iii) such time as
all the Registrable Stock purchased by the Holder have
been sold pursuant to a registration statement;
(e) so long as the Registration Statement
is effective covering the resale of the Registrable
Stock owned by the Holders, furnish to the Holder such
reasonable number of copies of prospectuses and such
other documents as the Holders may reasonably request,
in order to facilitate the public sale or other
disposition of all or any of the Registrable Stock;
(f) file documents required of the Company
for blue sky clearance in states specified in writing
by the Purchaser; provided, however, that the Company
shall not be required to qualify to do business or
consent to service of process in any jurisdiction in
which it is not so qualified or has not so consented;
(g) bear all expenses in connection with
the procedures in paragraphs (a) through (f) of this
Section 7.2 and the registration of the Shares and
Warrant Shares pursuant to the Registration Statement,
except for any underwriting discounts, brokerage fees
and commissions incurred by the Purchaser, if any; and
(h) with a view to making available to the
Purchaser the benefits of Rule 144 (or its successor
rule) and any other rule or regulation of the
Commission that may at any time permit the Purchaser
to sell the Shares and Warrant Shares to the public
without registration, the Company covenants and agrees
to: (i) make and keep public information available, as
those terms are understood and defined in Rule 144,
until the earlier of (A) such date as all of the
Purchaser's Shares and Warrant Shares may be resold
within a given three-month period pursuant to Rule 144
or any other rule of similar effect or (B) such date
as all of the Purchaser's Shares and Warrant Shares
shall have been resold and (ii) file with the
Commission in a timely manner all reports and other
documents required of the Company under the Securities
Act and under the Exchange Act.
(i) notify the Holders participating in
such registration, promptly after it shall receive
notice thereof, of the date and time when such
Registration Statement and each post-effective
amendment thereto has become effective or a supplement
to any prospectus forming a part of such Registration
Statement has been filed;
(j) notify the Holders participating in
such registration promptly of any request by the
Commission or any state securities commission or
agency for the amending or supplementing of such
Registration Statement or prospectus or for additional
information;
(k) prepare and promptly file with the
Commission, and promptly notify such participating
Holders of the filing of, such amendments or
supplements to such Registration Statement or
prospectus as may be necessary to correct any
statements or omissions if, at the time when a
prospectus relating to such securities is required to
be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or
any other prospectus as then in effect would include
an untrue statement of a material fact or omit to
state any material fact required to be stated therein
or necessary to make the statements therein not
misleading;
(l) advise such participating Holders,
promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order
by the Commission or any state securities commission
or agency suspending the effectiveness of such
Registration Statement or the initiation or
threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance
of any stop order or to obtain its withdrawal if such
stop order should be issued;
(m) cooperate with the Holders to
facilitate the timely preparation and delivery (under
normal way settlement procedures) of certificates
representing securities to be sold pursuant to any
Registration Statement free of any restrictive legends
and in such denominations and registered in such names
as Holders may request prior to sales of securities
pursuant to such Registration Statement;
(n) comply with all applicable rules and
regulations of the Commission and shall make generally
available as soon as practicable after the effective
date of the applicable Registration Statement an
earnings statement satisfying the provisions of
Section 11(a) of the Securities Act;
(o) permit the Purchaser to assign the
rights under this Section 7 to any other person in
connection with a transfer of the Registrable Stock.
7.3 Blackout Period
(a) The Company may suspend, at any time or from
time to time, the use of the prospectus which forms
part of the Registration Statement (the "Prospectus")
for a period or periods of time not to exceed an
aggregate of 60 calendar days in any 12 month period,
provided that during any three month period such
aggregate period of time shall not exceed 30 calendar
days (each, a "Blackout Period"), if the Company
determines that the filing or continued use of the
Prospectus would (w) require the public disclosure of
material non-public information concerning any
transaction or negotiations involving the Company or
any of its affiliates that, in the good faith judgment
of the Board of Directors of the Company, would
materially interfere with such transaction or
negotiations, (x) otherwise require premature
disclosure of information that, in the good faith
judgment of the Board of Directors of the Company,
would adversely affect or otherwise be detrimental to
the Company, (y) require amendment or supplement to
the Registration Statement due to the happening of any
event that comes to the attention of the Company and
as a result of which the Registration Statement or
Prospectus would contain an untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein, in the light of the circumstances
under which they were made, not misleading, or (z)
adversely affect the success of an offering of
securities by the Company which the Company proposes
to or has registered under applicable securities laws.
The Company shall provide the Holders whose
Registrable Stock is registered under the Registration
Statement with written notice of the commencement of a
Blackout Period and of the termination of such
Blackout Period.
(b) The Purchaser agrees that, upon receipt of
any written notice from the Company of the happening
of any event of the kind described in Section 7.3(a)
(a "Material Event"), the Purchaser will forthwith
discontinue disposition of the Registrable Stock under
the Prospectus until the Company confirms in writing
that the Blackout Period has terminated and that the
Prospectus may be used for the disposition of
Registrable Stock or until receipt of copies of a
supplemented or amended Prospectus, and, if so
requested by the Company, will deliver to the Company
all copies of the Prospectus covering the Registrable
Stock in its possession at the time of receipt of such
notice.
(c) The Purchaser shall, at any time it is
engaged in a distribution of Registrable Stock, comply
with all applicable laws.
7.4 Indemnification and Contribution.
(a) The Company will indemnify and hold
harmless each Holder of shares of Registrable Stock
which are included in a Registration Statement
pursuant to the provisions of this Agreement, the
directors, officers, employees and agents of such
Holder, any underwriter (as defined in the Securities
Act) for such Holder, the directors, officers,
employees and agents of such underwriter, and any
person who controls such Holder or such underwriter
within the meaning of the Securities Act or the
Exchange Act, and each of their successors, from and
against any and all claims, actions, demands, losses,
damages or liabilities, joint or several, to which
they or any of them may become subject under the
Securities Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or
otherwise, or under Canadian law, insofar as such
claims, actions, demands, losses, damages or
liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of any material
fact contained in such Registration Statement
(including all documents incorporated therein by
reference) as originally filed or in any amendment
thereto, any preliminary or final prospectus contained
therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading and agrees to reimburse each
such Holder, as incurred, for any legal or other
expenses reasonably incurred by it in connection with
investigating or defending any such claim, action,
demand loss, damage or liability; provided, however,
that the Company will not be liable in any such case
to the extent that any such claim, action, demand,
loss, damage, or liability arises out of or is based
upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in reliance
upon and in strict conformity with information
furnished or on behalf of such Holder, specifically
for use in the preparation thereof. This indemnity
shall be in addition to any liability which the
Company may otherwise have and shall be in addition to
any subsequently executed indemnity agreements.
(b) Each Holder of shares of the
Registrable Stock which are included in a registration
pursuant to the provisions of this Agreement will,
severally and not jointly, indemnify and hold harmless
the Company, the directors, officers, employees and
agents of the Company and any person who controls the
Company within the meaning of the Securities Act or
the Exchange Act from and against any and all claims,
actions, demands, losses, damages or liabilities,
joint or several, to which they or any of them may
become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or
regulation, at common law or otherwise, or under
Canadian law, insofar as such claims, actions,
demands, losses, damages or liabilities arise out of
or are based upon any untrue statement or alleged
untrue statement of any material fact contained in
such Registration Statement (including all documents
incorporated therein by reference) as originally filed
or in any amendment thereto, any preliminary or final
prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, in each case to the extent, but only to
the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was
so made in reliance upon and in strict conformity with
written information furnished by such Holder for use
in the preparation thereof; provided, that the
liability of each Holder hereunder shall be limited to
the proportion of any such claim, action, demand,
loss, damage, liability, cost or expense which is
equal to the proportion that the public offering price
of the shares of Registrable Stock sold by such Holder
under such Registration Statement bears to the total
offering price of all securities sold thereunder, but
not, in any event, to exceed the proceeds received by
such Holder from the sale of shares of Registrable
Stock covered by the Registration Statement. This
indemnity shall be in addition to any liability which
such Holder may otherwise have and shall be in
addition to any subsequently executed indemnity
agreements.
(c) In order to provide for just and
equitable contribution to joint liability under the
Securities Act in any case in which either (i) any
Holder exercising rights under this Agreement, or any
controlling Person of any such Holder, makes a claim
for indemnification pursuant to this Section but it is
judicially determined (by the entry of a final
judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or
the denial of the last right of appeal) that such
indemnification may not be enforced in such case
notwithstanding the fact that this Section provides
for indemnification is such case, or (ii) contribution
under the Securities Act may be required on the part
of any such selling Holder or any such controlling
Person in circumstances for which indemnification is
provided under this Section; then, and in each such
case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities
to which they may be subject (including legal and
other expenses reasonably incurred in connection with
or defending same (collectively "Losses")) in such
proportion as is appropriate to reflect the relative
fault of the indemnifying party, on the one hand, and
the indemnified party, on the other. Relative fault
shall be determined by reference to whether any
alleged untrue statement or omission relates to
information provided by the indemnifying party, on the
one hand, or by the indemnified party, on the other
hand. The parties agree that it would not be just and
equitable if contribution were determined by pro rata
allocation or any other method of allocation which
does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of
this paragraph (c), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to
contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of
this Section, each person who controls a Holder within
the meaning of either the Securities Act or the
Exchange Act and each director, officer, employee and
agent of such Holder shall have the same rights to
contribution as such Holder, and each person who
controls the Company within the meaning of either the
Securities Act, each officer of the Company who shall
have signed the Registration Statement and each
director of the Company shall have the same rights to
contribution as the Company, subject in each case to
the applicable terms and conditions of this paragraph
(d); provided, however, that, in any such case, (A) no
person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)
of the Securities Act) will be entitled to
contribution from any person or entity who was not
guilty of such fraudulent misrepresentation and (B) no
such Holder will be required to contribute any amount
in excess of the public offering price of all such
Registrable Stock offered by it pursuant to such
Registration Statement.
(d) The provisions of this Section will
remain in full force and effect, regardless of any
investigation made by or on behalf of any Holder or
the Company or any of the officers, directors,
employees or agents or controlling persons referred to
in this Section, and will survive the sale by a Holder
of securities covered by a Registration Statement.
7.5 Definitions. The following terms shall be
used in this Section with the following respective
meanings:
"Commission" means the Securities and Exchange
Commission.
"Holder" means any holder of Registrable Stock.
"Registrable Stock" means the Shares and Warrant
Shares whether owned by a Purchaser or any third
party.
"Registration Statement" means a registration
statement filed by the Company with the Commission for
a public offering and sale of securities of the
Company (other than a registration statement on Form
S-8, Form F-4, or successor form).
SECTION 8. Notices. All notices, requests, consents
and other communications hereunder shall be in
writing, shall be mailed by first-class registered or
certified airmail, confirmed facsimile or nationally
recognized overnight express courier postage prepaid,
and shall be deemed given when so mailed and shall be
delivered as addressed as follows:
if to the Company, to:
Diversinet Corp.
2225 Sheppard Avenue East, Suite 1801
Toronto, Ontario M2J 5C2, Canada
Facsimile: (416) 756-7346
Attention: Chief Financial Officer
or to such other person at such other place as the
Company shall designate to the Purchaser in writing;
and
if to the Purchaser, at its address as set forth at
the end of this Agreement, or at such other address or
addresses as may have been furnished to the Company in
writing.
SECTION 9. Changes. This Agreement may not be
modified or amended except pursuant to an instrument
in writing, signed by the Company and the Purchaser.
SECTION 10. Headings. The headings of the various
sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed
to be part of this Agreement.
SECTION 11. Severability. In case any provision
contained in this Agreement should be invalid, illegal
or unenforceable in any respect, the validity,
legality and enforceability of the remaining
provisions contained herein shall not in any way be
affected or impaired thereby.
SECTION 12. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws
of the State of New York, without giving effect to any
choice of law provisions thereof.
SECTION 13. Counterparts. This Agreement may be
executed in two or more counterparts, each of which
shall constitute an original, but both of which, when
taken together, shall constitute but one instrument,
and shall become effective when one or more
counterparts have been signed by each party hereto and
delivered to the other party.
SECTION 14. Entire Agreement. This Agreement
(including the attachments hereto) contains the entire
agreement of the parties with respect to the subject
matter hereof and supersedes and is in full
substitution for any and all prior oral or written
agreements and understandings between them related to
such subject matter, and neither party hereto shall be
liable or bound to the other party hereto in any
manner with respect to such subject matter by any
representations, indemnities, covenants or agreements
except as specifically set forth herein.
SECTION 15. Right of Acceptance. The Purchaser
acknowledges and agrees that the Company shall have
the right, at its sole discretion, to accept or
reject, up to the Closing, any subscription for
securities and that acceptance thereof is not subject
to the Company having received any minimum amount of
subscription proceeds. The Purchaser further
acknowledges and agrees that execution of this
Agreement by the Purchaser shall not result in any
obligation on the Company until such time as this
Agreement shall have been duly executed by the Company
and Closing shall have occurred. Any funds received
by the Company or its agent from the Purchaser on
account of the transaction contemplated hereby will be
returned to the Purchaser (without interest or
deduction) at the address indicated in Appendix I in
the event the Company determines, in its sole
discretion, to reject the Purchaser's subscription.
SECTION 16. Reimbursement of Expenses. Upon Closing,
the Company will reimburse the Purchaser for all
reasonable out-of-pocket expenses incurred by the
Purchasers (including, without limitation, reasonable
outside attorneys' fees). Such amount shall not
exceed US$7,500.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be executed by their duly
authorized representatives shown below:
Jay Wigdale
Lakefront Partners, LLC
By: Lakefront Capital
Management, LLC
By: Jay Wigdale, Sole Member
205 E. Wisconsin Ave, Ste
220
205 E. Wisconsin Ave, Ste 220
Milwaukee, WI 53202
Milwaukee, WI 53202
Warrants: 1,100,000
Shares: 1,000,000
Date:
Date:
Accepted and Agreed to by:
DIVERSINET CORP.
By:
Nagy Moustafa, President
and Chief Executive
Officer
Date:
Previously filed with Registration Statement on Form F-3 filed July 22, 2003
Previously filed with Registration Statement on From F-3 filed July 22, 2003
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