UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=================
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 AND L5D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(SEPTEMBER 11, 2003)
DIVERSINET CORP.
------------------------------------------------------------
(Name of Registrant)
2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario M2J 5C2
------------------------------------------------------------
(Address of principal executive offices)
1. Press Release - Completion of Caradas, Inc. Acquisition
2. Press Release - Quarter ended July 31, 2003
3. Financial Statements for the Nine Months ended July 31, 2003
4. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quarter ended July 31, 2003
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
------
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
YES NO X
------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 6-K to be signed on its behalf by the
undersigned, thereunto duly authorized
DIVERSINET CORP.
- -----------------
(REGISTRANT)
DATE: SEPTEMBER 11, 2003 BY: /s/ DAVID HACKETT
---------------------
DAVID HACKETT, CHIEF FINANCIAL OFFICER
DIVERSINET BUYS BOSTON-BASED CARADAS, EXPANDING PUSH INTO U.S.
STRENGTHENS SECURE WIRELESS OFFERINGS INTO GLOBAL FINANCE, GOVERNMENT SECTORS
TORONTO, SEPTEMBER 9, 2003 - DIVERSINET CORP. (OTCBB: DVNTF) today announced it
has significantly expanded its opportunities in the financial services and
government sectors by acquiring CARADAS, INC. in an all-stock transaction.
Caradas, founded in 2001, has annual revenues of approximately US$4 million and
is currently profitable.
"The list of the wireless sector's potential killer applications is expanding
rapidly, including everything from new types of mobile payment techniques to
software applications that enable a workforce to go wireless," said Nagy
Moustafa, president and CEO of Diversinet. "Our acquisition of Caradas puts us
in a position to provide the security infrastructure for many of those
applications."
Diversinet's acquisition of Caradas and its digital identity and authentication
management technology broadens the Diversinet skill set, gives the company a
deeper knowledge of financial applications and provides established
relationships with important financial customers, including Visa, MasterCard,
Fleet Bank, First National Bank Omaha, and other institutions. Caradas also
operates Caradas Labs, an independent test facility, providing functional,
security, and standards testing services to the financial services industry.
Diversinet, over the past seven years, has been a provider of secure mobile
solutions. It enables its customers and their employees to securely access
applications and critical corporate information from anywhere, at anytime and
via any mobile device.
"For Caradas, the acquisition provides a broader framework to expand
relationships with key customers such as Visa and to enlarge our geographic
reach to include Asia-Pacific, Europe, and Canada," said Caradas founder and
chairman Charles Walton.
Besides accelerating Diversinet's push into the financial services sector, the
acquisition also strengthens the company's technology offering to U.S.
government sectors. Caradas has an office in Washington, D.C. and has a highly
successful security consulting services team, in addition to its technology
platform.
"The importance to the government of secure wireless communications cannot be
overestimated," said J. Scott Lowry, President & CEO of Caradas. "It is clearly
a top priority of the federal government, and we look forward to bringing
Diversinet's mobile security product suite and technical expertise to bear in
helping the government solve this critical problem."
Mr. Moustafa said that combining Diversinet's focus on secure mobile solutions
for banks and government with Caradas' experience providing authentication
management solutions to some of the nation's largest banks creates a business
that is better than the sum of its parts.
"This acquisition creates immediate value for our shareholders because Caradas
is a profitable business, it brings us a stellar management team, and it puts
Diversinet in a very favourable position in what we expect will be one of the
fastest growing segments of the wireless market," said Mr. Moustafa.
Under the terms of the acquisition, Diversinet has issued to Caradas
stockholders 1,350,000 common shares and 200,000 share purchase warrants at
US$2.45 exercisable over five years. Of the 1,350,000 common shares, 1,150,000
will be held in escrow for one year, and released on an equal monthly basis over
the second year. The remaining 200,000 common shares will be registered with the
U.S. Securities & Exchange Commission after the closing of the transaction.
ABOUT DIVERSINET CORP.
Diversinet is a leading provider of secured mobile solutions to the enterprise,
financial services, and gaming and wagering marketplaces. With demonstrated
expertise in wireless and security, Diversinet delivers secure, reliable and
scalable mobile solutions through security products and professional services
such as application development
and integration, consulting, training and technical support. Diversinet enables
customers and their employees to securely access applications and critical
corporate information from anywhere, at anytime and via any mobile device.
Diversinet is headquartered in Toronto, Canada, with offices in Fremont,
California; Hong Kong; and London, England. For more information, visit
www.diversinet.com.
- ------------------
ABOUT CARADAS, INC.
Caradas, Inc. is a credential management platform provider to the financial
services industry. Caradas offers the Caradas Connexus(TM) Platform along with a
full suite of planning, implementation, integration, test, and training services
necessary to effectively implement a multi-application smart card program.
Caradas is headquartered in Braintree MA, hosts Caradas Labs(TM), an independent
test lab in Burlington MA, and has regional offices in the San Francisco and
Washington DC areas. Caradas team members are acknowledged thought leaders and
experts in applying smart card and security technologies to financial services,
retail, and government applications. For additional information, visit the
Caradas website at www.caradas.com.
---------------
###
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this press
release (as well as information included in oral statements or other written
statements made or to be made by the company) contains statements that are
forward-looking, such as statements relating to anticipated future revenues of
the company and success of current product offerings. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ materially from those expressed in any forward-looking statements made by
or on behalf of the company. For a description of additional risks and
uncertainties, please refer to the company's filings with the Securities and
Exchange Commission.
FOR MORE INFORMATION: FOR INVESTOR INQUIRIES:
Nagy Moustafa Charles Walton Derek L. Caldwell, EVP
Diversinet Corp Caradas, Inc. Sunrise Financial Group
tel: 416-756-2324, ext. 310 tel: 781-848-8336, ext. 23 tel: 212-421-1616
DIVERSINET CORP. ANNOUNCES CONTINUED REVENUE GROWTH
AND THIRD QUARTER FISCAL 2003 RESULTS
Operating cash loss narrows by 38%
Revenue up 800% for first nine months
TORONTO, CANADA, SEPTEMBER 11, 2003 - DIVERSINET CORP. (OTCBB: DVNTF), a leading
provider of secured mobile solutions, today announced its third quarter fiscal
2003 results.
Revenues for the third quarter of fiscal 2003 were $2,515,000, up from $221,000
in the third quarter of fiscal 2002. For the nine months ended July 31, 2003,
the Company reported revenue of $6,383,000, compared to revenue of $706,000 for
the nine months ended July 31, 2002. The higher revenue was primarily due to the
inclusion of DSS Software Technologies, which was acquired on January 3, 2003.
The net loss for the quarter ended July 31, 2003, was $1,065,000, or $(0.18) per
share, compared to a net loss for the same quarter in fiscal 2002 of $1,575,000,
or $(0.49) per share. The net loss reported for the nine months ended July 31,
2003 was $4,263,000, or $(1.04) per share, compared to a net loss of $5,364,000,
or $(1.86) in the same period in fiscal 2002. The improved reduction in net loss
is due in part to the Company's continued efforts to reduce costs.
During the quarter the Company completed a US$3.1 million private placement.
Cash used in operating activities was $1,017,000 in the three months ended July
31, 2003, down 38% from the amount used in the same period of the prior year.
With the financing completed and the continued efforts to manage costs, the
Company is well positioned to achieve profitability and positive cash flow in
the foreseeable future.
Subsequent to quarter-end, the Company completed its acquisition of Caradas,
Inc. for a combination of common shares and share purchase warrants exercisable
over five years. Currently profitable, Caradas brings a digital identity and
transaction management product suite, the Connexus platform, along with a highly
successful security consulting services team to the combined company. The
addition of Caradas will allow Diversinet to expand and provide an even stronger
combination of technology platforms, mobile security solutions, and professional
services to its tier one customers. It also accelerates Diversinet's push into
the financial services and U.S. government sectors, by enhancing Diversinet's
existing technology solutions, and strengthening its development team.
During the third quarter, the Company appointed Derek Buntain to its Board of
Directors. Mr. Buntain is the President of The Dundee Bank and holds seats on a
number of boards. Mr. Buntain brings a wealth of experience in corporate
finance, mergers and acquisitions and international business.
Diversinet launched Passport SMS Messenger(TM) solution which connects
Internet-enabled applications and mobile phones using SMS technology, and
announced an agreement with Arcot Systems Inc. to develop and co-market systems
for mobile authentication of online credit card transactions. By integrating
Arcot's TransFort(TM) e-payments authentication product suite, Passport SMS
Messenger further extends the TransFort platform by adding support for SMS
wireless access. The combined solution provides bank card issuers with a new
mobile device channel for delivering Verified by Visa(R) and MasterCard(R)
SecureCode(R) online credit card transactions.
Diversinet's advanced wireless security solutions provide technologies
electronically that verify and authenticate each party involved in a mobile
transaction. During the quarter, Diversinet licensed its mobile security
software to the Edvance Limited for use in a secure Fleet and Workforce
Management System in Hong Kong with location-based technology. Additionally,
Edvance Limited will become an authorized reseller of Diversinet's mobile
security solution in the Asia Pacific region.
Diversinet's systems integration subsidiary, DSS Software, entered into new
product and project development agreements in the third quarter with Men's
Warehouse, a North American retailer of men's clothing; Williams-Sonoma, a
nationwide retailer of products for the home; Cisco, a worldwide leader in
networking for the Internet; Merador LLC, a provider of business intelligence
software solutions; SNAPFISH, a leading online photo service; and Digital
Globalsoft, a Hewlett-Packard company that is focused on software development
and IT services.
ABOUT DIVERSINET CORP.
Diversinet is a leading provider of secured mobile solutions to the enterprise,
financial services, and gaming and wagering marketplaces. With demonstrated
expertise in wireless and security, Diversinet delivers secure, reliable and
scalable mobile solutions through security products and professional services
such as application development and integration, consulting, training and
technical support. Diversinet enables customers and their employees to securely
access applications and critical corporate information from anywhere, at anytime
and via any mobile device.
Diversinet is headquartered in Toronto, Canada, with offices in Fremont,
California; Braintree, Massachusetts; Hong Kong; and London, England. For more
information visit www.diversinet.com.
------------------
###
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this press
release (as well as information included in oral statements or other written
statements made or to be made by the company) contains statements that are
forward-looking, such as statements relating to anticipated future revenues of
the company and success of current product offerings. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ materially from those expressed in any forward-looking statements made by
or on behalf of the company. For a description of additional risks and
uncertainties, please refer to the company's filings with the Securities and
Exchange Commission.
For more information:
Diversinet Corp.
David Hackett
tel: 416-756-2324, ext. 275
web: www.diversinet.com
------------------
DIVERSINET CORP.
CONSOLIDATED BALANCE SHEETS
[in Canadian dollars]
JULY 31 October 31
2003 2002
$ $
=========================================================================
(UNAUDITED)
ASSETS
CURRENT
Cash and cash equivalents 520,901 953,272
Short-term investments 3,482,618 2,887,352
Accounts receivable 1,638,914 416,070
Other receivables 139,207 24,952
Prepaid expenses 273,818 120,608
- -------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,055,458 4,402,254
- -------------------------------------------------------------------------
Capital assets, net 1,269,387 1,877,012
Goodwill 1,446,397 -
- -------------------------------------------------------------------------
TOTAL ASSETS 8,771,242 6,279,266
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable 1,170,306 551,306
Accrued liabilities 1,610,270 1,093,352
Current portion of promissory note 420,000 -
Current portion of notes payable 14,455 -
Deferred revenue 56,276 14,452
- -------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,271,307 1,659,110
- -------------------------------------------------------------------------
Promissory note 420,000 -
- -------------------------------------------------------------------------
TOTAL LIABILITIES 3,691,307 1,659,110
- -------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 63,090,916 58,957,962
Share purchase warrants 589,824 -
Contributed surplus 97,500 97,500
Deficit (58,698,305) (54,435,306)
- -------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,079,935 4,620,156
- -------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 8,771,242 6,279,266
=========================================================================
See accompanying notes to interim financial statements.
DIVERSINET CORP.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
[in Canadian dollars]
Three and nine months ended July 31, 2003
(Unaudited)
THREE MONTHS JULY 31 NINE MONTHS JULY 31
2003 2002 2003 2002
$ $ $ $
- ------------------------------------------------------------------------------------------
REVENUE 2,515,706 220,764 6,382,625 706,405
Cost of sales 2,147,268 - 5,186,384 -
- ------------------------------------------------------------------------------------------
GROSS MARGIN 368,438 220,764 1,196,241 706,405
EXPENSES
Research and development 175,011 565,454 1,144,546 1,974,087
Sales and marketing 400,358 377,096 1,181,342 1,285,107
General and administrative 771,163 692,236 2,610,283 2,484,392
Depreciation and amortization 106,803 202,530 609,641 470,004
- ------------------------------------------------------------------------------------------
1,453,335 1,837,316 5,545,812 6,213,590
- ------------------------------------------------------------------------------------------
Loss before the following (1,084,897) (1,616,552) (4,349,571) (5,507,185)
Interest expense (income) (19,455) (41,207) (86,572) (143,558)
==========================================================================================
LOSS FOR THE PERIOD (1,065,442) (1,575,345) (4,262,999) (5,363,627)
==========================================================================================
LOSS PER SHARE (0.18) (0.49) (1.04) (1.86)
==========================================================================================
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 5,784,984 3,218,839 4,085,920 2,887,270
==========================================================================================
DEFICIT, BEGINNING OF PERIOD (57,632,863) (51,826,646) (54,435,306) (48,038,364)
Loss for the period (1,065,442) (1,575,345) (4,262,999) (5,363,627)
- ------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD (58,698,305) (53,401,991) (58,698,305) (53,401,991)
==========================================================================================
See accompanying notes to interim financial statements.
DIVERSINET CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[in Canadian dollars]
---------------------
Three and nine months ended July 31, 2003
(Unaudited)
Three months July 31 Nine months July 31
2003 2002 2003 2002
$ $ $ $
- --------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period (1,065,442) (1,575,345) (4,262,999) (5,363,627)
Add (deduct) items not requiring an outlay of cash:
Depreciation and amortization 106,803 202,530 609,641 470,004
Gain on disposal of capital assets (6,274) - (6,274) -
Changes in non-cash working capital items related to operations:
Accounts receivable and other receivables (200,451) (49,140) 2,248,734 47,921
Prepaid expenses 125,352 80,542 (94,992) 358,255
Accounts payable and accrued liabilities (7,380) (288,212) (400,028) (1,723,697)
Deferred revenue 30,498 (12,765) 41,824 (8,912)
- --------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,016,894) (1,642,390) (1,864,094) (6,220,056)
==========================================================================================================================
FINANCING ACTIVITIES
Issue of common shares, common purchase options,
warrants for cash and share consolidation costs 4,140,955 191,344 4,132,954 4,964,970
Notes payable (4,445) - (1,363,750) -
Promissory notes payable (24,000) - (106,140) -
Bank indebtedness - - (380,000) -
Deferred financing costs - - (27,401) -
- --------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,112,510 191,344 2,255,663 4,964,970
==========================================================================================================================
INVESTING ACTIVITIES
Short-term investments (3,482,618) - (595,266) 3,087,680
Proceeds from disposal of capital assets 100,000 - 100,000 -
Acquisition, net of cash received (29,022) - (380,174) -
Additions to capital assets (5,847) - 51,500 (11,392)
- --------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,417,487) - (823,940) 3,076,288
==========================================================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS DURING THE PERIOD (321,871) (1,451,046) (432,371) 1,821,202
Cash and cash equivalents,
beginning of the period 842,772 6,334,092 953,272 3,061,844
==========================================================================================================================
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD 520,901 4,883,046 520,901 4,883,046
==========================================================================================================================
See accompanying notes to interim financial statements.
DIVERSINET CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts expressed in Canadian dollars)
Three and nine months ended July 31, 2003
Diversinet Corp. (the "Company"), an Ontario corporation, develops and markets
security software products, utilizing public-key infrastructure technology
primarily for use within wireless mobile e-commerce applications, such as
banking, stock trading, gaming and health care. The Company, through its
subsidiary, DSS Software Technologies, provides consulting services to
businesses in Silicon Valley and professional software consultants to IS/IT
departments.
1. Future Operations
These interim financial statements have been prepared on a going concern basis,
which assumes the Company will continue in operation in the foreseeable future
and be able to realize assets and satisfy liabilities in its normal course of
business. Certain conditions and events exist that cast doubt on the Company's
ability as a going concern.
The Company has incurred significant losses and used significant amounts of cash
in operating activities in recent years.
Continued operations depend upon the Company's ability to generate future
profitable operations and/or obtain additional financing to fund future
operations and, ultimately, to generate positive cash flows from operating
activities. There can be no assurance that the Company will be successful in
obtaining additional financing.
Should the Company be unable to generate positive cash flows from operations or
secure additional financing in the foreseeable future, the application of the
going concern principle for financial statement reporting purposes may no longer
be appropriate. These interim financial statements do not include any
adjustments related to the valuation or classification of recorded asset amounts
or the amounts or classification of liabilities that may be necessary should the
Company be unable to continue as a going concern.
2. Significant accounting policies
a) Basis of presentation
In the opinion of management, the unaudited consolidated financial statements of
the Company have been prepared on a consistent basis with the October 31, 2002
audited consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company at July 31, 2003 and the statement of loss and
deficit and cash flows for the three and nine months ended July 31, 2003 in
accordance with Canadian generally accepted accounting principles (GAAP). The
disclosures contained in these unaudited interim consolidated financial
statements do not include all requirements of generally accepted accounting
principles for annual financial statements. The unaudited interim consolidated
financial statements should be read in conjunction with the annual consolidated
financial statements for the year ended October 31, 2002.
b) Goodwill
The Company uses the purchase method of accounting for business combinations.
The Company evaluates all business combinations for intangible assets that must
be recognized and reported apart from goodwill. Goodwill acquired in business
combinations after June 30, 2001 is not amortized and will be tested for
impairment on at least an annual basis.
c) Stock-based compensation
Effective November 1, 2002, the Company adopted 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. There was
no impact on the consolidated financial statements on adoption of the section.
However, the standard permits the Company to continue its existing policy of
recording no compensation cost on the grant of stock options to employees with
the addition of pro-forma information as if the fair value method has been
applied (note 6).
3. Acquisition
In January 2003, the Company acquired 100% of the outstanding shares of DSS
Software Technologies, a consulting services provider. The aggregate purchase
price was $2,022,573 consisting of $473,070 (U.S.$300,000) in cash, $13,539 in
the costs associated with the acquisition, $946,140 (U.S.$600,000) of promissory
note payable in instalments of U.S.$300,000 on January 2, 2004 and U.S.$300,000
on January 2, 2005 and 120,000 share purchase warrants with a value of $589,824
(U.S.$374,040). The share purchase warrants vest equally on January 2, 2003,
2004 and 2005 and are exercisable at U.S.$3.75 per share for five years.
Additional future cash consideration in the amount of $1,892,280
(U.S.$1,200,000) is payable based on the achievement of certain financial
targets over the next three years and will be recorded as an increase to
goodwill when the targets have been met. The acquisition was accounted for
using the purchase method and the purchase price was allocated as follows:
Fair value of net capital assets acquired 147,242
Working capital 457,957
Goodwill 1,417,374
- --------------------------------------------------------------------------------
Purchase price 2,022,573
================================================================================
4. Interest in joint venture
On June 4, 2001, the Company entered into an agreement with an Asian company to
establish a joint venture to conduct certain of the Company's Asian activities.
Each party holds a 50% interest in the joint venture. These financial
statements reflect the Company's proportionate interest in the joint venture's
assets, liabilities, revenue and expenses.
The following amounts included in the consolidated financial statements
represent the Company's proportionate interest in the joint venture at July 31,
2003. There were no operations in the joint venture this quarter.
================================================================================
Capital assets 328,971
- --------------------------------------------------------------------------------
Total assets $328,971
================================================================================
================================================================================
Accounts payable 196,843
Accrued liabilities 1,870
- --------------------------------------------------------------------------------
Total liabilities $198,713
================================================================================
5. Segmented information
All revenue was generated from one operating segment.
THREE MONTHS JULY 31 NINE MONTHS JULY 31
2003 2002 2003 2002
$ $ $ $
================================================================================
REVENUE
United States 2,451,104 - 6,004,467 28,744
Asia 64,602 98,664 368,492 355,786
Canada - 75,000 9,666 274,775
Other - 47,100 - 47,100
- --------------------------------------------------------------------------------
2,515,706 220,764 6,382,625 706,405
================================================================================
6. Private placement
On June 24, 2003, the Company received gross proceeds $4,254,000 (US$3,100,000)
from the issue and sale of 5,000,000 common shares.
7. Share capital
a) As at July 31, 2003, the following were outstanding:
Number of common shares 9,585,444
Number of common share options granted under the Company's stock option plan 627,354
On January 28, 2003 the Company completed a reverse stock split of its issued
and outstanding common shares whereby every ten shares of common stock were
exchanged for one share of common stock. All common share amounts in the
financial statements have been restated to give effect to the stock split.
b) Stock-Based compensation
For companies electing not to adopt the fair value measurement for stock-based
compensation for employee grants, the pronouncement (note 1c) required the
disclosure of proforma loss and loss per share information. The Company has
elected to present the proforma information as if the Company had accounted for
its stock options issued from December 15, 1995 onwards under the fair value
method. A summary of the required proforma disclosure of the impact on the
consolidated statements of loss is presented in the table below:
THREE MONTHS JULY 31 NINE MONTHS JULY 31
2003 2003
$ $
=======================================================================================================
Loss for the period (1,065,442) (4,262,999)
Compensation expense related to the fair value of stock options 509,108 3,146,492
- -------------------------------------------------------------------------------------------------------
Proforma loss for the period (1,574,550) (7,409,491)
Proforma loss per common share: Basic and diluted (0.27) (1.81)
=======================================================================================================
Weighted average number of common shares 5,784,984 4,085,920
The fair value of each option granted has been determined using the
Black-Scholes option-pricing model. Assumptions used when valuing the options
at their date of grant using the Black-Scholes option pricing model include:
risk-free interest rate of 3.092%, estimated life of three years, expected
divided yield of 0% and volatility of 150%.
The Company granted 347,700 options (2002 - 231,800) during the nine month
period ended July 31, 2003.
8. Subsequent event
On September 1, 2003, the Company acquired 100% of the outstanding shares of
Caradas, Inc., an information security firm and consulting services provider.
The aggregate consideration was 1,417,500 Diversinet common shares and 200,000
share purchase warrants. The share purchase warrants are exercisable at
U.S.$2.45 per share for five years. The share purchase warrants will vest to
the holder quarterly over three years. The acquisition will be accounted for
using the purchase method.
9. Reconciliation of Canadian and United States generally accepted accounting
principles ("GAAP")
The consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles. Material differences between Canadian
and United States generally accepted accounting principles are described below.
==================================================================
July 31, 2003
- ------------------------------------------------------------------
Share capital:
Canadian GAAP $ 63,090,916
Elimination of reduction of share capital (a) 41,248,993
- ------------------------------------------------------------------
U.S. GAAP $ 104,339,909
==================================================================
Deficit and comprehensive loss:
Canadian GAAP $ (58,698,305)
Elimination of reduction of share capital (a) (41,248,993)
Compensation expense (b) (1,587,165)
- ------------------------------------------------------------------
U.S. GAAP $ (101,534,463)
==================================================================
================================================================================
July 31, 2003 July 31, 2002
- --------------------------------------------------------------------------------
Consolidated statements of loss:
Loss under Canadian GAAP $ (4,262,999) $(5,363,627)
Compensation expense (b) (26,444) (40,644)
- --------------------------------------------------------------------------------
Loss under U.S. GAAP $ (4,289,443) $(5,404,271)
================================================================================
Basic and diluted loss per share under U.S. GAAP $ (1.05) $ (1.87)
================================================================================
(a) Share capital and deficit:
On March 1, 1999, the shareholders approved a resolution to reduce the stated
capital of the Company by $41,248,993 to eliminate the deficit as at October 31,
1999. Under Canadian GAAP, a reduction of the share capital of outstanding
common shares is allowed with a corresponding offset to deficit. This
reclassification, which the Company made in 2000 to eliminate the deficit that
existed at October 31, 1999, did not meet the criteria specified by U.S. GAAP
and results in an increase to share capital with a corresponding increase in
deficit of $41,248,993.
(b) Options to consultants:
Under Canadian GAAP, the Company did not recognize compensation expense when
stock or stock options were issued to consultants prior to November 1, 2002.
Any consideration paid on exercise of stock options or purchase of stock is
credited to share capital. Under U.S. GAAP and Canadian GAAP subsequent to
October 31, 2002, the Company records compensation expense for stock or stock
options granted in exchange for services from consultants.
During the nine-month periods ended July 31, 2003 and July 31, 2002, the Company
has recorded compensation expense of $26,444 and $40,644 respectively relating
to options granted to consultants.
(c) Interest in joint venture:
Canadian GAAP requires the proportionate consolidation of interests in joint
ventures. Proportionate consolidation is not permitted under U.S. GAAP and
interests in joint ventures are accounted for on the equity basis. However, as
allowed by the Securities and Exchange Commission ("SEC"), reclassification is
not required in a SEC filing when specified criteria are met and information
disclosed. These criteria have been met and the information is disclosed in
note 4 of the interim consolidated financial statements.
Although the adoption of proportionate consolidation has no impact on net
earnings or shareholders' equity, it does increase assets, liabilities, revenue,
expenses and cash flows from operations from those amounts otherwise reported
under U.S. GAAP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
When used herein, the words "may", "will", "expect", "anticipate", "continue",
"estimate", "project", "intend", "plan" and similar expressions are intended to
identify forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, operating results and financial position. All statements,
other than statements of historical facts, included or incorporated by reference
in this Form 6-K which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
business strategy, expansion and growth of the Company's business and
operations, and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. Such statements are not guarantees of
future performance and are subject to risks and significant uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. The occurrence of
any unanticipated events may cause actual results to differ from those expressed
or implied by the forward-looking statements contained herein. You are
cautioned not to place undue reliance on these statements, which speak only as
of the date of this report.
Please find enclosed the Consolidated Balance Sheets as at July 31, 2003 and
October 31, 2002 and the Consolidated Statements of Loss and Deficit and the
Consolidated Statements of Cash Flows for the three months and the nine months
ended July 31, 2003 and 2002 and the Notes to Interim Consolidated Financial
Statements for Diversinet Corp. On January 2, 2003 we completed the acquisition
of DSS Software Technologies (DSS) and the DSS results are included as of the
acquisition date. Subsequent to the quarter end, on September 1, 2003 we
completed the acquisition of Caradas, Inc. (Caradas) and the Caradas results
will be included on a go forward basis as of the acquisition date.
DSS is a software solutions and consulting provider serving businesses in the
Silicon Valley with skilled and professional software consultants. DSS's
consultants work in information services and information technology departments
for a wide variety of companies performing functions such as system
administration, database administration, software development, web development,
data conversion, ERP - CRM implementation, migrations, upgrades, integrations
and developing interfaces. DSS's current technical expertise is focused on
Oracle, CRM (Siebel), ERP, Java development and architecture.
Subsequent to quarter end, in September 2003, we acquired all of the capital
stock of Caradas, Inc. (Caradas), a systems integration provider headquartered
just outside Boston, 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 need
for multi-application smart card technology, essential for managing critical
business processes.
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 Connexus(TM) 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 Connexus(TM)
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 Labs(TM): 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 finacial 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, 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 smart card-based application
security systems and software development, which are natural extensions of
wireless and require enhanced security.
OPERATING RESULTS
We reported an improved net loss of $1,065,000 for the three months ended July
31, 2003 compared to a net loss of $1,575,000 in the prior year's third quarter.
The net loss was $4,263,000 for the nine months ended July 31, 2003 compared to
a net loss of $5,364,000 in the same period in fiscal 2002. During the quarter
we sublet approximately two thirds of our Toronto space. As part of the sublet,
we sold the furniture and fixtures in the space for $100,000 (and reduced our
capital assets by $618,000 less accumulated depreciation and amortization of
$525,000). The decreased net loss in the first nine months of 2003 is
attributable to our continued efforts in cost control and in part to the
acquisition of DSS effective January 2, 2003.
For the three months ended July 31, 2003, we reported revenue of $2,516,000
compared to revenue of $221,000 for the quarter ended July 31, 2002. Revenue
denominated in US dollars on a quarter over quarter grew from US$1,555,000 to
US$1,637,0000, however during the period the Canadian dollar appreciated in
value, effectively reducing our reported revenues in Canadian dollars. The
increase in revenues is due largely to the inclusion of DSS as of January 2003.
Cost of sales for the three months ended July 31, 2003 was $2,147,000
(representing a gross margin of 15%) compared with $0 for the quarter ended July
31, 2002. Cost of sales for the nine months ended July 31, 2003 was $5,186,000
(representing a gross margin of 19%) compared with $0 for the nine months ended
July 31, 2002. The cost of sales represents the direct costs associated for DSS
completing the consulting services revenue. As we integrate DSS and Diversinet
and start to focus DSS towards wireless application consulting, we expect that
the gross margins on DSS revenues will improve.
Research and development expenses decreased to $175,000 in the three months
ended July 31, 2003 from $565,000 in the three months ended July 31, 2002.
During the quarter we received an investment tax credit for R&D work done in
2002 in the amount of $165,000. With the completion of the development work on
Passport ONE during the quarter, we reduced our R&D staff by six people, leading
to additional reductions in the R&D expenses. Research and development expenses
decreased to $1,145,000 in the nine months ended July 31, 2003 from $1,974,000
in same period of fiscal 2002.
Sales and marketing expenses were $400,000 in the third quarter of fiscal 2003
compared to $377,000 in the third quarter of fiscal 2002. Sales and marketing
expenses were $1,181,000 in the first nine months of fiscal 2003 compared to
$1,285,000 in the same period of fiscal 2002. The decrease is due in part to a
reduction in travel costs and license fees. During the nine months of fiscal
2003 we expanded the sales team adding experienced sales people in Hong Kong,
the United States and Canada. We believe that
selective additions to the sales team will benefit the Company through increased
revenues in the short to medium term.
General and administrative expenses were $771,000 for the third quarter of 2003
compared to $692,000 incurred during the third quarter of 2002. Foreign
exchange gains were $76,000 for the three months compared to losses of $115,000
for the respective period in 2002. General and administrative expenses were
$2,610,000 for the first nine months of 2003 compared to $2,484,000 incurred
during the first three quarters of 2002. Overall Diversinet G&A costs have been
reduced from last year, however with the acquisition of DSS, the addition of the
DSS infrastructure has caused the overall G&A to increase.
Depreciation and amortization expense in the third quarter of fiscal 2003
decreased to $107,000 from $203,000 in the third quarter of fiscal 2002.
Depreciation and amortization expense in the first three quarters of fiscal 2003
increased to $610,000 from $470,000 for the same period of fiscal 2002. During
the second quarter the Company increased its depreciation for leasehold
improvements in anticipation of our subleasing of certain of its office space in
Toronto to be effective July 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,017,000 in the three months ended July
31, 2003, a decline of 38% from the amount used in the same period of the prior
year. Cash used during the quarter was comprised of the net loss of $1,065,000,
less net depreciation and amortization of $107,000. Other non-cash items
include a decrease in accounts payable and accrued liabilities of $7,000, an
increase in receivables of $200,000, an increase in deferred revenue of $30,000
and a decrease in prepaid expenses of $125,000. Cash used in operating
activities was $1,642,000 in the quarter ended July 31, 2002, attributable to
the net loss of $1,575,000 less net depreciation and amortization of $203,000.
Other non-cash items include a decrease in accounts payable and accrued
liabilities of $288,000, an increase in receivables of $49,000, a decrease in
deferred revenue of $13,000 and a decrease in prepaid expenses of $81,000.
Cash used in operating activities was $1,864,000 in the nine months ended July
31, 2003, a decline of 70% from the amount used in the same period of the prior
year. Cash used during the nine months was comprised of the net loss of
$4,263,000, less net depreciation and amortization of $610,000. Other non-cash
items include a decrease in accounts payable and accrued liabilities of
$400,000, a decrease in receivables of $2,249,000, an increase in deferred
revenue of $42,000 and an increase in prepaid expenses of $95,000. Cash used in
operating activities was $6,220,000 in the nine months ended July 31, 2002,
attributable to the net loss of $5,364,000 less net depreciation and
amortization of $470,000. Other non-cash items include a decrease in accounts
payable and accrued liabilities of $1,724,000, a decrease in receivables of
$48,000, a decrease in deferred revenue of $9,000 and a decrease in prepaid
expenses of $358,000.
Cash used in financing activities in the three months ended July 31, 2003, was
$4,113,000. During the quarter, the Company completed the issue and sale of
5,000,000 common shares in the capital of the Company at US$0.62 per shares for
gross proceeds of US$3,100,000. Other activities include a decrease in the
notes payable of $4,000, a decrease in the promissory notes payable of $24,000.
Cash used in financing activities in the quarter ended July 31, 2002, was
$191,000 as a result of follow on rights to a settlement agreement dated
February 1999 with Knockagh International Ltd. On May 7, 2002 Knockagh
purchased 20,000 units for U.S. $120,000 on the same terms and condition as our
recent April 2002 financing.
Cash used in financing activities in the nine months ended July 31, 2003 was
$2,256,000 representing the issue and sale from the private placement of
$4,141,000, a decrease in the notes payable of $1,364,000, a decrease in the
promissory notes payable of $106,000, repayment of the $380,000 bank
indebtedness, an increase in deferred financing costs of $27,000 and $8,000
spent on share consolidation costs. Cash provided by financing activities in
the nine months ended July 31, 2002 was $4,965,000 representing the net proceeds
from the private placement completed in April 2002. In April 2002 the Company
completed the issue and sale of 518,671 units in the capital of the Company at
US$6.00 per unit for gross proceeds of US$3,112,022. Each unit is comprised of
one common share and three-quarters of one common share purchase warrant. Each
warrant will entitle the holder thereof to acquire one common share at a price
of US$7.20 per common share for a period of up to three years.
Cash provided by investing activities in the three months ended July 31, 2003
was $3,417,000 and consisted of $3,482,000 for the purchase of a short term
investment, the disposal of capital assets from the sublease of part of the
Toronto office for $100,000, additional cost of $29,000 incurred for the
acquisition of DSS and net additions to capital assets of $6,000. Cash used in
investing activities in the three months ended July 31, 2002 was $0.
Cash provided by investing activities in the nine months ended July 31, 2003 was
$824,000 consisting of $595,000 for net purchases of short term investments and
$152,000 from net proceeds from the sale of capital assets. Cash provided by
investing activities in the nine months ended July 31, 2002 was 3,077,000
consisting of $3,088,000 received from proceeds of a short term investment
offset by $11,000 spent of capital asset additions.
RISKS AND UNCERTAINTIES
Our Company is subject to a number of risks and uncertainties that could cause
actual results to differ materially from those predicted or anticipated. These
risks are described in our F-3 and annual Form 20-F filed with the SEC in the
United States and filed on SEDAR in Canada. We encourage you to review these
filings in order to evaluate an investment in our securities. Some key risks
that could cause actual results to differ materially from those predicted or
anticipated are listed below.
Financial resources: The attached consolidated financial statements are
prepared on a going concern basis that assumes that the Company will continue in
operation in the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. The projected cash
flows for the company are based upon assumptions that include, amongst others, a
revenue stream from mobile business and the success of future external financing
initiatives. Should these projects be delayed then the present working capital
would not be sufficient for the company to continue in the normal course of
operations.
In recognition of these concerns, management is considering various revenue and
cost management alternatives and may consider raising additional cash through
external financing activities. It is not possible at this time to predict with
any assurance the success of these initiatives.
Our ability to continue operations may be dependent on our ability to obtain
additional financing. Although we have made progress in developing our products
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 2003. We have obtained funding for operations from
private equity placements in the past, but there is no assurance we will be able
to do so again in the near future despite the progress of the business. Our
failure to either raise capital when needed or to generate revenues would leave
us with insufficient resources to continue our business.
Our quarterly operating results have varied substantially in the past and are
likely to vary substantially from quarter to quarter in the future due to a
variety of factors. In particular, our period-to-period operating results are
significantly dependent upon DSS signing new consulting services contracts and
the completion date of license agreements. In this regard, the purchase of our
products often requires our customers to make a significant capital investment,
which customers may view as a discretionary cost and, therefore, a purchase that
can be deferred or cancelled due to budgetary or other business reasons.
Estimating future revenues is also difficult because we ship our products upon
receipt of a signed license agreement and, therefore, we do not have a backlog.
Thus, quarterly license revenues are heavily dependent upon agreements finalized
and software shipped within the same quarter. Moreover, we have generally
recorded a significant portion of our total quarterly revenues in the third
month of a quarter, with a concentration of these revenues in the last half of
that third month. This concentration of revenues is influenced by customers'
tendencies to make significant capital expenditures at the end of a fiscal
quarter. We expect these revenue patterns to continue for the foreseeable
future, until recurring revenue becomes a significant portion of total revenue.
Despite the uncertainties in our revenue patterns, our operating expenses are
based upon anticipated revenue levels and such expenses are incurred on an
approximately rateable basis throughout the quarter. As a result, if expected
revenues are delayed or otherwise not realized in a quarter for any reason, our
business, operating results and financial condition would be adversely affected
in a significant way.
Continued quotation on the Over the Counter Bulletin Board. If the Company's
shares do not continue to be listed on the OTC BB, holders of the common shares
will have difficulty selling their shares. Since April 30, 2003 the Company has
been trading on the Over the Counter Bulletin Board under the symbol "DVNTF.OB".
As a result there may only be a limited trading market for the common shares and
shareholders could find it difficult to dispose of, or obtain accurate
quotations, for the common shares. No assurance can be given that the Company's
common shares will become listed on the Nasdaq SmallCap market or a stock
exchange in the future.
Furthermore, the Securities Enforcement and Penny Stock Reform Act of 1990
requires additional disclosure in connection with trades in any stock defined as
a "penny stock". The 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 U.S. $5.00 per share, subject to certain exceptions.
The Company's common shares are currently penny stock.
The liquidity of the Company's common shares may be materially and adversely
affected if the Company's common shares continue to be deemed to be penny stock
in the future due to the burdensome administration requirements imposed by these
rules.
Commercial deployment: The ability of the Company to continue operations is also
dependent on the acceptance of its security products and the adoption of
transaction-based applications 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.
Market conditions: The general economic conditions may have a significant impact
on our ability to generate sales for our products. During fiscal 2002 and 2003
year to date, we experienced decreased activity from our potential customers and
generally the adoption of wireless services has not proceeded as rapidly as
previously expected. As a result, our product revenue declined from fiscal 2001
levels and may decline even further in the near future.
Foreign exchange: Our functional currency is the Canadian dollar. Sales
generated outside Canada are generally denominated in U.S. dollars. Furthermore
with the acquisition of DSS and Caradas, the majority of our revenues and costs
from operations are denominated in U.S. dollars. During fiscal 2002 and 2003
year to date, we incurred a large portion 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 Canadian 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.
Litigation: Our Company has been named as a defendant in various proceedings
arising in the course of our Company's activities and arising from transactions
relating to a previous business operated by our Company. Litigation arising from
these matters may be time consuming, distracting and expensive. An adverse
resolution to any of these proceedings may have a material adverse impact on our
business and financial condition.
CERTIFICATIONS
Certification of Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of Diversinet Corp. (the "Company") on
Form 6-K for the quarter ended July 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Nagy Moustafa,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge and belief:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 11, 2003
/s/ Nagy Moustafa
Nagy Moustafa
President & CEO
The foregoing certification is provided solely for purposes of complying with
the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being
filed as part of the Report or as a separate disclosure document.
Certification of Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of Diversinet Corp. (the "Company") on
Form 6-K for the quarter ended July 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, David Hackett, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge, such knowledge being limited by the fact that I was
not an officer of the Company until March 26, 2002 and belief:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 11, 2003
/s/ David Hackett
David Hackett
Chief Financial Officer
The foregoing certification is provided solely for purposes of complying with
the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not being
filed as part of the Report or as a separate disclosure document.