As filed with the Securities and Exchange Commission on November 7, 2005
An Exhibit List can be found on page 100.
Registration No 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MANARIS CORPORATION
(Name of small business issuer in its charter)
Nevada 3576 88-0467845
(State or Other (Primary Standard Industrial (IRS Employer
Jurisdiction of Classification Code) Identification #)
Organization)
MANARIS CORPORATION Nevada Corporate Headquarters, Inc.
1155 Rene-Levesque 101 Convention Center Drive
Suite 2720 Suite 700
Montreal, Quebec Las Vegas, Nevada 89109
Canada H3B 2K8 (702) 873-3488
(514) 337-2447
(Address and telephone of (Name, address and telephone
registrant's executive office) number of agent for service)
Copies to:
Darrin Ocasio Esq.
1065 Avenue of the Americas,
21st Floor
New York, New York 10018
(212) 981-6773
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional common stock for an offering under
Rule 462(b) of the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
1
If this Form is a post-effective amendment filed under Rule 462(c) of the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
If this Form is a post-effective amendment filed under Rule 462(d) of the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
If delivery of the prospectus is expected to be made under Rule 434, please
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Amount To Be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit (1) Offering Price Fee
- --------------------------------- ------------ ---------------- ---------------- ------------
Common stock issuable upon 3,797,976 $ 0.38 $ 1,443,230.88 $ 169.87
exercise of Series G Warrants
Common stock issuable upon 890,590 $ 0.38 $ 338,425.34 $ 39.83
exercise of Series H Warrants
Common stock issuable upon 3,797,976 $ 0.38 $ 1,443,230.88 $ 169.87
exercise of Series I Warrants
Common stock issuable upon 1,781,180 $ 0.38 $ 676,848.4 $ 79.67
exercise of Series J Warrants
Common stock issuable upon 4,688,566 0.38 1,781,655.08 209.7
exercise of Series K Warrants
Common stock issuable upon 605,676 $ 0.38 $ 230,156.88 $ 27.08
exercise of Series IB6 Warrants
Common stock issuable upon 52,251 0.38 19,855.38 2.34
exercise of Series IB7 Warrants
Shares underlying Series A Senior 11,325,370 $ 0.38 $ 4,303,640.6 $ 506.53
Convertible Promissory Note
Shares underlying Debentures 4,341,760 0.38 1,649,868.8 194.18
Total 31,281,345 0.38 11,886,911.1 $ 1,399.08
[1] Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over the Counter
Bulletin Board on November 1, 2005.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON 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, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON DATES
AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY DETERMINE.
2
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED NOVEMBER 7, 2005 MANARIS
CORPORATION
31,281,345 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of 31,281,345
shares of our common stock, including 15,614,215 shares issuable upon the
exercise of warrants. The selling stockholders may sell common stock from time
to time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions.
We will pay the expenses of registering these shares. We will not receive any
proceeds from the sale of shares of common stock in this offering. All of the
net proceeds from the sale of our common stock will go to the selling
stockholders. However, we may receive proceeds from the exercise of the
warrants.
Our common stock is traded on the Bulletin Board operated by the National
Association of Securities Dealers, Inc. under the symbol "MANS." On October 27,
2005, the closing price of our common stock was $0.38.
Investing in these securities involves significant risks. Investors should not
buy these securities unless they can afford to lose their entire investment.
The total number of shares sold herewith includes the following shares owned by
or to be issued to the selling stockholders:
We are registering the following securities:
* 3,797,976 shares of common stock underlying our Series G Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series G
Warrant and $0.35, subject to adjustment, will entitle a Series G Warrant
holder to acquire one share of common stock and one Series K warrant. The
Series G warrants have a 4.5 year term.
* 890,590 shares of common stock underlying our Series H Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series H
Warrant and $0.35, subject to adjustment, will entitle a Warrant holder to
acquire one share of common stock and one Series K warrant. The Series H
Warrants have a 4.5 year term.
* 3,797,976 shares of common stock underlying our Series I Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series I
Warrant and $0.50 will entitle a Warrant holder to acquire one share of
common stock. The Series I Warrants have a 4.5 year term.
* 1,781,180 shares of common stock underlying our Series J warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series J
Warrant and $0.50, subject to adjustment, will entitle a Series J Warrant
holder to acquire one share of common stock. The Series J warrants have a
4.5 year term.
* 4,688,566 shares of common stock underlying our Series K warrants, which
are issuable upon exercise of our Series G or Series H warrants. One
Series K Warrant and $0.70, subject to adjustment, will entitle a Warrant
holder to acquire one share of common stock. The Series K Warrants have a
2 year term.
3
* 605,676 shares of common stock underlying our Series IB6 Warrants. One
Series IB6 Warrant and $0.35, subject to adjustment, will entitle a Series
IB6 Warrant holder to acquire one share of common stock. The Series IB6
Warrants have a 5 year term.
561,012 Series IB6 warrants were issued to Midtown Partners & Co., LLC,
the placement agent for our July 2005 Warrant Offering, and employees of
Midtown Partners, pursuant to a Placement Agent Agreeement. 11,364 Series
IB6 Warrants were also issued to Starboard Capital Markets and employees
of Starboard pursuant to an agreement with Midtown Partners. In addition,
33,300 Series IB6 warrants were also issued to Midtown Partners for
services rendered in connection with a proposed Bridge financing.
* 52,251 shares of common stock underlying our Series IB7 Warrants. One
Series IB7 Warrant and $0.001, subject to adjustment, will entitle a
Series IB7 Warrant holder to acquire one share of common stock. The Series
IB7 Warrants have a 5 year term.
The Series IB7 warrants were issued to Midtown Partners & Co., LLC, the
placement agent for our July 2005 Warrant Offering, and employees of
Midtown Partners, for services rendered in connection with a proposed
Bridge financing.
* 11,325,370 shares of common stock issuable upon conversion of Series A
Senior Convertible Promissory Notes, which were issued as part of our
February 2005 financing. The Convertible Notes have an outstanding balance
of $2,642,586 and are currently convertible at $0.35 per share. We are
registering 150% of the shares underlying the convertible notes to account
for potential adjustments to the conversion price.
* 4,341,760 shares of common stock issuable in satisfaction of debentures
issued on February 14, 2005.
SEE "RISK FACTORS" BEGINNING ON PAGE _.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is ____ __, 2005.
The information in this prospectus is not complete and may be changed. This
prospectus is included in the registration statement that was filed by Manaris
Corporation with the Securities and Exchange Commission. The Selling
Stockholders may not sell these securities until the registration statement
becomes effective. This prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
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.
4
TABLE OF CONTENTS
Page No.
SUMMARY OF OUR OFFERING......................................................6
RISK FACTORS.................................................................9
USE OF PROCEEDS.............................................................17
MARKET FOR OUR COMMON EQUITY................................................17
PLAN OF DISTRIBUTION........................................................18
BUSINESS....................................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................33
MANAGEMENT..................................................................44
EXECUTIVE COMPENSATION......................................................47
SELLING SHAREHOLDERS........................................................51
DESCRIPTION OF SECURITIES...................................................59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................50
EXPERTS.....................................................................60
LEGAL MATTERS...............................................................60
FINANCIAL STATEMENTS........................................................61
5
SUMMARY OF OUR OFFERING
This summary highlights selected information about us. It may not contain all of
the information that you find important. You should carefully read this entire
document, including the "Risk Factors" our financial statements and their
related notes and the other documents incorporated by reference.
Our Business
Manaris Corporation's primary business is risk mitigation. Manaris offers
corporations and institutions security management solutions and services
enabling them to acquire market intelligence, lower business risks and improve
customer service. Our security solutions and services are geared towards
increasing customer revenues and profits.
Manaris operates the following wholly-owned subsidiaries:
o Avensys Inc, which provides risk management monitoring solutions;
o Chartrand Laframboise Investigation, which provides investigative
services;
o C-Chip Technologies Corporation (North America), which specializes
in high-tech security
Corporate History
Manaris Corporation was incorporated in the State of Nevada on June 26, 2000 as
Keystone Mines Limited and maintains its principal executive offices at 1155
Boulevard Rene-Levesque, Suite 2720, Montreal, Quebec, Canada.
In June 2000, we purchased four mineral claims, situated in the Greenwood Mining
Division in the Province of British Columbia, Canada. At that time, our
principal business plan was to acquire, explore and develop mineral properties
and to ultimately seek earnings by exploiting the mineral claims. In December
2002, we were advised that the mineral properties held were not economically
viable. Our board of directors approved the termination of our exploration
activity.
In March 2003, we changed our company name to C-Chip Technologies Corporation in
order to better reflect our new business activities, and began trading on the
OTC Bulletin Board (OTC-BB) under the symbol "CCHI."
In July 2005, our shareholders approved a name change for the Company to Manaris
Corporation to reflect C-Chip Technologies expanded scope of business. As a
result, the new trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."
6
The Offering
Common stock offered by selling
stockholders........................ 31,281,345 shares, including 15,614,215
shares issuable upon the exercise of
common stock purchase warrants, assuming
full exercise of the warrants. This
number represents 39.53% of the total
number of shares to be outstanding
following this offering assuming the
exercise of all securities being
registered.
Common stock to be outstanding after
the offering........................ 83,768,033 shares
Use of the sale proceeds............ We will not receive any proceeds from of
the common stock. However, we will
receive the exercise price of any common
stock we issue to the selling
stockholders upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of their
warrants, if any, for general working
capital purposes.
OTC:BB Symbol....................... MANS
The above information regarding common stock to be outstanding after the
offering is based on 68,153,818 shares of common stock outstanding as of October
26, 2005 and assumes the subsequent issuance of common stock to the selling
stockholders and exercise of warrants by our selling stockholders.
Recent Developments
Resignation of Our Chief Executive Officer
On September 16, 2005, following the resignation of Stephane Solis, John G.
Fraser, the Company's Secretary/Treasurer, was appointed as Chief Executive
Officer for a minimum period of three months. According to the terms of Mr.
Solis's agreement, he will receive 600,000 options exercisable at $0.00001 and
$30,000 CDN upon execution of the Agreement. John G. Fraser will receive a
compensation of $18,000CDN per month and 500,000 options exercisable at market
prices.
Closure of CSA subsidiary
On September 22, 2005, the Company decided to cease operations of our Canadian
Security Agency (2004) Inc. ("CSA") subsidiary, which provides security services
to large corporate accounts, including courier and trucking companies. As a
result, CSA has entered into an agreement with Securite Kolossal Inc. pursuant
to which CSA will sell its customer list to Securite Kolossal for $100,000 CDN.
The Company has owned CSA since February 2004.
July 2005 Warrant Offer
In July 2005, the Company concluded a Special Warrant Offering which raised
gross proceeds of $2,576,117. In connection with the Special Warrant Offer, our
Company issued 7,360,336 common shares to Warrant Holders as well as new
warrants which were issued in the following amounts: (i) 3,797,976 Series G
Warrants, (ii) 3,797,976 Series I Warrants, (iii) 890,590 Series H Warrants and
(iv)1,781,180 Series J Warrants.
7
Avensys Acquisition
In March 2005, Manaris acquired all of the issued and outstanding common stock
of Avensys Inc. ("Avensys"), a leader in risk management monitoring solutions
for commercial and industrial buildings, infrastructures and various
environments. The Company issued 10,400,002 restricted shares of common stock in
exchange for 15,746,369 shares of Avensys Inc. which constituted all of the
issued and outstanding common stock of Avensys. Further, Manaris agreed to pay
$312,625 (CDN$385,000) to holders of options of Avensys and then cancelled the
options. The beneficiaries of the options have received $187,592 (CDN$231,000)
as of the date hereof and will receive $124,970 (CDN$154,000) on or before
December 31, 2005. The balance of the purchase price due not later than December
31, 2005 will accrue interest from the date of closing at a rate of twelve
percent (12%) per year calculated daily and payable monthly and any unpaid
interest will carry interest at the same rate.
February 2005 Financing
In February 2005, we closed a private placement with eighteen institutional
investors. The Company issued Senior Secured Convertible Notes Series A
("Notes") and Series E and F Warrants for an aggregate principal amount of
$4,675,000. The Company allocated $1,863,870 to the Warrants Series E, $339,456
to the Warrants Series F and recognized an embedded beneficial conversion
feature of $2,470,674 accounted for as additional paid in capital and an
equivalent discount against the Notes.
Chartrand Laframboise Acquisition
In February 2005, we entered into agreements to acquire one hundred percent
(100%) of the outstanding shares of 9151-3929 QUEBEC INC., ("QUEBEC") and
3826961 CANADA INC. ("CANADA") through our wholly owned subsidiary, 6327915
CANADA, INC. QUEBEC and CANADA collectively owned 100% of 3428249 CANADA INC
which owned 100% of CHARTRAND LAFRAMBOISE INC., a company specializing in the
security field and 100% of 9126-7641 QUEBEC INC., a corporation specializing in
credit management and verification. On June 30, 2005, 3428249 Canada Inc. and
6327915 Canada Inc. completed a merger transaction. The merged company continues
to be 6327915 Canada Inc. Following the merger 3826961 Canada Inc. and 9151-3929
Quebec Inc. were each dissolved on June 9, 2005 and September 26, 2005,
respectively. QUEBEC, CANADA, 3428249 CANADA INC., CHARTRAND LAFRAMBOISE INC.,
and 9126-7641 QUEBEC INC. are hereinafter collectively referred to as "CLI." In
consideration for the acquisition of CLI, Manaris paid $2,436,251
(CDN$3,000,000.00) in cash and issued a debenture, convertible into 1,700,000
restricted shares of its common stock at a price of $0.82 per share on behalf of
its wholly own subsidiary, 6327915 CANADA, INC.,
Founded in 1986, CLI has become a leader in the field of investigative services
in Canada. CLI's core services include investigation, surveillance, background
verification, business intelligence, security consulting and labor management
conflict and engages undercover agents for many of its services. CLI is one of
Investigations Canada's major partners. Investigations Canada, a company
offering expertise throughout Canada, is comprised of nine partners, 25
locations and over 200 private investigation and security professionals. CLI is
located in Laval, Quebec.
8
Summary Selected financial data
The following financial information summarizes the more complete historical
financial information at the end of this prospectus.
As of As of
June 30, 2005 June 30, 2004
(Audited) (Audited)
------------- -------------
Balance Sheet
Total Assets $ 20,115,755 $ 3,053,936
Total Liabilities $ 8,867,863 $ 850,283
Stockholders Equity $ 11,229,859 $ 2,203,653
Year ended Year ended
June 30, 2005 June 30, 2004
(Audited) (Audited)
------------- -------------
Income Statement
Revenue $ 7,021,228 $ 1,040,898
Total Expenses $ 13,252,171 $ 5,631,459
Net Loss $ (6,230,943) $ (4,590,561)
Net Cash Used in Operating Activities $ 2,661,708 $ 1,813,789
RISK FACTORS
The risks and uncertainties described below are not the only ones facing our
Company. Additional risks not presently known or that we currently consider
insignificant may also impair our business operations in the future. Our
business, financial condition and plan of operations could be materially
adversely affected by any of the following risks. The trading price of our
common shares could decline due to any of these risks.
1. Our auditors have issued a going concern opinion. This means we may not be
able to achieve our objectives and may have to suspend or cease operations. Our
auditors have issued a going concern opinion as at June 30, 2005. This means
that there is substantial doubt that we can continue as an ongoing business
without additional financing and/or generating profits from our operations.
Further, the going concern opinion could make it more difficult for us to secure
additional financing on terms acceptable to us, if at all, and may materially
and adversely affect the terms of any financing that we may obtain.
2. Because we have historically incurred losses and these losses may increase in
the future, we must begin generating a profit from our operations. If we do not
begin generating a profit we may have to suspend or cease operations. As a
result, you may lose your investment. We have never been profitable. At June 30,
2005 we had negative working capital of $1,329,550. Included in current
liabilities are amounts due to related parties of $476,646 that carry no
interest or fixed terms of repayment. Funds on hand together with relatively low
revenues will not sustain operations for the next year. We will need to raise
additional capital to sustain our operations. In order to become profitable, we
will need to generate significant revenues to offset our cost of revenues, sales
and marketing, research and development and general and administrative expenses.
We may not achieve or sustain our revenue or profit objectives and our losses
may continue or increase in the future in which case you might lose your
investment.
9
3. We have experienced a history of losses and expect to incur future losses
albeit at a reduced level. Therefore, we must continue to raise money from
investors to fund our operations. If we are unable to fund our operations, we
will cease doing business. We have an accumulated deficit of $12,548,352 as of
June 30, 2005. Our losses have resulted principally from costs incurred in
research and development activities related to our efforts to develop our
technologies and from the associated marketing and administrative costs and
stock based compensation. We will need to generate significant revenues in order
to achieve and maintain profitability. We may not be able to generate these
revenues or achieve profitability in the future. Even if we do achieve
profitability, we may not be able to sustain or increase profitability. Product
revenue totaled $3,580,619 and service revenue totaled $3,440,609 for the twelve
month period ended June 30, 2005. Consequently, we have raised money from
investors to fund our operations. If we can't fund our operations through
product sales and investments by third parties, we will have to cease
operations.
4. We may not be able to obtain additional financing when needed or on
acceptable terms. We have never been profitable and we do not expect that funds
on hand together with relatively low revenues will sustain our operations for
the next year. We will need to raise additional capital to sustain our
operations or to pursue our acquisition strategy. We cannot assure you that any
required additional financing will be available or, if it is, whether it will be
on acceptable terms. Our inability to obtain any needed financing, or the terms
on which it may be available, could have a material adverse effect on our
business. As a result, we could have to suspend or cease our operations and you
could loose your entire investment.
5. We have incurred substantial debt which could affect our ability to obtain
additional funds and may increase our vulnerability to economic or business
downturns. On February 23, 2005, we entered into a Purchase Agreement with
eighteen institutional and accredited investors under the terms of which we
agreed to issue Units consisting of (i) an aggregate of $4,675,000 of our
Company's 9.0% Senior Secured Convertible Notes, Series A, which are convertible
into shares of our common stock at a conversion price of $0.65 per share,. Under
the terms of the 9.0% Senior Secured Convertible Note, Series A, the Principal
on the Note shall be paid in 20 equal monthly installments, with each payment
equal to 5% of the principal amount, commencing on June 23, 2005 and continuing
on the same day of each month thereafter to the Holder on the tenth date
immediately preceding the Principal Payment Date. All payments of principal
shall be made at our option in cash or, with 10 business day prior notice, in
our common stock valued at 85% of the average closing bid price of our stock in
the most recent five Trading Days prior to a Valuation Date. As a result, we are
subject to the risks associated with substantial indebtedness, including:
10
- - we are required to dedicate a portion of our cash flows from operations to
pay debt service costs;
- - it may be more difficult and expensive to obtain additional funds through
financings, if available at all;
- - we are more vulnerable to economic downturns and fluctuations in interest
rates, less able to withstand competitive pressures and less flexible in
reacting to changes in our industry and general economic conditions; and
- - if we defaulted under any of our existing indebtedness or if our creditors
demanded payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments.
6. If we default under our financing agreement, we could have to forfeit our
rights to our assets. We have pledged substantially all of our assets, including
the assets of our subsidiaries, as security to holders of our convertible
debentures. A default under the financing agreement concluded with holders of
our convertible debentures, if not waived or cured, would permit the holders of
the convertible debentures to foreclose on the collateral and we could lose all
our rights in the collateral, which would have a materially adverse effect on
our business. As a result, we could have to suspend or cease our operations and
you could loose your entire investment.
7. We may not be able to implement our acquisition strategy. While our
management has some experience in identifying and integrating acquisitions, we
may not be able to identify suitable acquisition candidates, obtain the capital
necessary to pursue our acquisition strategy or complete acquisitions on
satisfactory terms or at all. When companies are acquired, we may not be able to
integrate or manage these businesses to produce returns that justify our
investment. A number of our competitors have also adopted the strategy of
expanding and diversifying through acquisitions. We experience competition in
our effort to execute our acquisition strategy and expect the level of
competition to increase. As a result, we may be unable to continue to make
acquisitions or may be forced to pay more for the companies we are able to
acquire.
8. We may seek to make acquisitions that prove unsuccessful or strain or divert
our resources. We may seek to grow our business through acquisitions of related
businesses. Such acquisitions present risks that could materially adversely
affect our business and financial performance, including:
- - the diversion of our management's attention from our everyday business
activities;
- - the assimilation of the operations and personnel of the acquired business;
- - the contingent and latent risks associated with the past operations of,
and other unanticipated problems arising in, the acquired business; and
- - the need to expand management, administration, and operational systems.
If we make such acquisitions we cannot predict whether:
- - we will be able to successfully integrate the operations of any new
businesses into our business;
- - we will realize any anticipated benefits of completed acquisitions; or
- - there will be substantial unanticipated costs associated with
acquisitions.
11
In addition, future acquisitions by us may result in:
- - potentially dilutive issuances of our equity securities;
- - the incurrence of additional debt; and
- - the recognition of significant charges for depreciation and amortization
related to goodwill and other intangible assets.
Although we have no present plans or intentions, we continuously evaluate
potential acquisitions of related businesses. However, we have not reached any
agreement or arrangement with respect to any particular acquisition and we may
not be able to complete any acquisitions on favorable terms or at all.
9. We may not be able to develop or manage our internal growth. Our growing
existing businesses may strain our management, human resources and information
systems. To manage our growth successfully, we will have to add managers and
employees and update our operating, financial and other systems, procedures and
controls. In addition, issues relating to new acquisitions may divert current
management's attention from existing operations.
10. We are highly dependent on our executive management and other key employees.
We rely heavily on our executive management and key employees to provide
services and for continued business development. We have employment agreements
which contain non-competition and non-solicitation provisions with most of our
executive managers and other key employees. Our business could be materially
adversely affected if a number of our executive managers and other key employees
were to leave us and if we were unable to enforce the non-competition and
non-solicitation agreements or to attract and retain qualified replacements.
On September 16, 2005, the Chief Executive Officer, Stephane Solis, resigned.
John G. Fraser, the Company's Secretary/Treasurer, was appointed as Chief
Executive Officer for a minimum period of three months. We do not expect the
resignation to materially adversely affect the services and business
development.
11. Some of our products and services are in the development stage, and may not
be effective at a level sufficient to support a profitable business venture. If
our products or services are not effective at a level sufficient to support a
profitable venture, we will be unable to create marketable products and
services, and we will have to cease some of our operations. Most of our products
and services are in the development state. Although we have begun to sell some
of our products and services and have current data which indicates the promise
of the concept and market demand, we can offer you no assurance that all of our
products and services will be effective at a level sufficient to support a
profitable business venture. If they are not, we will be unable to create
marketable products, we will not generate sufficient revenues from our key
operations, and we will have to reduce, suspend or cease key operations and you
could lose your entire investment.
12. If we cannot deliver the features and functionality our customers demand, we
will be unable to attract customers that will result in a loss of income and
eventually a termination of our operations. As a result you could lose your
investment. As a security solutions provider, our future success depends largely
upon our ability to determine the features, functionality and services our
customers demand and to design and implement products and services that meet
their needs in a cost efficient manner. We cannot assure that we will be able to
successfully determine customer requirements or that our current or future
products and services will adequately satisfy customer demands. If we cannot
meet our customers' demands, we will not generate revenues from this business
segment and may have to cease or suspend key operations. As a result, you could
lose your investment.
12
13. Because some of our security solutions depend on a limited number of third
parties to manufacture and supply critical components for our products and
services, if the third party manufacturer should cease operations or refuse to
sell components to us, we may have to suspend or cease these operations. As a
result, you may lose your investment. If our suppliers do not execute their
obligations, or if they stop manufacturing and supplying components critical for
our products and services, we may be not be capable of finding other suppliers
or operating our business. We rely on limited suppliers for a number of key
components and do not have long-term agreements with any of our suppliers. If
our agreements with these suppliers were terminated or expired, if we were
unable to obtain adequate quantities of components critical for our products and
services, if the quality of these components was inadequate, or if the terms for
supply of these components became commercially unreasonable, our search for
additional or alternate suppliers could result in significant delays, added
expense and our inability to maintain or expand key components of our business.
Any of these events could require us to take unforeseen actions or devote
additional resources to provide our products and services and could harm our
ability to compete effectively. As a result, you could lose your investment.
14. Some of our products and services depend on GPS technology owned and
controlled by others, if access to the technology is terminated or withheld from
us, we may have to suspend or cease operations. Our services rely on signals
from GPS satellites built and maintained by the U.S. Department of Defense. GPS
satellites and their ground support systems are subject to electronic and
mechanical failures and sabotage. If one or more satellites malfunction, there
could be a substantial delay before they are repaired or replaced, if at all,
and our services may cease and customer satisfaction would suffer. In addition,
the U.S. government could decide not to continue to operate and maintain GPS
satellites over a long period of time or to charge for the use of satellites. If
the foregoing events occur, we may have to suspend or cease operations.
15. Some of our products and services depend on communication networks owned and
controlled by others, and if access to the technology is terminated or withheld
from us, we may have to suspend or cease operations. As a security solutions
provider, our ability to grow and achieve profitability depends on the ability
of communications carriers to provide sufficient network capacity, reliability
and security to our customers. When we use wireless communications, even where
wireless carriers provide coverage to entire metropolitan areas, there are
occasional lapses in coverage. These effects could make our services less
reliable and less useful, and customer satisfaction could suffer. Our financial
condition could be seriously harmed if our wireless and land-based carriers were
to increase the prices of their services, or to suffer operational or technical
failures.
16. Our business is subject to rapid technological change. Two of our business
units develop security solutions for clients. C-Chip itself integrates wireless
communications, online transactions, software applications, RFID technology, the
Internet and, when location is required, GPS technology, to enable business
users to efficiently access, control, manage and monitor remote assets at low
costs. Our wholly-owned subsidiary, Avensys, uses leading edge fiber optics
sensor technology to offer business and corporations different monitoring
solutions related to the environment, including buildings and infrastructure.
Many of the technologies that we currently use have only recently emerged and
our future success will depend upon the ability of our product development team
to remain current with the rapid changes in the technologies. If we fail to do
this, we could be at a competitive disadvantage. If we cannot foresee and adapt
to technological changes, our business will be materially adversely affected.
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17. Our business depends on the protection of its intellectual property and
proprietary information. We rely on a combination of trade secret and trademark
laws, confidentiality procedures, contractual provisions and patent and
copyright laws to protect our proprietary rights in our products and technology.
These measures may not be adequate to protect our trade secrets and proprietary
technology. As a result, unauthorized third parties may copy or otherwise obtain
and use our products or technology. To enforce our proprietary rights, we may
have to engage in litigation to defend and enforce our intellectual property
rights, either domestically or in other countries, and we could face substantial
costs and diversion of resources, including management' s attention, regardless
of the outcome of that litigation. Any of our attempts to enforce our
intellectual property rights may not be successful, may result in royalties that
are less than the cost of such enforcement efforts or may result in the loss of
the intellectual property altogether. Further, we may not have adequate funds
available to prosecute actions to protect or defend our proprietary rights, in
which case those using our proprietary rights may continue to do so in the
future. Even if we succeeded in protecting our intellectual property, others may
independently develop similar technologies or products that do not infringe on
our intellectual property.
18. Our trademarks may not give us adequate protection. As a result, third
parties may appropriate our trademarks that may reduce our competitive edge and
cause our revenues to decrease. We have trademarks. There is no assurance,
however, that third parties may not infringe on our trademarks. In order to
protect our trademark rights, we may have to file lawsuits and obtain
injunctions, which will likely be expensive and divert our resources. If we do
that, we will have to spend large sums of money for attorney's fees in order to
obtain the injunctions. Even if we obtain the injunctions, there is no assurance
that those infringing on our trademarks will comply with the injunctions.
Further, we may not have adequate funds available to prosecute actions to
protect or to defend our trademarks, in which case those infringing on our
trademarks could continue to do so in the future.
19. Claims that we infringe third-party proprietary rights could result in
significant expenses or restrictions on our ability to provide our products and
services Third parties may claim that our current or future products or services
infringe their proprietary rights or assert other claims against us. As the
number of entrants into our market increases, the possibility of an intellectual
property or other claim against us grows. Any intellectual property or other
claim, with or without merit, would be time-consuming and expensive to litigate
or settle and could divert management attention from focusing on our core
business. As a result of such a dispute, we may have to pay damages, incur
substantial legal fees, develop costly non-infringing technology, if possible,
or enter into license agreements, which may not be available on terms acceptable
to us, if at all. As a result, our business and operating results could be
materially adversely affected.
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20. Changes in government regulations and licensing requirements could have a
material adverse effect on our business. Our businesses are subject to various
federal, state, local and foreign laws and regulations. Two of our subsidiaries
hold security licenses from, and their security services are regulated by, local
government agencies. We also use some data from outside sources, including data
from third party vendors and various government and public records services, in
performing our security services. The use of this data is regulated by certain
laws and regulations. To date, applicable laws and regulations have not
interfered materially with the manner in which we obtain information and conduct
our operations, including our access to data used in our business. However,
changes in these laws and regulations or the adoption of new laws or
regulations, particularly those relating to privacy, could interfere with our
method of operations and access to data and, as a result, could materially
adversely affect our business. Our security products are also subject to
certification by the Federal Communications Commission in the US and by the
Department of Communications in Canada. Further, wireless carriers who supply us
with airtime enabling some of our services are also subject to regulation by the
Federal Communications Commission in the US and the Canadian Radio-Television
and Telecommunications Commission in Canada. If any of our security products
could not obtain certification from either or both the Federal Communications
Commission in the US and the Department of Communications, or if the
communications carriers that we use to provide some of our services to our
customers could not obtain a renewal of their licenses, our business would be
materially adversely affected.
21. Competitive conditions could materially adversely affect our businesses. The
markets in which we do, and intend to do, businesses are highly competitive with
few barriers to entry. Our ability to execute our business strategy depends in
part upon our ability to develop and commercialize efficient and effective
products based on our technologies. We compete against established companies as
well as numerous independently owned small businesses. Many of our competitors
are capable of developing products based on similar technology, have developed
and are capable of continuing to develop products based on other technologies,
which are or may be competitive with our products and technologies. In all
market segments in which we operate, there are many competitors, some of which
are significantly larger, have access to much more important resources or
capital than us, or have better reputations among potential customers in the
delivery of particular services or products. Our competitors may succeed in
developing competing products and technologies that are more effective than our
products and technologies, which may render our existing and new products or
technology uncompetitive, uneconomical or obsolete.
22. We may be exposed to liability claims if products based on our technologies
are marketed and sold. We have liability insurance coverage on our products
which varies from $1,000,000 to $3,000,000, however if a judgment is rendered
against us in excess of the amount of our coverage, we may have to cease
operations. If we are sued for any reason, we will have to rely on our liability
insurance to pay any judgment rendered against us. Although we maintain product
liability insurance of between $1,000,000 and $3,000,000, we cannot provide any
assurance that:
15
- - our insurance will provide adequate coverage against potential liabilities
if a product or a service that we provide causes harm or fails to perform
as promised;
- - adequate product liability insurance will continue to be available in the
future; or
- - our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to obtain would increase our expenses and could greatly
reduce our assets or cause us to cease operations. If a judgment is rendered
against us for any amount of money over our coverage of $1,000,000 and, in some
cases, of $3,000,000, we may have to cease operations.
23. Fluctuations in the value of foreign currencies could result in increased
product costs and operating expenses. We have suppliers that are located outside
Canada and the U.S. Our functional currency is Canadian dollars and we report
our results in U.S. dollars. Fluctuations in the value of Canadian and U.S.
dollars are difficult to predict and can cause us to incur currency exchange
costs. Although, we cannot predict the effect of exchange rate fluctuations on
our future operating results any material changes could cause our operating
results to be materially adversely affected.
24. Because a limited number of our stockholders collectively continue to own a
majority of our stock, they may act, or prevent certain types of corporate
actions, to the detriment of other stockholders. Our officers and directors and
certain stockholders beneficially own in the aggregate approximately 11.02% of
our outstanding shares of common stock. As a result, these stockholders may be
able to influence significantly the actions that require stockholder approval,
including:
- - the election of a majority of our directors; and
- - the approval of mergers, sales of assets or other corporate transactions
or matters submitted for stockholder approval.
As a result, our other stockholders may have little or no influence over matters
submitted for stockholder approval. In addition, this influence could preclude
any unsolicited acquisition of us and consequently materially adversely affect
the price of our common stock.
25. Because the market for our common stock is limited, you may not be able to
resell your shares of common stock. There is currently only a limited trading
market for our common stock. Our common stock trades on the Bulletin Board
operated by the National Association of Securities Dealers, Inc. under the
symbol "MANS." Trading volume of OTC Bulletin Board stocks has been historically
lower and more volatile than stocks traded on an exchange. As a result, you may
not be able to resell your securities in open market transactions.
26. Sales of substantial amounts of our common stock could cause our stock price
to fall. As of June 30, 2005, 54,782,802 shares of our common stock were
outstanding, 37,692,544 of which were freely tradable and 17,090,258 of which
were restricted as a result of securities laws. In addition, as of June 30,
2005, 31,073,088 shares of our common stock were issuable upon conversion of our
outstanding debentures and exercise of outstanding options and warrants. Sales
of a substantial number of shares of our common stock could cause the price of
our securities to fall and could impair our ability to raise capital by selling
additional securities. The terms on which we could obtain additional capital
during the life of the options and warrants may be adversely affected, and it
should be expected that the holders of the options and warrants would exercise
or convert them at a time when we would be able to obtain equity capital on
terms more favorable than those provided for by such convertible securities. As
a result, any issuance of additional shares of common stock may cause our
current shareholders to suffer significant dilution which may adversely affect
the market price of our common stock.
16
27. Because our common stock is subject to penny stock rules, the liquidity of
your investment may be restricted. Our common stock is now and may continue to
be in the future subject to the penny stock rules under the Securities Exchange
Act of 1934, as amended. These rules regulate broker/dealer practices for
transactions in "penny stocks." Penny stocks are generally equity securities
with a price of less than $5.00. The penny stock rules require broker/dealers to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker/dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker/dealer and its
salesperson and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations and the
broker/dealer and salesperson compensation information must be given to the
customer orally or in writing prior to completing the transaction and must be
given to the customer in writing before or with the customer's confirmation. In
addition, the penny stock rules require that prior to a transaction, the broker
and/or dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These additional penny stock disclosure
requirements are burdensome and may reduce the trading activity in the market
for our common stock. As long as the common stock is subject to the penny stock
rules, holders of our common stock may find it more difficult to sell their
securities.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock in this offering.
All proceeds from the sale of of our common stock by the selling stockholders
will be received by the selling stockholders.
We may receive proceeds from the exercise of the warrants. If all of the
warrants held by the selling stockholders are exercised, we will receive net
proceeds of approximately $7,924,611. The holders of the warrants are not
obligated to exercise the warrants and we cannot assure that the holders of the
warrants will choose to exercise all or any of the warrants. Our Series IB6 and
Series IB7 warrants contain a cashless exercise provision. If the cashless
exercise provision is exercised, we will not receive any proceeds from the
exercise of the warrants. We intend to use the estimated net proceeds received
upon exercise of the warrants, if any, for working capital and general corporate
purposes.
MARKET FOR OUR COMMON EQUITY
Our common shares are traded on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc under the symbol "MANS." Our shares began
trading on July 2, 2001. The following table sets forth the closing high and low
bid prices of the common stock for each quarter within the last three years. The
quotations reflect inter-dealer prices and do not represent retail mark-ups,
markdowns, commissions, and may not reflect actual transactions. Prices before
January 23, 2003 are adjusted for a 20:1 stock split on that date.
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Fiscal Quarter High Bid Low Bid
------------------- -------- -------
2006
07-01-05 - 09-30-05 0.61 0.29
2005
04-01-05 - 06-30-05 0.79 0.41
01-01-05 - 03-31-05 1.02 0.65
10-01-04 - 12-31-04 0.86 0.65
07-01-04 - 09-30-04 0.90 0.62
2004
04-01-04 - 06-30-04 1.09 0.71
01-01-04 - 03-31-04 0.87 0.63
10-01-03 - 12-31-03 0.94 0.50
07-01-03 - 09-30-03 0.87 0.17
2003
04-01-03 - 06-30-03 0.53 0.15
01-01-03 - 03-31-03 1.00 0.21
10-01-02 - 12-31-02 0.20 0.05
07-01-02 - 09-30-02 0.10 0.06
As of June 30, 2005, we had one hundred twenty-four shareholders of record of
our common stock. This does not reflect persons or entities that hold stock
through various brokerage firms or depositories.
The market price of our common shares may to be the object of significant
fluctuations related to a number of events and reasons, such as variations in
our operating results, publication of technological developments or new products
or services by us or our competitors, recommendations of securities analysts on
us or our competitors, the operating and stock performance of other companies
that the market may view as related to our business, and news reports relating
to trends in our activities.
In addition, the stock market in recent years has experienced significant price
and volume fluctuations that have particularly affected the market prices of
many high technology companies that may have often been not related or
inconsistent to the operating performance of those companies. These
fluctuations, as well as general political, economic and market conditions and
other factors, may adversely affect the market price for our common stock.
PLAN OF DISTRIBUTION
The selling shareholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
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The selling shareholders may use any one or more of the following methods when
disposing of shares or interests therein:
- - ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- - block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
- - purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
- - an exchange distribution in accordance with the rules of the applicable
exchange;
- - privately negotiated transactions;
- - short sales effected after the date the registration statement of which
this Prospectus is a part is declared effective by the SEC;
- - through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
- - broker-dealers may agree with the selling shareholders to sell a specified
number of such shares at a stipulated price per share;
- - a combination of any such methods of sale; and
- - any other method permitted pursuant to applicable law.
The selling shareholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
shareholders to include the pledgee, transferee or other successors in interest
as selling shareholders under this prospectus. The selling shareholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the
selling shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling shareholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
19
The selling shareholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The selling shareholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling shareholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of
the selling shareholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have advised the selling shareholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling shareholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling shareholders for the purpose
of satisfying the prospectus delivery requirements of the Securities Act. The
selling shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have agreed to indemnify the selling shareholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this prospectus.
We have agreed with the selling shareholders to keep the registration statement
of which this prospectus constitutes a part effective until the earlier of (1)
such time as all of the shares covered by this prospectus have been disposed of
pursuant to and in accordance with the registration statement or (2) the date on
which the shares may be sold pursuant to Rule 144(k) of the Securities Act.
20
Section 15(g) of the Exchange Act
Our shares are covered by section 15(g) of the Securities Exchange Act of 1934,
as amended, and Rules 15g-1 through 15g-6 promulgated there under. They impose
additional sales practice requirements on broker/dealers who sell our securities
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $8,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouses).
Rule 15g-1 exempts a number of specific transactions from the scope of the penny
stock rules.
Rule 15g-2 declares unlawful broker/dealer transactions in penny stocks unless
the broker/dealer has first provided to the customer a standardized disclosure
document.
Rule 15g-3 provides that it is unlawful for a broker/dealer to engage in a penny
stock transaction unless the broker/dealer first discloses and subsequently
confirms to the customer current quotation prices or similar market information
concerning the penny stock in question.
Rule 15g-4 prohibits broker/dealers from completing penny stock transactions for
a customer unless the broker/dealer first discloses to the customer the amount
of compensation or other remuneration received as a result of the penny stock
transaction.
Rule 15g-5 requires that a broker/dealer executing a penny stock transaction,
other than one exempt under Rule 15g-1, disclose to its customer, at the time of
or prior to the transaction, information about the sales persons compensation.
Rule 15g-6 requires broker/dealers selling penny stocks to provide their
customers with monthly account statements.
Rule 15g-9 requires broker/dealers to approved the transaction for the
customer's account; obtain a written agreement from the customer setting forth
the identity and quantity of the stock being purchased; obtain from the customer
information regarding his investment experience; make a determination that the
investment is suitable for the investor; deliver to the customer a written
statement for the basis for the suitability determination; notify the customer
of his rights and remedies in cases of fraud in penny stock transactions; and,
the NASD's toll free telephone number and the central number of the North
American Administrators Association, for information on the disciplinary history
of broker/dealers and their associated persons.
The application of the penny stock rules may affect your ability to resell your
shares.
BUSINESS
Overview
Manaris Corporation's primary business is risk mitigation. Manaris offers
corporations and institutions security management solutions and services
enabling them to acquire market intelligence, lower business risks and improve
customer service. The Company's security solutions and services are geared
towards increasing customer revenues and profits.
21
Manaris operates the following wholly-owned subsidiaries:
o Avensys Inc, which provides risk management monitoring solutions
o Chartrand Laframboise Investigation, which provides investigative
services
o C-Chip Technologies Corporation (North America), which specializes
in high-tech security
Corporate History
Manaris Corporation (sometimes referred to as "we," "our," "us," or the
"company"), was incorporated in the State of Nevada on June 26, 2000 as Keystone
Mines Limited and maintains its principal executive offices at 1155 Boulevard
Rene-Levesque, Suite 2720, Montreal, Quebec, Canada.
In June 2000, the Company purchased four mineral claims, situated in the
Greenwood Mining Division in the Province of British Columbia, Canada. At that
time, our principal business plan was to acquire, explore and develop mineral
properties and to ultimately seek earnings by exploiting the mineral claims. In
December 2002, we were advised that the mineral properties held were not
economically viable. Our board of directors approved the termination of our
exploration activity.
In March 2003, we changed our company name to C-Chip Technologies Corporation in
order to better reflect our new business activities, and began trading on the
OTC Bulletin Board (OTC-BB) under the symbol "CCHI."
In July 2005, Shareholders approved a name change for the Company to Manaris
Corporation to reflect C-Chip Technologies expanded scope of business. As a
result, the new trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."
Recent Developments
Resignation of Our Chief Executive Officer
On September 16, 2005, following the resignation of Stephane Solis, John G.
Fraser, the Company's Secretary/Treasurer, was appointed as President and Chief
Executive Officer for a minimum period of three months. According to the terms
of Mr. Solis's agreement, he will receive 600,000 options exercisable at
$0.00001 and $30,000 CDN upon execution of the Agreement. John G. Fraser will
receive a compensation of $18,000CDN per month and 500,000 options exercisable
at market prices.
Closure of CSA subsidiary
On September 22, 2005, the Company decided to cease operations of our Canadian
Security Agency (2004) Inc. ("CSA") subsidiary, which provides security services
to large corporate accounts, including courier and trucking companies. As a
result, CSA has entered into an agreement with Securite Kolossal Inc. pursuant
to which CSA will sell its customer list to Securite Kolossal for $100,000 CDN.
The Company has owned CSA since February 2004.
22
July 2005 Warrant Offer
In August 2005, the Company concluded a Special Warrant Offering which raised
gross proceeds of $2,576,168. In connection with the Special Warrant Offer, our
Company issued 7,360,336 common shares to Warrant Holders as well as new
warrants which were issued in the following amounts: (i) 3,797,976 Series G
Warrants, (ii) 3,797,976 Series I Warrants, (iii) 890,590 Series H Warrants and
(iv)1,781,180 Series J Warrants.
Each holder participating in the Special Warrant Offer by exercising any Series
E Warrants at $0.35 per share received new Series G incentive warrants (the
"Series G incentive warrants") and new Series I incentive warrants (the "Series
I Incentive Warrants"), each in an amount equal to 100% of the number of shares
of the Company's common stock issued upon exercise of the Series E Warrants
pursuant to the Special Warrant Offer. Each of the Series G Incentive Warrants
and the Series I Incentive Warrants have a term of four and one-half years,
contain piggyback registration rights, contain full ratchet anti-dilution
protection and have an exercise price equal to $0.35 and $0.50 per share,
respectively.
Each holder participating in the Special Warrant Offer by exercising any Class A
Warrants, Series A Warrants or Series F Warrants received new Series H incentive
warrants (the "Series H Incentive Warrants") and new Series J incentive warrants
(the "Series J Incentive Warrants"), each in an amount equal to twenty-five
percent (25%) and fifty percent (50%), respectively, of the number of shares of
the Company's common stock issued upon exercise of the Class A Warrants, the
Series A Warrants or the Series F Warrants pursuant to the Special Warrant
Offer. Each of the Series H Incentive Warrants and Series J Incentive Warrants
have a term of four and one-half years, contain piggyback registration rights
and have an exercise price equal to $0.35 and $0.50 per share, respectively.
In connection with the Special Warrant Offer, the Company also issued to the
placement agent and its designees warrants to purchase up to 561,012 shares of
common stock at an exercise price of $0.35. The placement agent warrants are
exercisable immediately and will expire on the fifth anniversary of the issue
date.
The Company and the holders consummated the Special Warrant Offer in reliance
upon the exemption from securities registration afforded by the rules and
regulations as promulgated by the United States Securities and Exchange
Commission under Section 4(2) of the Securities Act of 1933, as amended, and
pursuant to Regulation D promulgated thereunder.
Avensys Acquisition
In March 2005, Manaris acquired all of the issued and outstanding common stock
of Avensys Inc. ("Avensys"), a leader in risk management monitoring solutions
for commercial and industrial buildings, infrastructures and various
environments. The Company issued 10,400,002 restricted shares of common stock in
exchange for 15,746,369 shares of Avensys Inc. which constituted all of the
issued and outstanding common stock of Avensys. Further, Manaris agreed to pay
$312,625 (CDN$385,000) to holders of options of Avensys and then cancelled the
options. The beneficiaries of the options have received $187,592 (CDN$231,000)
as of the date hereof and will receive $124,970 (CDN$154,000) on or before
December 31, 2005. The balance of the purchase price due not later than December
31, 2005 will accrue interest from the date of closing at a rate of twelve
percent (12%) per year calculated daily and payable monthly and any unpaid
interest will carry interest at the same rate.
23
February 2005 Financing
In February 2005, we closed a private placement with eighteen institutional
investors. The Company issued Senior Secured Convertible Notes Series A
("Notes") and Series E and F Warrants for an aggregate principal amount of
$4,675,000. the Company allocated $1,863,870 to the Warrants Series E, $339,456
to the Warrants Series F and recognized an embedded beneficial conversion
feature of $2,470,674 accounted for as additional paid in capital and an
equivalent discount against the Notes.
As of October 27, 2005 the Notes have an outstanding balance of $2,642,586 and
are currently convertible at $0.35 per share.
The obligations of the Company are guaranteed by all of the Subsidiaries of the
Company pursuant to the terms of a Guaranty Agreement.
The Notes and the Guaranty have a secured by perfected first priority security
interests in all the assets of the Company and its Subsidiaries, including,
without limitation, accounts receivable, intellectual property rights and
inventory (the "Collateral") pursuant to the terms of a Pledge and Security
Agreement.
Chartrand Laframboise Acquisition
In February 2005, we entered into agreements to acquire one hundred percent
(100%) of the outstanding shares of 9151-3929 QUEBEC INC., ("QUEBEC") and
3826961 CANADA INC. ("CANADA") through our wholly owned subsidiary, 6327915
CANADA, INC. QUEBEC and CANADA collectively owned 100% of 3428249 CANADA INC
which owned 100% of CHARTRAND LAFRAMBOISE INC., a company specializing in the
security field and 100% of 9126-7641 QUEBEC INC., a corporation specializing in
credit management and verification. On June 30, 2005, 3428249 Canada Inc. and
6327915 Canada Inc. completed a merger transaction. The merged company continues
to be 6327915 Canada Inc. Following the merger 3826961 Canada Inc. and 9151-3929
Quebec Inc. were each dissolved on June 9, 2005 and September 26, 2005,
respectively. QUEBEC, CANADA, 3428249 CANADA INC., CHARTRAND LAFRAMBOISE INC.,
and 9126-7641 QUEBEC INC. are hereinafter collectively referred to as "CLI." In
consideration for the acquisition of CLI, Manaris paid $2,436,251
(CDN$3,000,000.00) in cash and issued a $1,387,302 (CDN $1,700,000) debenture,
convertible into 1,700,000 restricted shares of its common stock at a price of
$0.82 per share on behalf of its wholly own subsidiary, 6327915 CANADA, INC.,
24
Founded in 1986, CLI has become a leader in the field of investigative services
in Canada. CLI's core services include investigation, surveillance, background
verification, business intelligence, security consulting and labor management
conflict and engages undercover agents for many of its services. CLI is one of
Investigations Canada's major partners. Investigations Canada, a company
offering expertise throughout Canada, is comprised of nine partners, 25
locations and over 200 private investigation and security professionals. CLI is
located in Laval, Quebec.
Services and Technologies
We offer the following services and technologies: Risk Management Solutions;
Security Services; Environmental Monitoring; Web-Based Security Solutions.
Risk Management Solutions
Our risk management solutions are provided by our C-Chip Technologies
Corporation (North America) subsidiary ("C-Chip"). To allow increased security
and to control the usage of remote equipment, C-Chip initially focused on the
development and marketing of risk management solutions using integrated wireless
communications, RFID technology, transaction processing, software applications
and the Internet, and when location is required, Global Positioning System (GPS)
technology to enable users to efficiently access, control, manage and monitor
remote assets. Customers have access to a corporate website in order to remotely
access, control, locate and monitor different types of equipment or services
anywhere throughout North America for increased security. These security
solutions provide significant value to business users by lowering their risks
and associated costs as well as increasing efficiency of their operations.
Because there is a large, readily available market for telematics applications
for automotive products, management has focused initial product development
effort in this industry. C-Chip is now starting to market an offering targeting
the automotive sector with solutions encompassing the credit, asset and security
management industry. Its current technology is based on a platform that can be
adapted to a wide number of products, including office equipment, industrial
machinery and consumer electronics products.
Our competitors in credit management solutions for the automotive sector include
OnTime, PassTime, and PayTeck. These competitors offer different versions of an
"egg timer" whereby a code must be manually entered using a keypad to enable a
physical device connected to the vehicle's starter. The process enables the use
of the vehicle for a certain period of time. Although the device does not rely
on wireless network coverage to function, a code must be given and manually
entered after each payment has been made. These devices work well but involve
significant management time and expense. Our basic product offers a significant
price advantage over these manual devices and, in management's opinion, is a
much more sophisticated solution as it is totally transparent to users.
25
Security Services
Since 9/11, ensuing world events have further supported our position that the
security industry offers significant opportunity for growth. Our goal is to
attain a leading position within this industry through our subsidiary CLI.
CLI's services include the following:
Security Officers
Security officers provide services primarily to commercial and industrial
centers and office buildings. Their mission consists of delivering quality
protection services combined with courteous customer service. These security
officers all possess the necessary qualifications to work with complex and
multi-purpose high-tech security systems.
Investigation
CLI's investigation team is made up of highly specialized experts with
long-standing experience in investigation and research. They provide external
and internal investigation services as well as other related services. External
investigations include fraud, insurance, workers' compensation, in-house theft,
productivity problems, inventory protection, and drug trafficking. Internal
investigations are mainly focused on research, pre-employment checks, criminal
files, and due diligences. Other related services include VIP personal
protection services as well as labor conflict management.
The market for our security services is subject to intense competition. Although
a large part of the market is provided by important multinationals, the vast
majority of security- related services are provided by thousands of small
entities, all offering a range of limited services. Our security services are
primarily offered in the province of Quebec in Canada. Our competitors are
mainly with Canadian firms such as Garda World, Kolossal, Sec-Pro and many other
smaller entities and less with larger multinationals.
Competition is based on reputation, relationship with customers, quality of
services and, to some extent, price.
Environmental Monitoring
Our environmental monitoring services are provided by our Avensys subsidiary. In
order to developing monitoring solutions to different environments as well as
buildings and infrastructure, we acquired Avensys Inc. Avensys has developed a
distinctive expertise in Fiber Bragg Grating (FBG) offering unique advantages
for distributing sensing applications, namely for variables such as temperature,
humidity, pressure, strain, etc. To further broaden its sensing expertise,
Avensys has implemented a research & development program intended to extend its
expertise to organic and chemical compounds. In addition, Avensys is developing
complementary technologies such as innovative optoelectronic interrogation units
to collect data from thousands of fiber sensors in a cost effective manner.
26
Avensys' fiber-based sensing technology offers multiple variable sensors all of
which are installed on a single fiber strand. Sensors can be interrogated
remotely from different means of communications; are not sensitive to EMI/RFI
and lightning; do not require electricity; can sustain very high temperatures;
and are ideal for hostile or corrosive environments. Furthermore, all of
Avensys' FBG-based sensors are designed for a minimum 25-year lifecycle with
little or no maintenance, considerably reducing the cost of ownership. Avensys'
fiber-based sensing technology is particularly applicable to the environmental,
geotechnical, industrial, aerospace, nuclear and semiconductor vertical markets.
Avensys is considered a key player in the environment monitoring market with a
significant foothold in the structure & geotechnical market segments. It is one
of a few world players in the market for Fiber Bragg Grating (FBG) technology
and believes that its cost structure is one of the lowest in the industry. In
fact, some of Avensys' competitors in distributed fiber based sensing technology
purchase optical components from it. In order to offer complete end to end
security monitoring solutions, Avensys intends to leverage its existing customer
base which includes over 1,000 established accounts. A sample of the customer
base follows:
Components and Sensors
3m Canada City of Toronto IGA Supermarkets
Abitibi-Consolidated Daishowa Marabeni Inc. Irving Oil
Agri-Food Canada Department of Agriculture INRS-Institut Armand-Frappier
Agropur Department of Fisheries And Oceans Labatt Breweries of Canada
Alcan Aluminum Ltd. Department of National Defense Merck Frost Canada
B.C. Environmental Department of The Environment Metro and Richelieu
Basf Canada Dofasco Inc. Ontario's Ministry of Environment & Energy
Bombardier Inc. GE Canada Inc. Nestle
Bowater Pulp And Paper Gouvernment Du Quebec Nova Scotia Power
Bristol-Myers Squibb Health Canada Domtar
Cascades Carton Plat Hydro Quebec Federal Public Works & Government Services
Bookham
Integrated Monitoring Solutions
National water level management (Poland) Optical network (US National Defense) Refrigeration controls (IGA)
Flood prevention (China) Ammonia levels monitoring (Versacold)
Flood prevention (Guyanna) Water level measurements (Hydro Quebec)
Landslide prevention (Hong Kong) Air quality surveillance (Environnent Quebec)
The reputation of Avensys has been built on years of experience in solving
environmental monitoring problems, from micro scale in-building sensing systems
to the real-time monitoring of temperature, humidity, pressure or chemical
levels and macro-scale wireless landslide and flood warning systems in different
countries. Through integrated solutions and services branded under the name
SenseYourWorldTM, Avensys combines skills, staff and the knowledge to integrate
multiple monitoring technologies to deliver real-time, automated, cost-efficient
data to business users requesting increased market intelligence.
27
The Company intends to design and market monitoring devices & instrumentations
and to offer complete, turnkey integrated monitoring solutions branded under the
brand name "SenseYourWorldTM". To provide end to end monitoring solutions to its
customers, Avensys intends to have a foothold and be involved in all realms of
turnkey monitoring solutions, including:
1) Monitoring Technologies. The provisioning of physical devices to measure
desired conditions;
2) Data Acquisition Process. An overall physical architecture to bring data to a
central point;
3) Data Applications. A software layer to analyze and process information; and,
4) Data Access & Reporting Process. An access to software tools and reports
needed for a specific application
To enable Avensys to offer end to end monitoring solutions to its customers,
proprietary technologies were designed to work with technologies from other
companies, including partners, competitors, and other third parties. Similarly,
Avensys' services were designed to operate with a variety of communications
protocols. It intends to continue to develop additional proprietary technology
where feasible and to purchase or license technology where cost-effective.
Web-Based Security Solutions
Our Web-Based Security Solutions are provided by our C-Chip subsidiary. On
January 7, 2003, we acquired all assets and intellectual property related to a
new wireless, web-based set of communication tools offering users complete
access, remote control, and monitoring of a variety of equipment from Capex
Investments Limited ("Capex"). The technology we acquired allows selective
enabling, disabling (on/off) of targeted equipment, and other commands at will,
from anywhere to almost anywhere in North America. Essentially, the products and
solutions derived from this technology are targeted to financial institutions
and leasing companies to mitigate risks and enforce schedule of payment of
borrowers and lessees of certain equipment. This technology is herein referred
as the C-Chip technology.
The basic system component of C-Chip's technology entails a chipset embedded in
target devices. This includes a radio frequency receiver and microprocessor,
web-based applications and database management. Other required components
include access to wireless networks and Internet access. The processor is
addressable through a unique electronic serial number that corresponds to the
individual device. The processor accepts an input signal and compares the signal
to a number of criteria to determine if the current operating condition should
be maintained or modified. Additional components to the basic unit include GPS
technology for location/tracking and a host of additional monitoring features.
To process the commands of authorized users and to enable users to manage their
own database of embedded devices from a central point using the Web, C-Chip has
built a proprietary Secure Data Management Center. This eliminates the need for
users to make a substantial investment in acquiring and supporting capital
equipment, such as hardware, software and data networking equipment, in order to
use the Company's services.
28
C-Chip utilizes proven and effective wireless communications technologies
including one-way messaging services, two-way messaging services and cellular
services.
C-Chip's proprietary technologies are designed to work with those from other
companies, including corporate partners, competitors, and other third parties.
Similarly, C-Chip's services are designed to operate with a variety of wireless
communications protocols. The Company expects to continue development of
additional proprietary technology, and, where cost-effective, purchase or
license technology.
With approximately 4,000 units now in the field which were delivered based on
minimal production volume, and market reception to its offering, C-Chip chose to
reengineer its product for mass production in the first quarter of calendar 2005
to achieve increased efficiencies and to streamline processes. In order to
achieve this as promptly as possible, C-Chip concluded an agreement in April
2005 with iMetrik Inc, a company specializing in the development and marketing
of wireless solutions to improve management of mobile and remote assets. The
process is now essentially completed and the Company expects to begin delivery
of its new units in sizeable quantities, starting October 2005 to provide three
core solutions:
1. Credit Chip II is a small two-way communications device installed in a
rented, leased or financed vehicle's starter and ignition circuitry, or fuel
pump. It allows the credit grantor to disable starting the vehicle in the event
that a customer's account is in default. Addressing and disabling a vehicle is
as simple as logging onto the Company's secure website, entering a username and
password, selecting the customer account, and then clicking on "Disable." In
respect of "Right to cure" laws, an audible warning may also be enabled to
advise the customer of the impending shut-down, giving them a 1, 2 or 3-day
grace period.
2. Credit Chip 100 provides two-way wireless communications allowing remote
visibility of vehicles at all times. It is one of the most cost-effective
vehicle tracking devices on the market today. It provides the user with a
location map, in real-time via the Internet right on their computer screen.
Users can locate a targeted vehicle at any time and each location is stamped
with a time and date.
3. Credit Chip 100 C is C-Chip's most advanced credit management solution. It
combines remote visibility of vehicles and immobilization capabilities. Using
two-way wireless communications and our Internet Web Applications, credit
grantors have the ability to go online, sound a pre-warning, and then disable a
vehicle. If suitable payment arrangement is not made, the vehicle can be located
on a map in real-time, via the Internet right on any computer screen.
In each of market segments where we intend to position our web-based products,
we compete primarily on the basis of functionality, ease of use, quality, price,
service availability, effectiveness and financial strength. All our target
markets for all market segments are highly competitive. As market demand for
wireless communications tools enabling management of remote assets increases,
the quality, functionality and availability of competitors' products and
services is expected to progress. And with new competitors flooding our market,
further price reduction of products and services is expected. In addition, we
expect that the widespread adoption of industry standards may make it easier for
new market entrants or existing competitors to improve their products and
services or offer some or all of the products and services we offer or may offer
in the future, possibly at lower prices than ours. This would harm the
competitive advantages that our products and services currently enjoy.
29
Warranties
All of the Company's web-based products are offered with a warranty. The
Company's current policy is to offer a warranty a one year warranty on all of
its web-based products. Avensys' warranty policy for manufactured products
varies between 3 months and one year, depending on the product.
Insurance
Manaris currently has $1,000,000 of insurance coverage for its web-based
security products and $1,000,000 for general liability and coverage for our
fixed assets. CLI has insurance coverage of $3,000,000 for services and
$1,000,000 for general liability and coverage of its fixed assets. Avensys has
insurance coverage of $3,000,000 for its fiber based products and $1,000,000 for
general liability and coverage of its fixed assets.
Government Regulation
Manaris's businesses in the security service industry are subject to various
federal, state, local and foreign laws and regulations. CLI and CSA hold
security licenses from, and their security services are regulated by a local
government agency. Both are in good standing. The Company also uses some data
from outside sources, including data from third party vendors and various
government and public records services, in performing its security services. The
use of this data is regulated by certain laws and regulations. To date,
applicable laws and regulations have not interfered materially with the manner
in which the Company obtains information and conducts its operations, including
its access to data used in its business. However, changes in these laws and
regulations or the adoption of new laws or regulations, particularly those
relating to privacy, could interfere with the Company's method of operations and
access to data and, as a result, could materially adversely affect Manaris's
business.
In addition to regulations applicable to businesses in general, the Company's
web-based products are subject to certification by the Federal Communications
Commission in the US and by the Department of Communications in Canada. C-Chip's
first generation of web-based products are all in the process of obtaining such
certification for the US and Canadian markets. Other web-based products are
expected to undergo the certification process once all pre-commercialization
tests are completed. Furthermore, wireless carriers who supply the Company with
airtime enabling our services are also subject to regulation by the Federal
Communications Commission in the US and the Canadian Radio-Television and
Telecommunications Commission in Canada.
Manufactured products are subject to various industry and government
certifications, all of which need to be obtained before commercial launch.
30
Employees
As of October 20, 2005, we have one hundred and seventy-one (171) employess; 85
(CLI), 75 (Avensys), 5 (C-Chip), 6 (Manaris) employees on the payrolls of
C-Chip, CLI and Avensys and we retained several full-time and part-time
consultants. Our employees are not unionized. We believe relationships with our
employees and consultants are good.
Legal Proceedings
In the course of normal business, the Company may be subject to threat of
litigation, claims and assessments. Management does not believe that unfavorable
decisions in any pending procedures or threat of procedures or any amount it
might be required to pay will not have a material adverse impact on our
financial condition.
A motion was filed by Citicorp Vendor Finance Ltd., under Quebec law, in the
district of Montreal, Province of Quebec, totalling $69,600 USD ($85,348 CAD)
for an unpaid contract of credit. The Company intends to contest the case
vigorously and, in the event of an unfavorable outcome, the amount of any
damages is not expected to have a material adverse impact on our financial
condition.
A lawsuit was filed on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $506,000 USD ($620,000 CAD) with
regards to alleged breach of employment contract and wrongful dismissal of
Charles Finkelstein. This lawsuit was settled on September 2, 2005 for an amount
of $81,600 USD ($100,000 CAD) and the transfer of 200,000 shares of the Company,
currently held in escrow. The parties exchanged under this agreement a complete
and final release regarding their business and employment relationship.
Autoland filed a lawsuit on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $81,600 USD ($100,000 CAD) with
regards to alleged expenses incurred by the plaintiff for the purchase of
anti-theft product known as the "Hawk 200". The Company intends to contest the
case vigorously and, in the event of an unfavorable outcome, the amount of any
damages will be charged to the earnings of the quarter and is not expected to
have a material adverse impact on our financial condition
A lawsuit was filed by Richard Larocque on June 30, 2005 under Quebec law, in
the District of Montreal, Province of Quebec pertaining to a claim in the amount
of $88,900 USD ($108,900 CAD) for alleged wrongful and unnecessary use of force
in the exercise of the Company's employee security duties. The Company intends
to contest the case vigorously and, in the event of an unfavorable outcome, the
amount of any damages will be charged to the earnings of the quarter and is not
expected to have a material adverse impact on our financial condition.
Rothsman Bastien, filed a lawsuit under Quebec law, in the district of Laval,
Province of Quebec, totalling $66,351USD ($81,306 CAD) for compensatory damages
and $12,240USD ($15,000 CAD) in punitive and exemplary damages. The claim
alleges that the Company submitted erroneous evidence that was based on racial
profiling which led to the arrest of the plaintiff. The Company intends to
contest the case vigorously and, in the event of an unfavorable outcome, the
amount of any compensatory damages will be covered by the Company's insurance
policy. The punitive and exemplary damages will be charged to the earnings of
the quarter and is not expected to have a material adverse impact on our
financial condition.
31
Description of Property
The Manaris main office is located at 1155, Rene-Levesque West, Suite 2720,
Montreal, Quebec, Canada. The base rent for the current premises is
approximately CDN$8,161 inclusive of taxes per month and is subject to annual
increases equivalent to the increase in the Consumer Price Index ("CPI"). This
lease expires on November 30.
The office of our wholly owned subsidiary, C-Chip, is located at 740 Notre-Dame
West, Suite 1320, Montreal, Quebec, Canada. They currently lease approximately
1,900 square feet for administration and development. The base rent for the
current premises is approximately CND$2,300 inclusive of taxes per month and is
subject to annual increases equivalent to the increase in the Consumer Price
Index ("CPI"). This lease expires in June 2010.
The office of our wholly owned subsidiary, Chartrand Laframboise Inc., is
located at 2 Place Laval, Suite 350, Laval, Quebec, Canada. They currently lease
approximately 6,700 square feet for administration. The base rent for the
current premises is approximately CND$12,100 inclusive of taxes per month and is
subject to annual increases equivalent to the increase in the Consumer Price
Index ("CPI"). This lease expires on January 31, 2007.
The main office of our wholly owned subsidiary, Avensys Inc., is located at 880
Selkirk, Pointe-Claire, Quebec, Canada. They currently lease approximately
20,500 square feet for administration and production. The base rent for the
current premises is approximately CND$13,670 inclusive of taxes per month and is
subject to annual increases equivalent to the increase in the Consumer Price
Index ("CPI"). This lease expires on July 31, 2006.
Avensys has also two sales representative offices in Canada. They currently
lease approximately 3,615 square feet for administration at 1131 Derry Road
East, Mississauga, Ontario Canada. The base rent for the current premises is
approximately CND$2,184 inclusive of taxes per month and is subject to annual
increases equivalent to the increase in the Consumer Price Index ("CPI"). This
lease expires on June 30, 2006. They currently lease approximately 400 square
feet for administration at 301-1493 Johnston Road, White Rock, British Columbia,
Canada. The base rent for the current premises is approximately CND$500
inclusive of taxes per month and is subject to annual increases equivalent to
the increase in the Consumer Price Index ("CPI"). This lease expires on January
31, 2007.
Avensys Inc. also maintains research and development facilities and development
facilities. These facilities are located at 247 Boulevard Thibeau,
Cap-de-la-Madeleine, Quebec, Canada They currently lease approximately 6,500
square feet and the base rent for the current premises is approximately
CND$2,871 inclusive of taxes per month and is subject to annual increases
equivalent to the increase in the Consumer Price Index ("CPI"). This lease
expires on October 30, 2006.
We believe that additional office space will be required, and readily available,
as our business grows.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
With respect to forward-looking statements made in this Management's Discussion
and Analysis of Financial Condition and Results of Operations see Part I initial
paragraph concerning "forward-looking statements".
Executive Overview
Significant milestones were accomplished in the twelve month period ended June
30, 2005. In particular, the acquisitions of Avensys Inc, and Chartrand
Laframboise Inc. (CLI) in Q3 of the fiscal period have both grown our asset base
significantly and expanded our sources of revenue. In fact, of the $7 million in
revenue for FY 2005, $3.7 million was generated in Q4.
We expect steady growth and profitability from these two subsidiaries in the
coming year. Aside from any possible acquisitions made by Avensys and CLI, the
major potential for revenue growth in the next 12 months for Manaris rests with
C-Chip, the subsidiary conducting the Company's original core business. We have
made a significant investment in reengineering the C-Chip product line as we
strongly believe in the product concept. C-Chip's senior management clearly
understands the need to produce results during FY2006. Market conditions appear
to be healthy for all three subsidiaries.
In February 2004, we purchased 100% of Canadian Security Agency (2004) Inc.
("CSA"), a private Montreal-based business established in 1984 that provides
security services to large corporate accounts, including courier and trucking
companies. As consideration for the purchase of CSA, we issued 1,600,000
restricted common shares to 9129-2763 Quebec Inc. On closing, 600,000 of
restricted common shares were released to 9129-2763 Quebec Inc. with the
remaining 1 million shares being subject to an escrow agreement. The release of
these 1 million restricted common shares to 9129-2763 Quebec Inc. were subject
to the attainment of certain milestones by CSA. The first milestone was achieved
on May 2004 and 300,000 shares were released from escrow. In September 2004, a
second milestone was attained and an additional 200,000 shares were released
from escrow. Subject to the payment by 9129-2763 Quebec Inc. of notes amounting
to $383,536 as of March 31, 2005, we will release the remaining 500,000 shares
to the selling shareholder. We are doubtful that we will recover this amount.
The Canadian Security Agency (2004) Inc. (CSA) has been a disappointment and has
not lived up to expectations. We made a decision subsequent to the end of FY2005
to cease operations at CSA and sold the client list to Securite Kolossal Inc. At
the same time we settled a pending lawsuit with the original shareholder of CSA.
The loss of CSA revenues will not have a material impact on our revenue stream.
In February 2005, we closed a private placement of $4,675,000 with eighteen
institutional investors. Subsequent to our year end of June 30, 2005, we
concluded a Special Warrant Offering enabling our Company to raise approximately
an additional $2.6 million.
33
The Company has several priorities for FY2006. Manaris, the holding company,
will reduce costs where possible. We will further leverage the success of both
Avensys and CLI and expect C-Chip to start realizing its potential. Overall,
corporate focus will be on the need towards profitability and continued growth.
In addition, we will also look to streamline operations and develop efficiencies
amongst complementary activities of our subsidiaries. The following are our
subsidiaries' priorities for FY2006:
Chartrand Laframboise Inc. offers services that include investigation,
surveillance, undercover agents, background verification, business intelligence,
security consulting and labor management conflict to over 1,000 customers. For
FY2006, in addition to continued profitability, CLI is seeking opportunities to
broaden its service offering and expand geographically across Canada.
Avensys Inc. is a leader in risk management monitoring solutions for commercial
and industrial buildings, infrastructures and various environments, including
air, soil and water. We anticipate that FY2006 should be a profitable year
accompanied with significant revenue growth when compared to the previous 12
months period. If we exclude a one-time procurement project realized in FY2005,
the planned growth is superior to 30. We expect that the production of fiber
optics components will continue to be the highest growth area of the company,
with some investments needed to keep our lead position and improve our
manufacturing processes. This fiscal year will also see the transfer of our
first optical sensors from the research and development group to the
manufacturing group. The market for optical sensing solutions should therefore
produce tangible results, although we expect that the real growth for that
sector will start in the next fiscal year.
With regards to environmental and geotechnical solutions, the volume of
distributed monitoring equipment should be stable, but our involvement into
customer solutions will show double digit growth. It is our intention to create
a team totally dedicated to integrated solutions in FY2006, with the achievement
of a first large scale integrated customer solution during the year.
We anticipate that our recent launch in summer 2005, of our advanced limnimeter
will result in excellent year-end results for this new technology, with even
higher growth in the coming years.
C-Chip specializes in the high-tech sector of the security industry, with
technology that allows credit grantors the ability to efficiently access,
control, manage and monitor remote assets at low costs. For FY2006, C-Chip's
priority is to manufacture and deliver an increasing number of C-Chip products
into the North American marketplace.
Recent Financings
In February 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which we issued units
consisting of an aggregate of $4,675,000 of our Company's 9.0% Senior Secured
Convertible Notes, Series A, which are convertible into shares of our common
stock at a conversion price of $0.35 per share. Under the terms of the 9.0%
Senior Secured Convertible Notes, Series A, principal on the Notes shall be paid
in 20 equal monthly installments, with each payment equal to 5% of the principal
amount, commencing on June 16, 2005 and continuing on the same day of each month
thereafter to the Holder on the tenth date immediately preceding the Principal
Payment Date. All payments of principal by us shall be made at our option in
cash or, with 10 business day's prior notice, in common stock of our Company
valued at 85% of the average closing bid price of the security in the most
recent five trading days prior to a Valuation Date. The Notes contains full
ratchet anti-dilution protection.
34
In July 2005 the Company made a Special Warrant Offer (the "Offer") to all Class
A Series A, Series E, and Series F warrant holders. A total of $2,576,168 was
raised under the Private Placement. Under the terms of the Offer, each Holder
participating in the Offer by exercising any Series E Warrants at $0.35 per
share received new Series G Incentive Warrants (the "Series G Incentive
Warrants") and new Series I Incentive Warrants (the "Series I Incentive
Warrants"), each in an amount equal to one hundred percent (100%) of the number
of shares of the Company's common stock issued upon exercise of the Series E
Warrants pursuant to the Offer. A total of 3,797,976 Series E Warrants were
exercised which prompted the issuance of 3,797,976 of Series G Incentive
Warrants and 3,797,976 of Series I Incentive Warrants.
Holders participating in the Offer by exercising any Class A Warrants, Series A
Warrants or Series F Warrants received new Series H Incentive Warrants (the
"Series H Incentive Warrants") and new Series J incentive warrants (the "Series
J Incentive Warrants"), each in an amount equal to twenty-five percent (25%) and
fifty percent (50%), respectively, of the number of shares of the Company's
common stock issued upon exercise of the Class A Warrants, the Series A Warrants
or the Series F Warrants pursuant to the Offer. A total of 3,562,359 of Class A
Warrants, Series A Warrants and Series F Warrants were exercised which prompted
the issuance of 890,590 Series H Warrants and 1,781,180 of Series J Warrants.
As a result of the Offer, the Company, pursuant to the Warrants in effect,
adjusted the respective Warrants accordingly.
Following the Offer, the Company received notice from the SEC inquiring about
details regarding the Offer and the registration amendment. The Company has
replied accordingly and is waiting for a response from the SEC.
Further, as a result of Special Warrant Offering, the Company issued shares of
common stock for a consideration per share less than the Conversion Price in
effect, which constitutes a "Trigger Issuance" under the Senior Secured
Convertible Note of February 16, 2005. Consequently, some Investors pursuant to
the Senior Secured Convertible Note exercised their right to convert part of the
Note into Shares of Common Stock. A total of $985,985 of the Senior Secured
Convertible Note was converted. As of October 27, 2005 having made five
principle payments, the balance remaining on the Note Agreement totals
$2,642,586.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. At each balance sheet date, management evaluates its estimates,
including, but not limited to, those related to accounts receivable,
inventories, and deferred revenue. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates and critical accounting
policies that are most important in fully understanding and evaluating our
financial condition and results of operations are discussed below.
35
Revenue Recognition
One of our subsidiaries, C-Chip is still in a development stage and has
generated limited commercial sales of products. The Company developed prototypes
for testing by potential customers, which were billed for a portion of the costs
incurred. Commercial product sales are recorded when shipped as part of a sales
agreement, usually by customer purchase order. Certain product sales contain a
small charge for after sales service for up to one year; such amounts are
deferred and recognized as revenue when earned. Products carry a one-year
replacement warranty and the level of actual warranty expense has not been
material.
Our Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104 (" SAB 104" ), " Revenue
Recognition in Financial Statements." Revenue is recognized only when the price
is fixed or determinable, persuasive evidence of an arrangement exists, the
service is performed, and collectibility is reasonably assured.
Sales of security services commenced on the acquisition of Canadian Security
Agency (2004) Inc. on February 17, 2004. Clients are provided security services
with revenue recognized as services are performed.
CLI recognizes revenue for service contracts as the services are performed using
a proportional performance model. Revenues from investigation contracts are
reported on the percentage of completion method of accounting using measurements
of progress toward completion appropriate for the work performed. Progress is
generally based upon man-hours or costs incurred based upon the appropriate
method for the type of job.
Avensys Inc. recognizes revenues when goods are shipped and the risks and
rewards have transferred to customers. Revenues are recorded net of rebates,
discounts and sales returns. Avensys and its 70% owned subsidiary, specialize in
developing, manufacturing and installing control and monitoring remote security
solutions.
Our Company continually monitors timely payments and assesses any collection
issues. The allowance for doubtful accounts is based on the Company's detailed
assessment of the collectibility of specific customer accounts. Any significant
customer accounts that are not expected to be collected are excluded from
revenues.
Principles of Consolidation
Our consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Consolidated companies include: a) 100% of
Avensys and its subsidiary, Fizians Inc. of which Avensys owns 70% of its
outstanding shares and the accounts of Avensys Labs Inc., a company in which
Avensys holds variable interests and is the primary beneficiary. b) 100% of
6327915 Canada, Inc., 9151-3929 Quebec Inc., 3826961 Canada Inc., 3428249 Canada
Inc., Chartrand Laframboise Inc. and 9126-7641 Quebec Inc., (collectively the
"CLI Group" ) c) 100% of Canadian Security Agency (2004) Inc.d) 100% of C-Chip
..Operating results for the CLI Group and Avensys are included from the date of
acquisition of February 28, 2005. All inter-company accounts and transactions
have been eliminated.
36
Amortization of Equipment and Property
Our Company's property and equipment are recorded at cost. Our Company provides
for depreciation using the following methods and applying rates estimated to
amortize the cost over the useful life of the assets:
Computer equipment Straight-line and declining balance 30%-33 1/3%
Furniture and fixture Straight-line and declining balance 20%
Leasehold improvements Straight-line 5 to 8 years
Surveillance equipment Declining balance 30%
Communication equipment Declining balance 20%
Laboratory equipment Straight-line and declining balance 20%
Automotive equipment and software Declining balance 30%
Machinery and office equipment Declining balance 20%
Intangible Assets
An acquired intangible asset that represents technology that has reached
technological feasibility is capitalized at cost. Intangible assets with
definite lives are reported at cost, less accumulated amortization. The Company
does not have any identified intangible assets with a finite life. Acquired
in-process research and development is charged to operations in the period of
acquisition. The Company provides for amortization on a straight-line basis over
the following periods:
Customer lists 3-10 years
Licenses, patents and trademarks 4-6 years
Non-compete agreements 4 years
Goodwill
Goodwill represents the excess of the purchase price of acquired assets over the
fair values of the identifiable assets acquired and liabilities assumed.
Pursuant to SFAS No. 141, the Company does not amortize goodwill, but tests for
impairment of goodwill on an annual basis and at any other time if events occur
or circumstances indicate that the carrying amount of goodwill may not be
recoverable. Circumstances that could trigger an impairment test include but are
not limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition and loss of key personnel. Goodwill is tested for impairment using
present value techniques of estimated future cash flows; or using valuation
techniques based on multiples of earnings. If the carrying amount of goodwill
exceeds the implied fair value of that goodwill, an impairment loss is charged
to operations.
37
Stock-Based Compensation
Our Company has elected to apply the intrinsic value method of accounting in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB25). Under the intrinsic value method of
accounting, compensation expense is recognized if the exercise price of the
Company's employee stock options is less than the market price of the underlying
common stock on the date of grant. Stock-based compensation for employees is
recognized on the straight-line basis over the vesting period of the individual
options. Stock options granted to non-employees are accounted for under
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123), which establishes a fair value based method of
accounting for stock-based awards, and recognizes compensation expense based on
the fair market value of the stock award or fair market value of the goods and
services received, whichever is more reliably measurable. Under the provisions
of SFAS 123, companies that elect to account for stock-based awards in
accordance with the provisions of APB 25 are required to disclose the pro forma
net income (loss) that would have resulted from the use of the fair value based
method under SFAS 123.
Contingent Consideration
The measurement, recognition and allocation of contingent consideration are
accounted for using the following principles:
Measurement and Recognition
In accordance with SFASNo.141, Business Combinations ("SFAS141"),
contingent consideration is recorded when a contingency is satisfied and
additional consideration is issued or becomes issuable. Our Company
records the additional consideration issued or issuable in connection with
the acquisition when a specified internal performance goal is met. For
additional consideration paid in stock, our Company calculates the amount
of additional consideration using the closing price of its common stock on
the date the performance goal is satisfied.
Amount Allocated to Goodwill
In accordance with EITF No.95-8, Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination ("EITF 95-8") and FIN44, the portion of additional
consideration issuable to holders of unrestricted common stock and fully
vested options as of the acquisition date is recorded as additional
purchase price, as the consideration is unrelated to continuing employment
with the Company. Such portion is allocated to goodwill.
38
Amount Allocated to Stock-Based Compensation Expense
In accordance with EITF 95-8, the intrinsic value associated with
additional consideration related to stock or options that vest between the
acquisition date and the date at which the contingency is satisfied is
recorded as an immediate charge to stock-based compensation expense
because the consideration is related to continuing employment with the
Company.
Amount Allocated to Deferred Compensation
Additional consideration related to options and restricted stock that
remain unvested when the contingency is satisfied is recorded as deferred
compensation expense under EITF 95-8 and FIN44, as such consideration will
only be earned to the extent that the holder of such options or restricted
stock continues to be employed by our Company and meets the vesting
requirements. The amount recorded as deferred compensation is based upon
the intrinsic value of the restricted stock and unvested options at the
date at which the contingency is satisfied. Our Company amortizes such
deferred compensation over the remaining vesting period of the underlying
restricted stock and unvested options. In the event that a holder does not
fully vest in the restricted stock or unvested options, the unamortized
portion of deferred compensation is eliminated.
Income Tax
Our Company utilizes the liability method of accounting for income taxes as set
forth in SFAS No. 109, "Accounting for Income Taxes". Under the liability
method, deferred taxes are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates. A valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized. The Company has
incurred net operating losses of $10,934,000 which expire starting in 2015.
Pursuant to SFAS 109 our Company is required to compute tax asset benefits for
net operating losses carried forward. Potential benefit of net operating losses
have not been recognized in these financial statements because the company
cannot be assured it is more likely than not it will utilize the net operating
losses carried forward in future years.
Recent Accounting Pronouncements
In December 2004, FASB issued SFAS No. 153, " Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29" . The guidance in APB Opinion No. 29, "
Accounting for Nonmonetary Transactions" , is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Early application is permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a material
effect on our Company's results of operations or financial position.
39
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based
Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity' s equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R does not change the accounting
guidance for share-based payment transactions with parties other than employees
provided in SFAS 123 as originally issued and Emerging Issues Task Force Issue
No. 96-18, " Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" .
SFAS 123R does not address the accounting for employee share ownership plans,
which are subject to AICPA Statement of Position 93-6, " Employers' Accounting
for Employee Stock Ownership Plans" . SFAS 123R requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). SFAS 123R requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. The scope of SFAS 123R includes a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Public entities (other than those filing as small
business issuers) will be required to apply SFAS 123R as of the first interim or
annual reporting period that begins after June 15, 2005. Public entities that
file as small business issuers will be required to apply SFAS 123R in the first
interim or annual reporting period that begins after December 15, 2005. For
nonpublic entities, SFAS 123R must be applied as of the beginning of the first
annual reporting period beginning after December 15, 2005. Our Company is
evaluating the impact of adopting this standard on the Company's results of
operations and financial position.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB
107") to give guidance on the implementation of SFAS No. 123R. Our Company will
consider SAB 107 during the implementation of SFAS No. 123R.
Results of Operations
Twelve months ended June 30, 2005 compared to Twelve months ended June 30, 2004
The results of the operations include the accounts of the Company and its
wholly-owned subsidiaries.
40
Operating results for CSA were included for the twelve months in 2005 compared
to four months in 2004. Operating results for CLI Group and Avensys were
included from the date of acquisition of February 28, 2005. Operating results
for C-Chip were included from April 1, 2005.
Our revenues for the twelve months ended June 30, 2005 were $7,021,228 compared
to $1,040,898 last year. The increase was primarily due to acquisition of CLI
and Avensys during the year. For the same period, our product revenue accounted
for $3,580,619 compared to $210,222 last year. An increase of $3,238,000 was
primarily due to the acquisition of Avensys. Our service revenues were
$3,440,609 for the period ended June 30, 2005 compared to $830,676 in the prior
year. An increase of $1,472,000 was due to the acquisition of CLI during the
year and $1,164,000 was due to the impact of CSA that accounted for twelve
months in 2005 compared to four months in 2004. Gross margin for the twelve
months ended June 30, 2005 was $2,354,728 compared to $379,059 for the same
period last year. Our net loss for the twelve months ended June 30, 2005 was
$6,230,943 compared to $4,590,561 for the same period last year. Net losses were
generated mainly by our wholly owned subsidiary CSA, by our re-engineering of
the c-chip product line and by increased corporate expenses arising out of the
acquisitions and the February financing.
Operating expenses for the twelve months ended June 30, 2005 were $7,724,241
compared to $3,522,643 for the same period last year. Selling, General and
Administration expenses for the twelve months ended June 30 2005, which exclude
stock based compensation of $1,216,542, were $4,538,256 compared to $1,858,376
excluding stock based compensation of $856,384 in the same period last year. The
above reflected increased marketing, consulting and professional expenses in the
period ended June 30, 2005. Research and development expenses for the twelve
months ended June 30, 2005 were $731,865 compared to $351,584 for the same
period last year. Acquired in-process research and development for the twelve
months ended June 30, 2005 was $386,749 compared to none last year. Impairment
of goodwill and other intangible assets for the twelve months ended June 30,
2005 was $180,974 compared to $278,852 in the prior year.
Our results for the twelve months ended June 30, 2005 includes the results of
recently acquired CLI, from February 28, 2005 to June 30, 2005, and the results
of Avensys from February 28, 2005 to June 30, 2005, and C-Chip since April 1,
2005.
Financial Condition, Liquidity and Capital Resources
We are involved in the risk mitigation business. Through our different business
units, our aim is to provide services and solutions to our customers
encompassing all aspects of the security industry, from the collection and
transmission of information, to the treatment and analysis of the data
collected, all to offer the required intervention and protection whether it
pertains to assets, persons or the environment. So far, our operations have been
financed primarily from cash on hand, from the sale of common shares or of
convertible debentures and with respect to Avensys, CLI and CSA primarily from
revenue from the sales of products and services.
As of June 30, 2005 we had a deficiency in working capital of $1,329,550,
compared to a working capital of $1,564,254 at June 30, 2004. Included in these
figures, a cash balance of $287,147 (2004: $1,561,020), $2,858,275 (2004:
$237,384) in accounts receivable, $1,097,776 (2004: $155,680) in inventory,
$1,507,959 (2004: $165,362) in accounts payable and $2,021,127 (2004: $232,705)
in accrued liabilities and $1,598,273 (2004: $221,490) in loans payable. The
main reason for these significant changes is due to the consolidation of our new
wholly-owned subsidiaries, Avensys and CLI.
41
Net cash used for our operations was $2,661,708 (2004: $1,813,789). We mainly
financed our operations and acquisitions through the issuance of a Senior
Convertible Debentures for a total cash proceeds of $4,675,000 and 10,400,002
common shares for the acquisition of Avensys. Additional cash was raised through
the exercise of 2,120,501 stock options for $205,012 (2004: $339,618).
As of June 30, 2005, our Company's total assets were $20,115,755 compared to
$3,053,936. The increase is due to acquisition of our two wholly-owned
subsidiaries. The increase in total assets was primarily attributable to
Goodwill, $9,727,454 compared to $107,000 in 2004, and in intangible assets
$3,852,772 compared to $447,125 in 2003. The main reason for these significant
changes is due to the consolidation of our new wholly-owned subsidiaries,
Avensys and CLI.
As of June 30,2005, the Company had 54,782,802 issued and outstanding shares
compared to 39,595,803 in 2003. The increase in common shares is mainly due to
the issuance of 10,400,002 common shares for Avensys business acquisition.
Stock options outstanding at June 30 2005 totaled 3,842,500 at a weighted
average exercise price of $0.65 and have a weighted average remaining
contractual life of 4.13 years.
In January, 2005, we completed the acquisition of Markus 360, an asset
management software solution designed to control and monitor the movement of
assets within one or many premises. The purchase price of $125,000 was satisfied
by the issuance of 164,474 restricted shares of our common stock. The purchase
agreement requires us to pay the seller a royalty of 10% of future gross revenue
of the software, up to a maximum of $1,000,000, over a 5 year period.
In February, 2005, we completed the acquisition of CLI of Montreal Canada, and
all businesses related to CLI, including Commercial Business Bureau Inc. The
purchase price was $3,000,000CND (US$2,439,000) and a CDN $1,700,000 (US
$1,387,302) convertible debenture with a coupon of 9% and a 5 year maturity
date. At the option of the holders, the debenture is convertible into 1,700,000
shares of our common stock at price of $0.82 per share.
In February 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which we issued Units
consisting of (i) an aggregate of $4,675,000 of our Company's 9.0% Senior
Secured Convertible Notes, Series A, which are currently convertible into shares
of our common stock at a current conversion price of $0.35 per share. Under the
terms of the 9.0% Senior Secured Convertible Notes, Series A, principal on the
Notes shall be paid in 20 equal monthly installments, with each payment equal to
5% of the principal amount, commencing on June 16, 2005 and continuing on the
same day of each month thereafter to the Holders on the tenth date immediately
preceding the Principal Payment Date. All payments of principal by us shall be
made at our option in cash or, with 10 business days prior notice, in common
stock of our company valued at 85% of the average closing bid price of the
security in the most recent five trading days prior to a Valuation Date.
Further, as part of the Purchase Agreement, investors were issued warrants,
which if exercised, will provide $5,304,252 as follows:
42
i) 5,394,131 warrants exercisable at $0.75 each and expiring in February
2010.
ii) 1,798,077 warrants exercisable at $0.70 each and expiring in February
2006.
Related to the completion of the above private placement, we agreed to issue
warrants to the placement agents, which if exercised, will provide $472,724 as
follows:
i) 336,635 warrants exercisable at $0.0001 each and expiring in February
2010.
ii) 215, 385 warrants exercisable at $0.65 each and expiring in February 2010.
iii) 323, 076 warrants exercisable at $0.75 each and expiring in February 2010
iv) 107, 692 warrants exercisable at $0.70 each and expiring in February 2006
v) 20,000 warrants exercisable at $0.75 each and expiring three (3) following
the effectiveness of the current registration statement.
In March 2005, we acquired all of the issued and outstanding common stock of
Avensys. We issued 10,400,002 restricted shares of our common stock in exchange
for 15,746,369 shares of Avensys Inc. which constituted all of the issued and
outstanding common stock of Avensys Inc. Further, we agreed to pay CDN$385,000
to holders of options of Avensys, Inc. and then cancelled the options. The
beneficiaries of the options have received CDN$231,000 as of the date hereof and
will receive CDN$154,000 on or before December 31, 2005. The balance of the
purchase price due not later than December 31, 2005 will accrue interest as from
the date of closing at a rate of twelve percent (12 %) per year calculated daily
and payable monthly and any unpaid interest will carry interest at the same
rate.
The shares issued in exchange for the Avensys shares are restricted shares and
have been deposited in escrow and will be released to the shareholders as
follows:
- - A first portion representing twenty percent (20 %) of the issued shares
will be released to the stockholders four (4) months following the closing
of the transaction;
- - a second portion representing twenty percent (20 %) of the issued shares
will be released to the stockholders six (6) months after the closing of
the transaction;
- - A third portion representing twenty percent (20 %) of the issued shares
will be released to the stockholders nine (9) months after the closing of
the transaction, a fourth portion representing twenty percent (20 %) of
the issued shares will be released to the stockholders twelve (12) months
after the closing of the transaction; and,
- - The last portion representing the remaining twenty percent (20 %) of the
issued will be released to the stockholders eighteen (18) months after the
closing of the transaction.
43
MANAGEMENT
Officers and Directors
The directors and officers, their ages and positions held as of October 1, 2005
are listed below. Each director serves until our next annual meeting of the
stockholders or unless they resign earlier. The Board of Directors elects
officers and their terms of office are at the discretion of the Board of
Directors.
Name Age Position Held
- ------------- --- --------------------------------------------------
Robert Clarke 61 Chairman of the Board of Directors
John Fraser 59 President and Chief Executive Officer and Director
Cherry Lim 40 Director
Andre Monette 47 Chief Financial Officer, Secretary and Treasurer
The following describes the business experience during the past five years of
our directors and executive officers, including for each director, other
directorships held in reporting companies. There are no family relationships
among any of the persons listed.
Robert Clarke, Chairman of the Board of Directors. Mr. Clarke has been our
Chairman of the Board of Directors since January 2003. He has been Chairman and
Chief Executive Officer of 7bridge Capital, since June 2000, a private venture
capital group based in Hong Kong. Since October 1998, Mr. Clarke has been
Chairman of the Board of Directors of Asia Payment Systems, Inc. (OTCBB: APYM)
During the last five years, Mr. Clarke has served as a Director and as President
and Chief Executive Officer at various times of ePhone Telecom Inc. (OTCBB:
EPHO) as follows: He served as the Chairman of the Board of Directors from April
1999 until July 21, 2000 and again from December 1, 2000 to September 12, 2002.
Mr. Clarke also served as the President and Chief Executive Officer of ePhone
from June 3, 1999 to August 8, 1999, and also from March 9, 20000 until April 1,
2000 and again from December 1, 2000 to July 1, 2001. During two periods he was
CEO but not President. These periods were from August 8, 1999 to March 9, 2000
and from April 1, 2001 to July 2001. He carried out the functions normally
associated with the offices he held and in particular during the periods when he
held the office of CEO he was responsible for the overall direction and
operation of the company. From January 1997 to November 1997, Mr. Clarke was
President, CEO and a Director of WaveRider Communications Inc (OTCBB: WAVC). He
resigned as President in November 1997, but carried on as Director and CEO for
an additional month until December 1997. Mr. Clarke was a Director and Chairman
of TEK Digitel Corp. (OTCBB: TEKI) from June 1998 until September 1999, but had
no executive responsibilities and was paid no compensation. During the period
July 1998 to August 1999 Mr. Clarke was a director of Innofon.Com Inc.
(OTCBB:INNF).
John Fraser, Director, President and Chief Executive Officer. Mr. Fraser has
served as a Director since January 2003, and as our Secretary and Treasurer from
January 2003 until September 16, 2005. On September 16, 2005, Mr. Fraser was
appointed as our President and Chief Executive Officer for a minimum period of
three months, replacing Stephane Solis. He was a partner for twenty years with
KPMG Canada until January 1998. For the last four years of his career with KPMG,
he was Vice Chairman of the firm and responsible for the Canadian management
consulting division. In January 1998, he started providing consulting services
to professional services and high technology start-up firms, which services he
continues to provide to this day, and since January 1999, under the name J G
Fraser & Associates Inc. In February 2004, J G Fraser & Associates became a
partner in Catalyst Consulting, a private Canadian consulting firm providing
management consulting services to law firms and law departments in Canada and
internationally. From July 1999 to August 2002, Mr. Fraser was a director of
ePhone Telecom Inc. (OTCBB: EPHO). Mr. Fraser has been a director of Asia
Payment Systems, Inc. (OTCBB: APYM) since September 2002. From June 2000 to May
2003, Mr. Fraser was a director of Walters Forensic Engineering, a public
engineering firm based in Toronto, Canada. (CDNX: YWL). He is a director of
7bridge Capital, a private venture capital group based in Hong Kong. He is also
a director and immediate past Chairman of Hincks Dellcrest, a non-profit
organization located in Toronto, Canada.
44
Cherry Lim, Director. Ms. Lim has served as a Director since January 2003. Ms.
Lim has extensive professional experience in manufacturing and
Telecommunications in Asia. She began her career in manufacturing, and before
migrating to Singapore, she worked with a Hong Kong-based conglomerate assisting
the top management in the operation of manufacturing facilities in the region
and in negotiating various technology transfer projects to Mainland China. Since
1990 she has worked in telecoms, first for SingTel in Singapore and then
Deustsche Telekom in Hong Kong; and in 1996 she joined eGlobe, Inc. At eGlobe,
which she left as Director, Business Development in 2000, she was responsible
for spearheading and fostering partnerships with major Telcos and ISPs in the
Asia Pacific region. Ms. Lim is now President of 7bridge Systems (HK) Limited, a
Hong Kong based telecommunications company. Ms. Lim is now CEO of Tsing-tech
Innovations Company Limited, a Hong Kong based company specializing in
technology investment and technology management with a focus in technology
transfer for commercialization. Ms. Lim joined Tsing-Tech from 7bridge Capital
Partners Ltd., which is a privately-held company investing in IT and Telecom
startups.
Andre Monette, Chief Financial Officer. Mr. Monette has served as our Chief
Financial Officer since February 2005 and as our Secretary and Treasurer since
September 2005. He began his career in September 1979 with Raymond, Chabot,
Martin, Pare & Associes, as an auditor. In April 1984, he joined the North
American subsidiaries of Lombard Odier & Cie private bankers, Geneva,
Switzerland and as a Senior Manager and he carried out, until September 2002,
various functions within the Group. From 1985 to 2002, he served as Vice
President of Finance and Administration of Lombard Odier Company of Canada, a
holding company offering administrative and information technology services to
affiliated companies. From 1989 to 2002, he also served as President, Chief
Executive Officer and Director of Transatlantic Securities Company, a registered
securities broker/dealer member of The New York Stock Exchange. He was in 2002,
Treasurer of Lombard Odier Trust Company, an investment adviser providing
portfolio management to private clients and securities custody. From 1999 to
2002, he was Treasurer of Lombard Odier Holdings (US) Inc. which had two
wholly-owned subsidiaries, Lombard, Odier, Inc, an investment adviser registered
with the SEC and Lombard, Odier, Securities Inc, a broker-dealer intermediary
registered with the SEC and NASD. From October 2002 to December 2003 he was
self-employed. In January 2004 he joined Caisse de Depot et de Placement du
Quebec, a financial institution, as an operational Risk Manager. Mr. Monette was
unemployed from October 2004 to January 2005. Mr. Monette is a Chartered
Accountant and a Chartered Financial Analyst. He received his Bachelor in
Business Administration from the Ecole des Hautes Etudes Commerciales de
Montreal.
45
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires officers and directors of a company with securities registered
pursuant to Section 12 of the 1934 Act, and persons who own more than 10% of the
registered class of such company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the subject company with copies of all Section
16(a) forms filed. All reports required to be filed under Section 16 during the
last fiscal year have been filed.
Audit Committee and Charter
We have an audit committee charter. Under the charter, the committee is
comprised of all of our officers and directors. The majority of our directors
are not deemed independent. A copy of our audit committee charter is filed as an
exhibit to this report. Our audit committee is responsible for: (1) selection
and oversight of our independent accountant; (2) establishing procedures for the
receipt, retention and treatment of complaints regarding accounting, internal
controls and auditing matters; (3) establishing procedures for the confidential,
anonymous submission by our employees of concerns regarding accounting and
auditing matters; (4) engaging outside advisors; and, (5) funding for the
outside auditory and any outside advisors engagement by the audit committee. A
copy of our audit committee charter is filed as an exhibit to this report.
Audit Committee Financial Expert
We have no financial expert. We plan to add an independent and financial expert
to our audit committee during fiscal year 2006
Code of Ethics
We have adopted a corporate code of ethics. A copy of the code of ethics is
filed as an exhibit to this report. We believe our code of ethics is reasonably
designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports;
comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
Disclosure Committee and Charter
We have a disclosure committee charter. The purpose of the committee is to
provide assistance to the Chief management team in fulfilling their
responsibilities regarding the identification and disclosure of material
information about us and the accuracy, completeness and timeliness of our
financial reports. A copy of our disclosure committee charter is filed with this
report. The disclosure committee is currently inactive. We plan to activate the
disclosure committee during fiscal year 2006.
46
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by
us to our officers and directors during the three most recent fiscal years.
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards Payouts
--------------------------- ------------------------ --------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Salary Bonus sation Award(s) Options / Payouts Compens-
Position [1] Year ($) ($) ($) ($) SARs (#) ($) ation ($)
- ---------------------- ---- ------- ------ -------- ----------- ---------- -------- ---------
Stephane Solis 2005 86,709 0 0 500,000 0
President and Chief 2004 67,164 0 6,644 0 0 0 0
Executive Officer 2003 18,775 0 2,086 0 500,000 0 0
(resigned Sept. 2005)
Andre Monette 2005 25,112 0 0 0 150,000 0 0
Treasurer and Chief 2004 0 0 0 0 0 0 0
Financial Officer 2003 0 0 0 0 0 0 0
(since Sept. 2005 and
Feb 2005 respectively)
Robert Clarke 2005 0 0 0 0 150,000 0 0
Chairman of the 2004 0 0 0 0 0 0 0
Board of Directors 2003 0 0 0 0 250,000 0 0
John Fraser 2005 0 0 0 0 75,000 0 0
Secretary & Director 2004 0 0 0 0 0 0 0
(appointed President 2003 0 0 0 0 200,000 0 0
and CEO Sept 2005)
Cherry Lim 2005 0 0 0 0 75,000 0 0
Director 2004 0 0 0 0 0 0 0
2003 0 0 0 0 200,000 0 0
Benjamin Leboe 2005 0 0 0 0 350,000 0 62,096
Treasurer and Chief 2004 0 0 0 0 0 0 38,750
Financial Officer 2003 0 0 0 0 200,000 0 8,340
(resigned Feb 2005)
Claude Pellerin 2005 0 0 0 0 50,000 0 61,589
Vice President 2004 0 0 0 0 0 0 36,950
(resigned Oct 2004) 2003 0 0 0 0 100,000 0 18,955
[1] All compensation received by the officers and directors has been disclosed.
47
Option/SAR Grants
There are no stock option, retirement, pension, or profit sharing plans for the
benefit of our officers and directors, other than our 2003 and 2004 Incentive
Stock Option Plans. Under these Plans, the board of directors is vested with
discretionary authority to grant options to persons furnishing services to us.
There were 10,000,000 shares in the plans. 3,958,686 shares have been issued as
a result of the exercise of options, 3,842,500 options are outstanding and
2,198,814 shares remain in the plan.
Option Grants to Officers and Directors During the Last Fiscal Year
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in of Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- --------------- ------------ ------------ ------------ ----------
Stephane Solis 500,000 21% $ 0.68 09/14/2009
Robert Clarke 150,000 6.34% $ 0.68 09/14/2009
Cherry Lim 75,000 3.17% $ 0.68 09/14/2009
John Fraser 75,000 3.17% $ 0.68 09/14/2009
Benjamin Leboe 350,000 14.80% $ 0.68 09/14/2009
Claude Pellerin 50,000 2.11% $ 0.68 09/14/2009
Andre Monette 150,000 6.34% $ 0.81 02/14/2010
Aggregated option/SAR Exercised by Officers and Directors in Last Fiscal Year
and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)
Acquired on Realized --------------------------- ---------------------------
Name Exercised (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------- ------------- --------- ----------- ------------- ----------- -------------
Stephane Solis 0 1,000,000 150,000
Robert Clarke 250,000 $ 154,000 150,000 0
Cherry Lim 200,000 $ 131,000 75,000 0
John Fraser 200,000 $ 18,900 75,000 0
Benjamin Leboe 170,000 $ 49,600 380,000 15,000
Claude Pellerin 100,000 20,235 50,000 0
Andre Monette 0 37,500 0
48
Future Compensation of Our Officers
For the fiscal year ending June 30, 2006, we intend to pay John Fraser, our
president and chief executive officer, a base salary of $173,000 and grant him
500,000 stock purchase options priced at the market on the date of grant.
For the fiscal year ending June 30, 2006, we intend to pay Andre Monette, our
treasurer and chief financial officer, a base salary of approximately $115,000.
We are currently in negotiation with Mr. Andre Monette to determine his bonus
plan. As part of his remuneration, he has been awarded 150,000 options with an
exercise price of $0.81US for the twelve month period ending February 14, 2006.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation intended
to serve as incentive for performance to occur over a period longer than one
fiscal year, whether such performance is measured by reference to our financial
performance, our stock price, or any other measure other than our 2003 and 2004
Incentive/or Nonqualified Stock Option Plans.
Compensation of Directors
We do not have any plans to pay our directors any money. We do intend to grant
our directors options for serving on our board of directors. For fiscal year
ending June 30, 2006, we have not determined the compensation that we may grant
our directors.
Indemnification
Pursuant to the articles of incorporation and bylaws of the corporation, we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the state of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of
1933 which may be permitted to directors or officers pursuant to the foregoing
provisions, we are informed 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.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of interim financing by shareholders, we have purchased management
services from Capex Investments Limited, the vendor in our asset purchase
transaction. Capex is owned and controlled by Robert Clarke, who is a member of
our Board of Directors. Capex and related parties also paid certain operations
expenses directly and advanced funds for working capital. The amounts due are
non-interest bearing, unsecured, and have no fixed terms of repayment. The
amount due to related parties, including Capex, as of June 30, 2005 is $476,646.
Capex Investments Limited is controlled by members of our board of directors.
On February 17, 2004 the Company acquired all the issued and outstanding shares
of Canadian Security Agency (2004) Inc. ("CSA") in exchange for 1,600,000
restricted common shares of the Company. CSA is in the business of providing
guard and security services in Montreal, Canada. Pursuant to the terms of the
acquisition agreement, 600,000 shares were released on closing and 1,000,000
shares were held in escrow as contingent consideration related to revenue
targets and repayment of a note receivable. The note receivable, originally in
the amount of $473,271, is due from the seller on or before February 17, 2005.
The Company has taken a provision against the note for the outstanding balance
of $383,536. The released shares were recorded at their fair value of $468,000.
The Company used the purchase method of accounting for the CSA acquisition as at
February 17, 2004 based on management's best estimate of fair values.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table represents the shares of common stock owned by each officer,
director, and owner of 5% or more of our common stock. The address for each
person is our address at 1155 Rene-Levesque Blvd. West Suite #2720, Montreal,
Quebec, Canada H3B 2K8.
Direct Amount of Percent of
Name of Beneficial Owner Beneficial Owner Position Class [4]
- ------------------------- ---------------- ------------------------------------------------ ----------
Stephane Solis 1,050,000[2] President, Chief Executive Officer and Director 0.00%
until September 16, 2005 [6]
Robert Clarke 150,000[1] Chairman of the Board of Directors 0.00%
John Fraser 170,000[3] President and Chief Executive Officer since 0.00%
September 16, 2005 and a Director [6]
Cherry Lim 75,000[1] Director 0.00%
Andre Monette 150,000[1] Chief Financial Officer, Secretary and Treasurer 0.00%
All officer and Directors
as a Group (5 Persons) 1,595,000[4] 0.00%
Capex Investments Ltd 6,039,560[5] 11.02%
315 St. James Court
St. Denis Street
Port Louis
Republic of Mauritius
Cede & Co. 36,134,705 65.96%
PO Box 222
Bowling Green Station
New York, NY
50
[1] The foregoing figures include unexercised options. No outstanding shares are
currently owned by this person.
[2] Includes 50,000 shares of common stock and an unexercised option to acquire
1,000,000 shares.
[3] Includes 95,000 shares of common stock and an unexercised option to acquire
75,000 shares.
[4] Includes unexercised option shares
[5] Capex Investments is owned and controlled by Robert Clarke, who is a
Director of Manaris.
[6] On September 16, 2005, Stephane Solis, resigned as President and Chief
Executive Officer. Under the terms of the agreement, Mr. Solis received 600,000
options exercisable at $0.00001 (not included in table above). Following the
resignation of Mr. Solis, John Fraser was appointed CEO and President for a
minimum period of three months. Under the agreement, John Fraser will receive
500,000 options exercisable at current market prices (not included in table
above).
The persons named above are our parents and promoters within the meaning of such
terms under the Securities Act of 1933 by virtue of their direct and indirect
stock holdings.
SELLING SHAREHOLDERS
The tables below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
51
This prospectus, as it may be amended or supplemented from time to time, is
deemed to relate to 31,281,345 shares of common stock that may be sold by
certain of our existing shareholders, including:
* 3,797,976 shares of common stock underlying our Series G Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series G
Warrant and $0.35, subject to adjustment, will entitle a Series G Warrant
holder to acquire one share of common stock and one Series K warrant. The
Series G warrants have a 4.5 year term.
* 890,590 shares of common stock underlying our Series H Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series H
Warrant and $0.35, subject to adjustment, will entitle a Warrant holder to
acquire one share of common stock and one Series K warrant. The Series H
Warrants have a 4.5 year term.
* 3,797,976 shares of common stock underlying our Series I Warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series I
Warrant and $0.50 will entitle a Warrant holder to acquire one share of
common stock. The Series I Warrants have a 4.5 year term.
* 1,781,180 shares of common stock underlying our Series J warrants, which
were issued pursuant to our July 2005 Warrant Offering. One Series J
Warrant and $0.50, subject to adjustment, will entitle a Series J Warrant
holder to acquire one share of common stock. The Series J warrants have a
4.5 year term.
* 4,688,566 shares of common stock underlying our Series K warrants, which
are issuable upon exercise of our Series G or Series H warrants. One
Series K Warrant and $0.70, subject to adjustment, will entitle a Warrant
holder to acquire one share of common stock. The Series K Warrants have a
2 year term.
* 605,676 shares of common stock underlying our Series IB6 Warrants. One
Series IB6 Warrant and $0.35, subject to adjustment, will entitle a Series
IB6 Warrant holder to acquire one share of common stock. The Series IB6
Warrants have a 5 year term.
561,012 Series IB6 warrants were issued to Midtown Partners & Co., LLC,
the placement agent for our July 2005 Warrant Offering, and employees of
Midtown Partners, pursuant to a Placement Agent Agreeement. 11,364 Series
IB6 Warrants were also issued to Starboard Capital Markets and employees
of Starboard pursuant to an agreement with Midtown Partners. In addition,
33,300 Series IB6 warrants were also issued to Midtown Partners for
services rendered in connection with a proposed Bridge financing.
* 52,251 shares of common stock underlying our Series IB7 Warrants. One
Series IB7 Warrant and $0.001, subject to adjustment, will entitle a
Series IB7 Warrant holder to acquire one share of common stock. The Series
IB7 Warrants have a 5 year term.
The Series IB7 warrants were issued to Midtown Partners & Co., LLC, the
placement agent for our July 2005 Warrant Offering, and employees of
Midtown Partners, for services rendered in connection with a proposed
Bridge financing.
* 11,325,370 shares of common stock issuable upon conversion of Series A
Senior Convertible Promissory Notes, which were issued as part of our
February 2005 financing. As October 27, 2005, the Convertible Notes have
an outstanding balance of $2,642,586 and are currently convertible at
$0.35 per share. We are registering 150% of the shares underlying the
convertible notes to account for potential adjustments to the conversion
price.
* 4,341,760 shares of common stock issuable in satisfaction of debentures
issued on February 14, 2005.
52
Midtown Partners & Co., LLC, acted as the placement agent for our February 2005
Convertible Note Offering and July 2005 Warrant Offering. Midtown Partners &
Co., LLC is an SEC and NASD registered broker dealer located in Boca Raton,
Florida.
Pursuant to the Placement Agent Agreement we entered into with Midtown in
connection with our July 2005 Warrant Offering, Midtown Partners received a cash
fee in an amount equal to ten percent (10.0%) of the principal amount of the
financing on all warrants with a term to maturity of over one (1) year, and two
percent (2%) on all Warrants with a maturity of less than one (1) year. In
addition, Midtown Partners received warrants to purchase such number of shares
of the common stock of Manaris equal to ten percent & five percent (ten percent
(10.0%) on Warrants that have over one (1) year to maturity and five percent
(5%) on Warrants that have less than one (1) year to maturity) of the aggregate
number of shares of common stock of Manaris issued by the Manaris upon closing
of the Offering.
53
Shares Beneficially
Shares Beneficially Owned Owned After the
Prior to the Offering(1) Offering(2)
---------------------------- ----------------
Total Shares of
Common Stock Total
and Common Percentage
Stock Issuable of Common
Upon Exercise Stock,
of Warrants or Assuming
Conversion of Full Total
Convertible Conversion Shares
Name Notes(3) (4) Registered Number Percent
- ----------------------------------------------- --------------- ---------- ---------- ------ -------
Alpha Capital, AG (5) 2,695,603 3.96% 2,695,603 -0- 0.00%
Design Investments, Ltd. (6) 1,818,383 2.67% 1,818,383 -0- 0.00%
DKR Soundshore Oasis, Holding Fund, Ltd (7) 2,581,612 3.79% 2,581,612 -0- 0.00%
Double U Master Fund, LP (8) 1,412,087 2.07% 1,412,087 -0- 0.00%
Ellis International (9) 1,379,147 2.02% 1,379,147 -0- 0.00%
Monarch Capital Fund, LTD. (10) 2,292,174 3.36% 2,292,174 -0- 0.00%
Nite Capital, LP (11) 1,998,134 2.93% 1,998,134 -0- 0.00%
Platinum Partners Value Arbitrage Fund, LP (12) 2,691,823 3.95% 2,691,823 -0- 0.00%
Professional Traders Fund, LLC (13) 713,806 1.05% 713,806 -0- 0.00%
SRG Capital, LLC (14) 1,278,161 1.88% 1,278,161 -0- 0.00%
Vicis Capital Master Fund (15) 1,765,111 2.59% 1,765,111 -0- 0.00%
Basso Holdings, Ltd (16) 100,000 * 100,000 -0- 0.00%
Basso Multi-Strategy Holding Fund Ltd (17) 100,000 * 100,000 -0- 0.00%
Basso Private Opportunity Holding Fund LTD (18) 100,000 * 100,000 -0- 0.00%
Capex Investment Limited(19) 382,079 * 382,079 -0- 0.00%
DT Crystal (20) 727,273 1.07% 727,273 -0- 0.00%
Michael Maloney (21) 18,182 * 18,182 -0- 0.00%
Oleg Kharlanov (22) 410,000 * 410,000 -0- 0.00%
Republic Aggressive Growth (23) 250,000 * 250,000 -0- 0.00%
Silver Oak Investments (24) 248,486 * 248,486 -0- 0.00%
Enable Growth Partners, LP (25) 531,992 * 531,992 -0- 0.00%
Starboard Capital Markets (26) 2,841 * 2,841 -0- 0.00%
Anthony Spatacco (27) 2,841 * 2,841 -0- 0.00%
Michael Hamblett (28) 5,682 * 5,682 -0- 0.00%
Midtown Partners & Co., LLC (29) 323,281 * 323,281 -0- 0.00%
John Rory Rohan (30) 161,641 * 161,641 -0- 0.00%
Richard Henri Kreger (31) 161,641 * 161,641 -0- 0.00%
JGB Capital, LP (32) 503,571 1.21% 503,571 -0- 0.00%
TCMP3 Partners (33) 312,604 * 312,604 -0- 0.00%
Truk International Fund, LP (34) 77,143 * 77,143 -0- 0.00%
Truk Opportunity1 Fund (35) 1,208,573 1.77% 1,208,573
Whalehaven Capital Fund Limited (36) 685,714 1.01% 685,714 -0- 0.00%
Louis Laframboise (37) 2,170,880 3.18% 2,170,880 -0- 0.00%
Jean Talbot (38) 2,170,880 3.18% 2,170,880 -0- 0.00%
TOTAL 31,281,345 45.89% 31,281,345 -0- 0.00%
* Less than 1%.
54
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days.
(2) Assumes that all securities registered will be sold and that all shares of
common stock underlying the warrants and convertible notes will be issued.
(3) The current conversion price for the convertible notes is $0.35 per share.
We are registering 150% of the shares underlying the convertible notes to
account for potential adjustments to the conversion price.
(4) Based on 68,153,818 shares of common stock outstanding as of October 26,
2005.
(5) Represents (i) 461,538 shares underlying Series G warrants (ii) 113,462
underlying Series H warrants (iii) 461,538 shares underlying Series I warrants
(iv) 226,924 shares underlying Series J warrants (v) 575,000 shares underlying
Series K warrants (vi) 857,143 shares underlying Series A Convertible Notes.
Alpha Capital AG is a private investment fund that is owned by all its investors
and managed by Mr. Konrad Ackerman and Rainer Posch, may be deemed the control
person of the securities.
(6) Represents (i) 288,362 shares underlying Series G warrants (ii) 24,039
shares underlying Series H warrants (iii) 288,362 shares underlying Series I
warrants (iv) 48,077 shares underlying Series J warrants (v) 312,401 shares
underlying Series K warrants (vi) 857,143 shares underlying Series A Convertible
Notes. Haim Rolnitsky has sole dispositive voting power and control of the
securities.
(7) Represents (i) 576,923 shares underlying Series G warrants (ii) 576,923
shares underlying Series I warrants (iii) 576,923 shares underlying Series K
warrants (iv) 850,843 shares underlying Series A Convertible Notes. DKR
SoundShore Oasis Holding Fund Ltd. (the "Fund") is a master fund in a
master-feeder structure. The Fund's investment manager is DKR Oasis Management
Company LP (the "Investment Manager"). Pursuant to an investment management
agreement among the Fund, the feeder funds and the Investment Manager, the
Investment Manager has the authority to do any and all acts on behalf of the
Fund, including voting any shares held by the Fund. Mr. Seth Fischer is the
managing partner of Oasis Management Holdings LLC, one of the general partners
of the Investment Manager. Mr. Fischer has ultimate responsibility for trading
with respect to the Fund. Mr. Fischer disclaims beneficial ownership of the
shares.
55
(8) Represents (i) 230,769 shares underlying Series G warrants (ii) 19,231
shares underlying Series H warrants (iii) 230,769 shares underlying Series I
warrants (iv) 38,462 shares underlying Series J warrants (v) 250,000 shares
underlying Series K warrants (vi) 642,857 shares underlying Series A Convertible
Notes.
(9) Represents (i) 250,000 shares underlying Series G warrants (ii) 250,000
shares underlying Series I warrants (iii) 250,000 shares underlying Series K
warrants (iv) 629,147 shares underlying Series A Convertible Notes. Mr. Wilhelm
Ungar may be deemed the control person of the securities.
(10) Represents (i) 461,538 shares underlying Series G warrants (ii) 461,538
shares underlying Series I warrants (iii) 461,538 shares underlying Series K
warrants (iv) 907,560 shares underlying Series A Convertible Notes. Mr. Jonno
Elliott, may be deemed the control person of the securities.
(11) Represents (i) 403,846 shares underlying Series G warrants (ii) 33,654
shares underlying Series H warrants (iii) 403,846 shares underlying Series I
warrants (iv) 67,308 shares underlying Series J warrants (v) 437,500 shares
underlying Series K warrants (vi) 651,981 shares underlying Series A Convertible
Notes. Mr. Keith Goodman, a Manager of the General Partner of Nite Capital, LP
has voting control of the security investments.
(12) Represents (i) 461,538 shares underlying Series G warrants (ii) 38,462
shares underlying Series H warrants (iii) 461,538 shares underlying Series I
warrants (iv) 76,923 shares underlying Series J warrants (v) 500,000 shares
underlying Series K warrants (vi) 1,153,363 shares underlying Series A
Convertible Notes. Mr. Mark Nordlicht, may be deemed the control person of the
securities.
(13) Represents (i) 144,231 shares underlying Series G warrants (ii) 12,019
shares underlying Series H warrants (iii) 144,231 shares underlying Series I
warrants (iv) 24,039 shares underlying Series J warrants (v) 156,250 shares
underlying Series K warrants (vi) 233,036 shares underlying Series A Convertible
Notes. Mr. Howard Berger and Mr. Marck Swickle have control over the investment
decisions.
(14) Represents (i) 230,769 shares underlying Series G warrants (ii) 53,322
shares underlying Series H warrants (iii) 230,769 shares underlying Series I
warrants (iv) 106,644 shares underlying Series J warrants (v) 284,091 shares
underlying Series K warrants (vi) 372,567 shares underlying Series A Convertible
Notes. Edwin Mecabe and Tai May Lee, are authorized agents for SRG Capital, LLC,
have joint dispositive, voting and investment control of the securities held by
SRG Capital, LLC. Edwin Mecabe and Tai May Lee disclaim beneficial ownership of
these securities. SRG Capital, LLC is an affiliate of a broker dealer.
(15) Represents (i) 288,462 shares underlying Series G warrants (ii) 24,039
shares underlying Series H warrants (iii) 288,462 shares underlying Series I
warrants (iv) 48,077 shares underlying Series J warrants (v) 312,501 shares
underlying Series K warrants (vi) 803,571 shares underlying Series A Convertible
Notes Mr. John Succo, Sky Lucas, Shad Stastney may be deemed the control person
of the securities.
56
(16) Represents (i) 25,000 shares underlying Series H warrants (ii) 50,000
shares underlying Series J warrants (iii) 25,000 shares underlying Series K
warrants. Basso Capital Management, LP ("Basso") is the Investment Manager to
Basso Holdings Ltd. Howard I. Fischer is a managing member of Basso GP,LLC, the
General Partner of Basso, and as such has investment power and voting control
over these securities. Mr. Fischer disclaims beneficial ownership of these
securities.
(17) Represents (i) 25,000 shares underlying Series H warrants (ii) 50,000
shares underlying Series J warrants (iii) 25,000 shares underlying Series K
warrants. Basso. Capital Management, LP ("Basso") is the Investment Manager to
Basso Multi-Strategy Holding Fund Ltd. Howard I. Fischer is a managing member of
Basso GP, LLC, the General Partner of Basso, and as such has investment power
and voting control over these securities. Mr. Fischer disclaims beneficial
ownership of these securities.
(18) Represents (i) 25,000 shares underlying Series H warrants (ii) 50,000
shares underlying Series J warrants (iii) 25,000 shares underlying Series K
warrants. Basso. Capital Management, LP ("Basso") is the Investment Manager to
Basso Private Opportunity Holding Ltd. Howard I. Fischer is a managing member of
Basso GP, LLC, the General Partner of Basso, and as such has investment power
and voting control over these securities. Mr. Fischer disclaims beneficial
ownership of these securities.
(19) Represents (i) 95,520 shares underlying Series H warrants (ii) 191,040
shares underlying Series J warrants (iii) 95,520 shares underlying Series K
warrants. Capex Investments Limited is owned and controlled by Robert Clarke,
who is a director of Manaris.
(20) Represents (i) 181,818 shares underlying Series H warrants (ii) 363,637
shares underlying Series J warrants (iii) 181,818 shares underlying Series K
warrants. Michael Roberts may be deemed the control person of the securities.
(21) Represents (i) 4,546 shares underlying Series H warrants (ii) 9,091 shares
underlying Series J warrants (iii) 4,546 shares underlying Series K warrants.
Michael J. Maloney has control of the security investments in Manaris
Corporation.
(22) Represents (i) 102,500 shares underlying Series H warrants (ii) 205,000
shares underlying Series J warrants (iii) 102,500 shares underlying Series K
warrants.
(23) Represents (i) 62,500 shares underlying Series H warrants (ii) 125,000
shares underlying Series J warrants (iii) 62,500 shares underlying Series K
warrants. Mr. Wilhelm Ungar, may be deemed the control person of the securities.
(24) Represents (i) 12,019 shares underlying Series H warrants (ii) 24,039
shares underlying Series J warrants (iii) 12,019 shares underlying Series K
warrants (iv) 200,409 shares underlying Series A Convertible Notes. Mr. Murray
Todd, may be deemed the control person of the securities.
(25) Represents (i) 38,462 shares underlying Series H warrants (ii) 76,923
shares underlying Series J warrants (iii) 38,462 shares underlying Series K
warrants (iv) 378,146 shares underlying Series A Convertible Notes. Enable
Growth Partners L.P. is affiliated with Enable Capital LLC, a registered
broker-dealer. Mitch Levine is the Managing Member of Enable Capital LLC and is
also a principal in Enable Growth Partners L.P.'s general partner. Enable Growth
Partners LP is purchasing shares of MANS for the sole benefit of the fund's
limited partners, and with no pre-existing, current or future intent to
distribute shares of MANS through Enable Capital LLC. Enable acquired the
securities in the ordinary course of business and, at the time of acquisition,
had no agreements, understandings or arrangements with any other persons,
directly or indirectly, to dispose of the securities. Lastly, Enable Capital LLC
is foreclosed from the same anyway, insofar as it maintains no customer or
client accounts.
57
(26) Represents (i) 2,841 shares underlying Series IB6 warrants. Starboard
Capital Markets is a registered broker dealer. Starboard Capital Markets and
affiliated individuals received Series IB6 warrants pursuant to an agreement
with Midtown Partners. Mr. James Dotzman, may be deemed the control person of
the securities.
(27) Represents (i) 2,841 shares underlying Series IB6 warrants. Anthony
Spatacco, who is affiliated with Starboard Capital Markets, received the
warrants for services rendered in connection with our July 2005 Warrant
Offering.
(28) Represents (i) 5,682 shares underlying Series IB6 warrants. Michael
Hamblett, who is affiliated with Starboard Capital Markets, received the
warrants for services rendered in connection with our July 2005 Warrant
Offering.
(29) Represents (i) 297,156 shares underlying Series IB6 warrants (ii) 26,125
shares underlying Series IB7 warrants. Midtown Partners & Co., LLC is an SEC and
NASD registered broker dealer located in Boca Raton, Florida. Midtown acted as
the placement agent for our February 2005 Convertible Note Offering and our July
2005 Warrant offering.
(30) Represents (i) 148,578 shares underlying Series IB6 warrants (ii) 13,063
shares underlying Series IB7 warrants. John Rory Rohan is affiliated with
Midtown Partners & Co., LLC, which acted as the placement agent for our July
2005 Warrant Offering.
(31) Represents (i) 148,578 shares underlying Series IB6 warrants (ii) 13,063
shares underlying Series IB7 warrants. Richard Henri Kreger is affiliated with
Midtown Partners & Co., LLC, which acted as the placement agent for our July
2005 Warrant Offering.
(32) Represents 503,571 shares underlying Series A Convertible Notes. Mr. Brett
Cohen may be deemed the control person of the securities.
(33) Represents 312,604 shares underlying Series A Convertible Notes. Mr. Steve
Slawson and Mr. Walter Schenker may be deemed the control persons of the
securities.
(34) Represents 77,143 shares underlying Series A Convertible Notes. Michael E.
Fein and Stephen E. Saltzstein, as principals of Atoll Asset Management, LLC,
the Managing Member of Truk International Fund, LP, exercise investment and
voting control over the securities owned by Truk International Fund, LP. Both
Mr. Fein and Mr. Saltzstein disclaim beneficial ownership of the securities
owned by Truk International Fund, LP.
58
(35) Represents 1,208,573 shares underlying Series A Convertible Notes. Michael
E. Fein and Stephen E. Saltzstein, as principals of Atoll Asset Management, LLC,
the Managing Member of Truk Opportunity Fund, LLC, exercise investment and
voting control over the securities owned by Truk Opportunity Fund, LLC. Both Mr.
Fein and Mr. Saltzstein disclaim beneficial ownership of the securities owned by
Truk Opportunity Fund, LLC.
(36) Represents 685,714 shares underlying Series A Convertible Notes. Arthur
Jones, Jennifer Kelly and Evan Schemenauer may be deemed control persons of the
securities.
(37) Represents 2,170,880 shares issuable in satisfaction of a debenture issued
on February 14, 2005.
(38) Represents 2,170,880 shares issuable in satisfaction of a debenture issued
on February 14, 2005.
DESCRIPTION OF SECURITIES
Common Stock
Our authorized capital stock consists of 500,000,000 shares of common stock,
$0.00001 par value per share. The holders of our common stock:
* have equal ratable rights to dividends from funds legally available if and
when declared by our board of directors;
* are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation, dissolution or
winding up of our affairs;
* do not have preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions or rights; and
* are entitled to one non-cumulative vote per share on all matters on which
stockholders may vote.
All shares of common stock now outstanding are fully paid for and non-assessable
and all shares of common stock that are the subject of this offering, when
issued, will be fully paid for and non-assessable. We refer you to our Articles
of Incorporation, Bylaws and the applicable statutes of the state of Nevada for
a more complete description of the rights and liabilities of holders of our
securities.
Non-Cumulative Voting
Holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting
for the election of directors, can elect all of the directors to be elected, if
they so choose, and, in that event, the holders of the remaining shares will not
be able to elect any of our directors.
59
Cash Dividends
As of the date of this prospectus, we have not paid any cash dividends to
stockholders. The declaration of any future cash dividend will be at the
discretion of our board of directors and will depend upon our earnings, if any,
our capital requirements and financial position, our general economic
conditions, and other pertinent conditions. It is our present intention not to
pay any cash dividends in the foreseeable future, but rather to reinvest
earnings, if any, in our business operations.
Anti-Takeover Provisions
There are no Nevada anti-takeover provisions that may have the affect of
delaying or preventing a change in control.
Reports
After we complete this offering, we will not be required to furnish you with an
annual report. Further, we will not voluntarily send you an annual report. We
will be required to file reports with the SEC under section 15(d) of the
Securities Act. The reports will be filed electronically. The reports we will be
required to file are Forms 10-KSB, 10-QSB, and 8-K. You may read copies of any
materials we file with the SEC 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. The
SEC also maintains an Internet site that will contain copies of the reports we
file electronically. The address for the Internet site is www.sec.gov.
Stock transfer agent
Our stock transfer agent for our securities is Pacific Stock Transfer Company,
500 East Warm Springs Road, Las Vegas, Nevada 89119 and its telephone number is
(702) 361-3033.
EXPERTS
Our financial statements for the period ending June 30, 2005, included in this
prospectus have been audited by Manning Elliott, Chartered Accountants, 11th
Floor, 1050 West Pender Street; Vancouver, British Columbia, Canada V6E 3S7, as
set forth in their report included in this prospectus.
LEGAL MATTERS
Darrin Ocasio, Attorney at Law, 1065 Avenue of the Americas, 21st flr., New
York, New York 10018, telephone 212-930-9700 has acted as our legal counsel.
60
FINANCIAL STATEMENTS
Our fiscal year end is June 30. We will provide audited financial statements to
our stockholders on an annual basis.
Our audited financial statements for the years ending June 30, 2005 and 2004.
Manaris Corporation
(Formerly C-Chip Technologies Corporation
(Formerly A Development Stage Company)
Consolidated Financial Statements
June 30, 2005 and 2004
Index
Report of Independent Registered Public Accounting Firm......................F-1
Consolidated Balance Sheets..................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Cash Flows........................................F-4
Consolidated Statement of Stockholders' Equity ..............................F-6
Notes to the Consolidated Financial Statements...............................F-7
61
[MANNING ELLIOTT LETTERHEAD]
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Manaris Corporation (formerly C-Chip Technologies Corporation)
We have audited the accompanying consolidated balance sheets of Manaris
Corporation (formerly C-Chip Technologies Corporation) as of June 30, 2005 and
2004 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the two years in the period ended June 30,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manaris Corporation
(formerly C-Chip Technologies Corporation), as of June 30, 2005 and 2004, and
the results of its operations and its cash flows for each of the two years in
the period ended June 30, 2005, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant
operating losses since inception. The Company's working capital and cash flows
generated from product and service revenues may not be sufficient to fund
operations for the next twelve months. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
/s/ "Manning Elliott"
CHARTERED ACCOUNTANTS
Vancouver, Canada
August 29, 2005
F-1
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)
June 30, June 30,
2005 2004
$ $
----------- ----------
ASSETS
Current Assets
Cash 287,147 1,561,020
Accounts receivable, net of allowance for
doubtful accounts of $141,093 and $5,805,
respectively 2,858,275 237,384
Other receivables (Note 7) 899,248 --
Inventories (Note 7) 1,097,776 155,680
Note receivable from a related party (Note 9(b)) -- 417,899
Prepaid expenses 143,717 45,554
Restricted marketable securities 81,606 --
----------- ----------
Total Current Assets 5,367,769 2,417,537
Property and Equipment (Note 8) 731,075 82,274
Intangible Assets (Note 6) 3,852,772 447,125
Goodwill (Notes 3 and 6) 9,727,454 107,000
Deferred Financing Costs 436,685 --
----------- ----------
Total Assets 20,115,755 3,053,936
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 1,507,959 165,362
Accrued liabilities (Note 7) 2,021,127 232,705
Loans payable (Note 10) 1,598,273 221,490
Current portion of long-term debt 199,878 --
Current portion of convertible debentures 893,436 --
Due to related parties (Note 9(a)) 476,646 230,726
----------- ----------
Total Current Liabilities 6,697,319 850,283
Long-term Debt, less Current Portion (Note 11) 483,240 --
Convertible Debentures (Note 12) 1,687,304 --
----------- ----------
Total Liabilities 8,867,863 850,283
----------- ----------
Non-controlling Interest 18,033 --
----------- ----------
Commitments and Contingencies (Notes 1 and 16)
Stockholders' Equity
Common Stock, 100,000,000 shares authorized with
a par value of $0.00001; 54,782,802 and
39,595,803 issued and outstanding, respectively 548 396
Additional Paid-in Capital 24,142,078 8,536,780
Deferred Compensation -- (25,974)
Accumulated Other Comprehensive Income (Loss) (364,415) 9,860
Deficit (12,548,352) (6,317,409)
----------- ----------
Total Stockholders' Equity 11,229,859 2,203,653
----------- ----------
Total Liabilities and Stockholders' Equity 20,115,755 3,053,936
=========== ==========
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-2
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars)
For the Years Ended
June 30,
--------------------------
2005 2004
$ $
----------- -----------
Revenue
Product 3,580,619 210,222
Service 3,440,609 830,676
----------- -----------
Total Revenue 7,021,228 1,040,898
----------- -----------
Cost of Revenue
Product 2,255,020 102,487
Service 2,411,480 559,352
----------- -----------
Total Cost of Revenue 4,666,500 661,839
----------- -----------
Gross Margin 2,354,728 379,059
----------- -----------
Operating Expenses
Depreciation and amortization 461,819 177,456
Selling, general and administrative 4,538,256 1,858,367
Acquired in-process research and development 386,749 --
Impairment of goodwill and other intangible assets 180,974 278,852
Impairment of long-lived assets 15,487 --
Research and development 731,865 351,584
Stock based compensation(1) 1,216,542 856,384
Settlement costs 192,549 --
----------- -----------
Total Operating Expenses 7,724,241 3,522,643
----------- -----------
Loss from Operations (5,369,513) (3,143,584)
Other Expenses
Interest expense 288,735 11,901
Debenture accretion 609,225 16,625
Discount on conversion of debt -- 1,418,451
----------- -----------
Net Loss Before Income Tax Benefit (6,267,473) (4,590,561)
Income Tax Benefit 37,787 --
----------- -----------
Net Loss Before Non-controlling Interest (6,229,686) (4,590,561)
Non-controlling Interest 1,257 --
=========== ===========
Net Loss (6,230,943) (4,590,561)
=========== ===========
Comprehensive Loss (Note 15) (6,605,218) (4,580,701)
=========== ===========
Net Loss Per Share - Basic and Diluted (0.15) (0.14)
=========== ===========
Weighted Average Shares Outstanding 41,022,000 33,450,000
=========== ===========
(1) Stock based compensation is excluded from the
following:
Selling, general and administration 1,216,542 856,384
=========== ===========
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-3
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
For the Years Ended
June 30,
------------------------
2005 2004
$ $
---------- ----------
Operating Activities
Net loss (6,230,943) (4,590,561)
Adjustments to reconcile net loss to cash used in operating activities
Contingent consideration paid in shares 148,000 303,000
Stock based compensation 1,068,542 553,384
Expenses settled with issuance of common shares 79,200 261,534
Discount on conversion of debt -- 1,418,451
Depreciation and amortization 461,819 177,456
Amortization deferred financing costs 56,525 --
In-process research and development 386,749 --
Non-controlling interest 1,257 --
Accretion of debenture 609,225 16,625
Impairment of goodwill and other intangible assets 180,974 278,852
Impairment of long-lived assets 15,487 --
Impairment of promissory note 383,536 --
Changes in operating assets and liabilities
(Increase) in accounts receivable (852,061) (82,816)
Decrease (increase) in inventory 28,811 (142,340)
Decrease in other receivable 114,607 --
Decrease (increase) in prepaid and other assets 81,686 (33,108)
Increase in due to related parties 245,920 --
Increase in accounts payable and accrued liabilities 558,958 25,734
---------- ----------
Net Cash Used In Operating Activities (2,661,708) (1,813,789)
---------- ----------
Investing Activities
Acquisition of companies, net of cash acquired (2,741,657) --
Purchase of property and equipment (36,689) (28,429)
Payment received on note receivable -- 55,372
Acquisition of customer list (26,644) --
---------- ----------
Net Cash Provided by (Used) in Investing Activities (2,804,990) 26,943
---------- ----------
Financing Activities
Repayments on bank credit line (318,555) (62,250)
Repayment of debt (84,267) --
Related party advances -- (2,840)
Deferred financing costs related to senior convertible debenture (413,681) --
Proceeds from loans 445,561 --
Proceeds from senior convertible debenture 4,675,000 --
Proceeds from issuance of common shares, net -- 3,054,973
Proceeds from exercise of stock options and warrants 205,014 339,618
---------- ----------
Net Cash Provided By Financing Activities 4,509,072 3,329,501
---------- ----------
Effect of Exchange Rate Changes on Cash (316,247) 9,860
---------- ----------
Increase (Decrease) in Cash (1,273,873) 1,552,515
Cash - Beginning of Year 1,561,020 8,505
---------- ----------
Cash - End of Year 287,147 1,561,020
========== ==========
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-4
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
(expressed in U.S. dollars)
For the Years Ended
June 30,
-------------------
2005 2004
$ $
--------- -------
Non-Cash Financing and Investing Activities
Issuance of common shares for services 79,200 261,534
Issuance of common shares for finder's fees and
acquisition related consulting fees 678,463 --
Issuance of common shares for Avensys business
acquisition 7,633,588 --
Issuance of convertible debt for CLI business
acquisition 1,380,543 --
Issuance of common shares for technology acquisition 125,000 --
Issuance of common shares for acquisition of
Canadian Security Agency (2004) Inc. -- 468,000
Issuance of common shares for settlement of
promissory note -- 500,000
Issuance of common shares for convertible debenture 830,000 966,722
Issuance of common shares to settle outstanding
payables 127,327 --
========= =======
Supplemental Disclosures
Interest paid 48,597 11,901
Income taxes paid 27,441 --
========= =======
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-5
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
(Expressed in U.S. Dollars)
Accumulated
Common Shares Additional Other Total
------------------- Paid-In Deferred Comprehensive Stockholders'
# of Amount Capital Compensation Income Deficit Equity
Shares $ $ $ $ $ $
---------- ------ ---------- ------------ ------------- ----------- -------------
Balance, June 30, 2003 25,293,960 253 645,268 -- -- (1,726,848) (1,081,327)
Common stock issued for services 788,206 8 261,526 -- -- -- 261,534
Common stock issued for cash 5,503,008 55 3,054,917 -- -- -- 3,054,972
Common stock issued for
promissory note 909,091 9 499,991 -- -- -- 500,000
Common stock issued for debenture 3,910,120 39 966,683 -- -- -- 966,722
Discount on debenture -- -- 1,418,451 -- -- -- 1,418,451
Common stock issued for purchase
of business 1,600,000 16 467,984 -- -- -- 468,000
Issuance of common shares from
exercise of stock option 1,591,418 16 339,602 -- -- -- 339,618
Stock based compensation -- -- 882,358 (25,974) -- -- 856,384
Translation adjustment -- -- -- -- 9,860 -- 9,860
Net loss for the year -- -- -- -- -- (4,590,561) (4,590,561)
---------- ------ ---------- ------------ ------------- ----------- -------------
Balance, June 30, 2004 39,595,803 396 8,536,780 (25,974) 9,860 (6,317,409) 2,203,653
Common stock issued for services 1,002,145 10 757,653 -- -- -- 757,663
Common stock issued for purchase
of business 10,400,002 104 7,633,484 -- -- -- 7,633,588
Common stock issued for purchase
of intangible asset 164,474 1 124,999 -- -- -- 125,000
Issuance of common shares from
exercise of stock options 2,120,501 22 204,990 -- -- -- 205,012
Stock based compensation -- -- 1,190,568 -- -- -- 1,190,568
Amortization of deferred
compensation -- -- -- 25,974 -- -- 25,974
Common stock issued to settle
outstanding payables 176,767 2 127,325 -- -- -- 127,327
Discount on debenture -- -- 2,470,674 -- -- -- 2,470,674
Debenture conversion 1,106,667 11 829,989 -- -- -- 830,000
Warrants issued -- -- 2,265,616 -- -- -- 2,265,616
Common stock issued pursuant to
warrants exercised 216,443 2 -- -- -- -- 2
Translation adjustment -- -- -- -- (374,275) -- (374,275)
Net loss for the year -- -- -- -- -- (6,230,943) (6,230,943)
---------- ------ ---------- ------------ ------------- ----------- -------------
Balance, June 30, 2005 54,782,802 548 24,142,078 -- (364,415) (12,548,352) 11,229,859
========== ====== ========== ============ ============= =========== =============
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-6
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
1. Nature of Operations and Continuance of Business
Manaris Corporation (the "Company") was incorporated in the State of
Nevada on June 26, 2000 as Keystone Mines Limited.
On January 7, 2003 the Company acquired assets and intellectual property.
It then changed its business focus to the development of security
technology and changed its name to C-Chip Technologies Corporation. In
July 2005, the Company changed its name to Manaris Corporation.
On February 17, 2004, the Company acquired Canadian Security Agency (2004)
Inc., ("CSA") a company providing guard and security services. (Refer to
Note 3(c)).
The Company was previously a development stage company as defined by
Statement of Financial Accounting Standard No. 7, "Development Stage
Companies". The Company has achieved significant revenue from acquired
companies as described below. The companies acquired during the year ended
June 30, 2005 have significant operations which involve security services
and products. The Company is no longer considered a development stage
company.
On February 28, 2005, the Company acquired, through its wholly owned
subsidiary corporation, 6327915 Canada, Inc., 100% of the outstanding
shares of 9151-3929 Quebec Inc., ("Quebec") and 3826961 Canada Inc.
("Canada"). Quebec and Canada collectively own 100% of 3428249 Canada Inc.
3428249 Canada Inc. owns 100% of Chartrand Laframboise Inc., a company
specializing in the security field, and 100% of 9126-7641 Quebec Inc., a
company specializing in the credit management and verification. On June
30, 2005, 3428249 Canada Inc. and 6327915 Canada Inc. completed a merger
transaction. The merged company continues to be 6327915 Canada Inc.
Following the merger 3826961 Canada Inc. and 9151-3929 Quebec Inc. were
each dissolved on June 9, 2005 and September 26, 2005, respectively.
Collectively, Quebec, Canada, 3428249 Canada Inc., Chartrand Laframboise
Inc., and 9126-7641 Quebec Inc. are hereinafter collectively referred to
as "CLI". (Refer to Note 3(a)).
On February 28, 2005 the Company also acquired Avensys Inc. ("Avensys"), a
company incorporated under Part IA of the Companies Act (Quebec) in
Canada. Avensys is a leader in risk management monitoring solutions for
commercial and industrial buildings, infrastructures and various
environments. (Refer to Note 3(b)).
The Company's assets and operations at June 30, 2005 are located largely
in Quebec and in Ontario, Canada. In April 2005 the Company transferred
the production, marketing and sales of its C-Chip product technology to
it's wholly-owned subsidiary, C-Chip Technologies Corporation (North
America).
The Company's shares trade on the NASD OTC Bulletin Board under the symbol
MANS.
The Company has experienced significant operating losses since inception
and has a working capital deficiency of $1,329,550. These factors raise
substantial doubt regarding the Company's ability to continue as a going
concern. These consolidated financial statements do not include any
adjustments to the recoverability and classification of recorded assets
amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company has
funded itself through issuance of shares or by loans from shareholders
and/or directors. During the next twelve months the Company plans to fund
its operations through cash on hand, the sale of security services and the
sale of products. If profitable operations are not achieved, additional
financing will be required to pursue the Company's business plan.
2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year-end is June 30.
Basis of Accounting
These consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States and are
presented in US dollars.
F-7
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Principles of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries. Consolidated companies include: a) 100% of
Avensys and its subsidiary, Fizians Inc. of which Avensys owns 70% of its
outstanding shares and the accounts of Avensys Labs Inc., a company in
which Avensys holds variable interests and is the primary beneficiary. b)
100% of 6327915 Canada, Inc., 9151-3929 Quebec Inc., 3826961 Canada Inc.,
3428249 Canada Inc., Chartrand Laframboise Inc. and 9126-7641 Quebec Inc.,
(collectively the "CLI Group") c) 100% of Canadian Security Agency (2004)
Inc. d) 100% of C-Chip Technologies Corporation (North America). Operating
results for the CLI Group and Avensys are included from the date of
acquisition of February 28, 2005. All inter-company accounts and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three
months or less at the time of issuance to be cash equivalents.
Advertising
The Company charges to operations the cost of advertising as incurred
which was $94,296 for the year ended June 30, 2005 (2004 - $58,900).
Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company tests long-lived assets or
asset groups for recoverability when events or changes in circumstances
indicate that their carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant
decreases in the market price of the asset; significant adverse changes in
the business climate or legal factors; accumulation of costs significantly
in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses
combined with a history of losses or a forecast of continuing losses
associated with the use of the asset; and current expectation that the
asset will more likely than not be sold or disposed significantly before
the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances.
An impairment loss is recognized when the carrying amount is not
recoverable and exceeds fair value.
Foreign Currency Transactions/Balances
The Company's functional currency is the Canadian dollar. Occasional
transactions occur in U.S. dollars, and management has adopted SFAS No.
52, "Foreign Currency Translation". Financial statements denominated in
foreign currencies are translated into US dollars at rates of exchange in
effect at the balance sheet date. Average rates for the year are used to
translate revenues and expenses. Resulting translation gains and losses
are accumulated in a separate component of stockholders' equity as
accumulated other comprehensive income or loss. Currency transaction gains
and losses are included in the Company's results of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, "Accounting Changes and Error Corrections - A Replacement of APB
Opinion No. 20 and SFAS No. 3". SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle and
applies to all voluntary changes in accounting principle. It also applies
to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions.
SFAS 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect
of the change. The provisions of SFAS No. 154 are effective for accounting
changes and correction of errors made in fiscal years beginning after
December 15, 2005. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion
No. 29, "Accounting for Nonmonetary Transactions", is based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. SFAS No. 153
amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the
exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Early application is permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based
Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and its related implementation guidance.
SFAS 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It
also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. SFAS 123R does not change the accounting guidance
for share-based payment transactions with parties other than employees
provided in SFAS 123 as originally issued and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services". SFAS 123R does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". SFAS 123R
requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period (usually
the vesting period). SFAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. The scope of SFAS 123R includes a
wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Public entities
(other than those filing as small business issuers) will be required to
apply SFAS 123R as of the first interim or annual reporting period that
begins after June 15, 2005. Public entities that file as small business
issuers will be required to apply SFAS 123R in the first interim or annual
reporting period that begins after December 15, 2005. For nonpublic
entities, SFAS 123R must be applied as of the beginning of the first
annual reporting period beginning after December 15, 2005. The Company is
evaluating the impact of adopting this standard on the Company's results
of operations and financial position.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107
("SAB 107") to give guidance on the implementation of SFAS No. 123R. The
Company will consider SAB 107 during the implementation of SFAS No. 123R.
F-9
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Financial Instruments and Concentrations
Financial instruments include cash, accounts receivable, note receivable,
accounts payable, accrued liabilities, short and long-term debt and
related party payables. The fair values approximate their carrying values
due to the immediate or short-term maturity of these financial
instruments.
The Company sells the majority of its products and services in Canada. The
Company performs periodic credit evaluations of its ongoing customers and
generally does not require collateral. Reserves are maintained for
potential credit losses, which have not been historically significant. The
Company invests its excess cash in deposits with major financial
institutions.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earning per Share" (SFAS 128). SFAS 128 requires presentation of both
basic and diluted net loss per share (EPS) on the face of the income
statement. Basic net loss per share is computed by dividing the net loss
for the year by the weighted average number of shares of common stock
outstanding during the year. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of
shares of common stock and potential common stock outstanding during the
period, if dilutive.
Stock-Based Compensation
The Company has elected to apply the intrinsic value method of accounting
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Under the intrinsic value method
of accounting, compensation expense is recognized if the exercise price of
the Company's employee stock options is less than the market price of the
underlying common stock on the date of grant. Stock-based compensation for
employees is recognized on the straight-line basis over the vesting period
of the individual options. Stock options granted to non-employees are
accounted for under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), which establishes a
fair value based method of accounting for stock-based awards, and
recognizes compensation expense based on the fair value of the stock award
or fair value of the goods and services received, whichever is more
reliably measurable. Under the provisions of SFAS 123, companies that
elect to account for stock-based awards in accordance with the provisions
of APB 25 are required to disclose the pro forma net income (loss) that
would have resulted from the use of the fair value based method under SFAS
123.
The Company also complies with the provisions of FASB Emerging Issues Task
Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ("EITF 96-18") with respect to stock option
grants to non-employees who are consultants to the Company. EITF 96-18
requires variable plan accounting with respect to such non-employee stock
options, whereby compensation associated with such options is measured on
the date such options vest, and incorporates the then-current fair market
value of the Company's common stock into the option valuation model.
During the year ended June 30, 2005, the Company granted 3,857,668 stock
options, pursuant to a non-qualified stock option plan at exercise prices
ranging from $0.00001 to $0.933 per share. Stock options granted to
non-employees totaled 1,492,668 of which 1,322,268 have vested. Stock
options granted to employees vest over a period of one year.
During the years ended June 30, 2005 and June 30, 2004 the Company
recognized stock-based compensation for non-employees in the amount of
$1,068,542 and $553,384 respectively. The Company also recognized stock
based compensation of $148,000 ($303,000 in 2004) related to contingent
consideration for the acquisition of Canadian Security Agency (2004) Inc.
(Refer to Note 3(c)).
F-10
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
The fair value of the options granted during the period was measured at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
Year Ended
June 30,
----------------
2005 2004
------- ------
Risk - free interest rate 1.58% 2.25%
Expected volatility 43.84% 185%
Expected life of stock options (in years) 1.29 1.0
Assumed dividends None None
The following table illustrates the effect on net loss per share as if the
fair value method had been applied to all grants of stock options:
Year ended June 30,
------------------------
2005 2004
$ $
---------- ----------
Net loss - as reported (6,230,943) (4,590,561)
Add: Stock-based compensation expense
included in net loss - as reported 1,216,542 856,384
Deduct: Stock-based compensation expense
determined under fair value method (2,309,416) (1,520,398)
---------- ----------
Net loss - pro forma (7,323,817) (5,254,575)
========== ==========
Net loss per share (basic and diluted) - as reported (0.15) (0.14)
========== ==========
Net loss per share (basic and diluted) - pro forma (0.18) (0.16)
========== ==========
Revenue Recognition
The Company's C-Chip technology has generated limited commercial sales of
products. The Company developed prototypes for testing by potential
customers, which were billed for a portion of the costs incurred.
Commercial product sales are recorded when shipped as part of a sales
agreement, usually by customer purchase order. Certain product sales
contain a small charge for after sales service for up to one year; such
amounts are deferred and recognized as revenue when earned. Products carry
a one-year replacement warranty and the level of actual warranty expense
has not been material.
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue
Recognition in Financial Statements." Revenue is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is performed, and collectibility is reasonably
assured.
Sales of security services commenced on the acquisition of Canadian
Security Agency (2004) Inc. on February 17, 2004. Clients are provided
security services with revenue recognized as services are performed.
The CLI Group recognizes revenue for service contracts as the services are
performed using a proportional performance model. Revenues from
investigation contracts are reported on the percentage of completion
method of accounting using measurements of progress toward completion
appropriate for the work performed. Progress is generally based upon
man-hours or costs incurred based upon the appropriate method for the type
of job.
Avensys Inc. recognizes revenues when goods are shipped and the risks and
rewards have transferred to customers. Revenues are recorded net of
rebates, discounts and sales returns. Avensys and its 70% owned
subsidiary, specialize in developing, manufacturing and installing control
and monitoring remote security solutions.
F-11
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Allowance for Uncollectible Accounts
The Company continually monitors timely payments and assesses any
collection issues. The allowance for doubtful accounts is based on the
Company's detailed assessment of the collectibility of specific customer
accounts. Any significant customer accounts that are not expected to be
collected are excluded from revenues.
Property and Equipment
Property and equipment are recorded at cost. Amortization is based on the
following annual rates or period:
Computer equipment Straight-line and declining balance 30%-33 1/3%
Furniture and fixture Straight-line and declining balance 20%
Leasehold improvements Straight-line 5 to 8 years
Surveillance equipment Declining balance 30%
Communication equipment Declining balance 20%
Laboratory equipment Straight-line and declining balance 20%
Automotive equipment and software Declining balance 30%
Machinery and office equipment Declining balance 20%
Inventory
Inventory consists of finished products available for sale to customers
and components. Inventory is valued at the lower of cost and net
realizable value. Cost is determined on a weighted average cost basis.
Intangible Assets
An acquired intangible asset that represents technology that has reached
technological feasibility is capitalized at cost. Intangible assets with
definite lives are reported at cost, less accumulated amortization. The
Company does not have any identified intangible assets with an indefinite
life. Acquired in-process research and development is charged to
operations in the period of acquisition. The Company provides for
amortization on a straight-line basis over the following periods:
Customer lists 3-10 years
Licenses, patents and trademarks 4-6 years
Non-compete agreements 4 years
Acquired Goodwill
Goodwill represents the excess of the purchase price of acquired assets
over the fair values of the identifiable assets acquired and liabilities
assumed. Pursuant to SFAS No. 141, the Company does not amortize goodwill,
but tests for impairment of goodwill on an annual basis and at any other
time if events occur or circumstances indicate that the carrying amount of
goodwill may not be recoverable. Circumstances that could trigger an
impairment test include but are not limited to: a significant adverse
change in the business climate or legal factors; an adverse action or
assessment by a regulator; unanticipated competition and loss of key
personnel. Goodwill is tested for impairment using present value
techniques of estimated future cash flows; or using valuation techniques
based on multiples of earnings. If the carrying amount of goodwill exceeds
the implied fair value of that goodwill, an impairment loss is charged to
operations.
Deferred Financing Costs
Costs relating to long-term debt are deferred and amortized over the term
of the related debt facilities.
Research and Development Expenses and Tax Credits
Research and development expenses are expensed as they incurred. Research
and development tax credits are accounted for as a reduction of the income
tax provision during the year in which the costs are incurred, provided
that the Company is reasonably certain that the credits will be received.
The investment tax credits must be examined and approved by the tax
authorities and it is possible that the amounts granted will differ from
the amounts recorded.
F-12
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Contingent Consideration
In connection with the Company's acquisition of Canadian Security Agency
(2004) Inc., if certain future internal performance goals are later
satisfied, the aggregate consideration for the acquisition will be
increased. Such additional consideration, if earned, will be paid in the
form of additional shares of the Company's common stock now held in
escrow. Any additional consideration paid will be allocated between
goodwill, stock-based compensation expense and deferred compensation. The
measurement, recognition and allocation of contingent consideration are
accounted for using the following principles:
Measurement and Recognition
In accordance with SFAS No. 141, Business Combinations ("SFAS 141"),
contingent consideration is recorded when a contingency is satisfied and
additional consideration is issued or becomes issuable. The Company
records the additional consideration issued or issuable in connection with
the acquisition when a specified internal performance goal is met. For
additional consideration paid in stock, the Company calculates the amount
of additional consideration using the closing price of its common stock on
the date the performance goal is satisfied.
Amount Allocated to Goodwill
In accordance with EITF No. 95-8, Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination ("EITF 95-8") and FIN 44, the portion of additional
consideration issuable to holders of unrestricted common stock and fully
vested options as of the acquisition date is recorded as additional
purchase price, as the consideration is unrelated to continuing employment
with the Company. Such portion is allocated to goodwill.
Amount Allocated to Stock-Based Compensation Expense
In accordance with EITF 95-8, the intrinsic value associated with
additional consideration related to stock or options that vest between the
acquisition date and the date at which the contingency is satisfied is
recorded as an immediate charge to stock-based compensation expense
because the consideration is related to continuing employment with the
Company.
Amount Allocated to Deferred Compensation
Additional consideration related to options and restricted stock that
remain unvested when the contingency is satisfied is recorded as deferred
compensation expense under EITF 95-8 and FIN 44, as such consideration
will only be earned to the extent that the holder of such options or
restricted stock continues to be employed by the Company and meets the
vesting requirements. The amount recorded as deferred compensation is
based upon the intrinsic value of the restricted stock and unvested
options at the date at which the contingency is satisfied. The Company
amortizes such deferred compensation over the remaining vesting period of
the underlying restricted stock and unvested options. In the event that a
holder does not fully vest in the restricted stock or unvested options,
the unamortized portion of deferred compensation is eliminated.
Income Tax
Potential benefits of income tax losses are not recognized in the accounts
until realization is more likely than not. The Company has adopted SFAS
No. 109 as of its inception and has incurred net operating losses.
Pursuant to SFAS 109 the Company is required to compute tax asset benefits
for net operating losses carried forward. Potential benefit of net
operating losses have not been recognized in these financial statements
because the Company cannot be assured it is more likely than not it will
utilize the net operating losses carried forward in future years.
Shipping and Handling Costs
The Company's shipping and handling costs are included in cost of sales.
F-13
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
2. Summary of Significant Accounting Policies (continued)
Restricted Marketable Securities
The Company defines marketable securities as income yielding securities
that can be readily converted into cash. An irrevocable letter of credit
for $81,606 (CDN$100,000) was issued to an individual who personally
guaranteed a loan of the Company's Avensys subsidiary. A term deposit
which matures in June 2006 and with an interest rate of 1.3% is designated
as a guarantee for this same amount.
Litigation and Settlement Costs
From time to time, the Company is involved in disputes, litigation and
other legal actions in the normal course of operations. In accordance with
SFAS 5, the Company records a charge to operations equal to at least the
minimum estimated liability for a loss contingency when both of the
following conditions are met: (i) information available prior to issuance
of the financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date of the
financial statements and (ii) the range of loss can be reasonably
estimated.
Warranty Expense
The Company's products typically carry a one year warranty. The Company
establishes reserves for estimated product warranty costs at the time
revenue is recognized based upon its historical warranty experience, and
additionally for any known product warranty issues. The Company has not
incurred any significant warranty expense during the years ended June 30,
2005 and 2004.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current period's presentation.
3. Business Combinations
On February 28, 2005, the Company acquired two businesses. These
acquisitions have been accounted for using the purchase method and the
consolidated financial statements include the results of operations for
these businesses from the date of acquisition. In accordance with SFAS No.
141 `'Business Combinations", the Company allocated the purchase price to
the tangible and intangible assets acquired and liabilities assumed,
including in-process research and development, based on their estimated
fair values. The excess purchase price over those fair values is recorded
as goodwill. The fair values assigned to tangible and intangible assets
acquired and liabilities assumed are based on an independent valuation
analysis using estimates and assumptions provided by management, and other
information compiled by management, including valuations that utilize
established valuation techniques appropriate for the security industry. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill and purchased intangibles with indefinite lives are not amortized
but will be reviewed at least annually for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis
over their respective estimated useful lives.
a) CLI
In February 2005, the Company acquired, through its wholly-owned
subsidiary corporation, 6327915 Canada, Inc., all of the outstanding
shares of 9151-3929 Quebec Inc. ("Quebec") and 3826961 Canada Inc.
("Canada"). Quebec and Canada collectively own 100% of 3428249
Canada Inc. 3428249 Canada Inc. owns 100% of Chartrand Laframboise
Inc. a company specializing in the security field and 100% of
9126-7641 Quebec Inc., a company specializing in the credit
management and verification. Quebec, Canada, 3428249 Canada Inc.,
Chartrand Laframboise Inc., and 9126-7641 Quebec Inc. (hereinafter
collectively referred to as "CLI") were purchased for a total
consideration of $3,859,611 including acquisition costs of $42,817.
The acquisition costs were accounted for as a purchase price
adjustment to goodwill.
The purchase price was $2,436,251 (CDN$3,000,000) in cash and a
$1,380,543 (CDN$1,700,000) Secured Convertible Debenture with
interest of 9% payable quarterly and maturing in five years. At the
option of the holders, but not before the sixth month following the
closing date, the debenture is convertible into 1,700,000 shares of
the Company's common stock at price of $0.82 per share. The
debenture is secured by the universality of all of the moveable
property of the wholly-owned subsidiary, 3428249 Canada Inc.
F-14
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
3. Business Combinations (continued)
a) CLI (continued)
CLI's principal services include investigation, surveillance,
undercover agents, background verification, business intelligence,
security consulting and labor management conflict.
The purchase price was allocated to the following assets and
liabilities:
$
----------
Current assets 578,224
Property and equipment 192,340
Non-compete agreement 574,133
Customer lists 380,811
Current liabilities (341,280)
Bank indebtedness (43,809)
Long-term debt - current portion (74,829)
Long-term debt (5,411)
Other liabilities (19,757)
Excess purchase consideration (goodwill) 2,576,372
----------
3,816,794
==========
The purchase price allocation was preliminary and subject to change
if the Company obtains additional information concerning the fair
values of certain tangible assets and liabilities of CLI. During the
three months ended March 31, 2005, the Company adjusted the net
tangible assets acquired and increased goodwill by approximately
$235,000 due to purchase price adjustments.
Net Tangible Assets
The acquisition cost has been allocated to the assets and
liabilities according to their estimated fair value at the
acquisition date.
Amortizable Intangible Assets
The customer lists consist of information about customers such as
their name, contact information, order history and demographic
information. The income approach using a discounted cash flow
approach was used to estimate the fair value of the customer list,
more specifically, the multi-period excess earnings method. This
method is predicated on the theory that the value of an asset or
investment is the present value of future cash flows discounted at a
rate commensurate with the time value of money and the underlying
risks of the subject investment. The Company is amortizing the fair
value of the customer list on a straight-line basis over the
remaining estimated useful life of ten years.
The non-compete agreements represent an agreement by the seller to
refrain from competing with the Company. The agreement normally
restricts the seller from competing in the same line of business for
a certain period of time. The comparative business valuation method
was used to estimate the fair value. This approach assumes that in
the absence of such agreement, the sellers would be free to compete
and take business away, thus reducing sales and profitability. The
Company is amortizing the fair value of the non-compete agreements
on a straight-line basis over the remaining estimated life of four
years.
F-15
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
3. Business Combinations (continued)
b) Avensys Inc.
On February 28, 2005, the Company completed its acquisition of
Avensys Inc. ("Avensys"). The acquisition resulted in the issuance
of 10,400,002 restricted shares of the Company's common shares
having a fair value of $0.75 per share and a total value of
$7,800,000 (before discounting as discussed below) in exchange for
15,746,369 shares of Avensys which constituted all of the issued and
outstanding common stock of Avensys. The Company also purchased and
cancelled all of the outstanding Avensys stock options for a total
of $312,652 (CDN$385,000). The beneficiaries of the options received
$187,592 (CDN$231,000) on February 28, 2005 and will receive the
balance of $124,970 (CDN$154,000) on or before December 31, 2005.
The Company issued 427,432 restricted shares of common stock as a
finder's fee to an unrelated party. The Company incurred direct
costs associated with the acquisition of $45,000 (CDN$55,413). The
total value of the cancelled stock options, finder's fee and direct
costs were accounted for as purchase price adjustments to goodwill.
The 10,400,002 restricted shares are to be released from escrow over
the eighteen months after acquisition. As a result the value of
restricted stock paid was discounted in the amount of $166,414.
Avensys offers leading edge fiber optics sensor technology to
monitor a variety of environments, including air, water, soil as
well as buildings and infrastructures. Avensys specializes in
providing solutions to monitor different types of environments,
solving environmental monitoring problems, from micro scale
in-building sensing systems to macro scale wireless landslide and
flood warning systems in different countries, covering air, water
and soil as well as the security of materials and infrastructures,
employing a wide range of technologies including Optical Fiber
Sensing Technology.
The purchase price was allocated to the following assets and
liabilities:
$
----------
Current assets 3,499,635
Property and equipment 523,898
Customer list 701,621
Other assets 101,511
Current liabilities (2,358,108)
License agreements 2,085,357
In-process research and development 386,749
Bank Indebtedness (1,202,483)
Long-term debt - current portion (122,829)
Long-term debt (1,453,966)
Other liabilities (16,678)
Excess purchase consideration (goodwill) 5,488,879
----------
7,633,586
==========
The purchase price allocation is preliminary and subject to change
if the Company obtains additional information concerning the fair
values of certain tangible assets and liabilities of Avensys.
Net Tangible Assets
The acquisition cost has been allocated to the assets and
liabilities according to their estimated fair value at the
acquisition date.
F-16
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
3. Business Combinations (continued)
b) Avensys Inc. (continued)
Amortizable Intangible Assets
Customer list represents information about customers such as their
name, contact information, order history and demographic
information. The income approach using a discounted cash flow method
was used to estimate the fair value of the customer list, more
specifically, the multi-period excess earnings method. This method
is predicated on the theory that the value of an asset or investment
is the present value of future cash flows discounted at a rate
commensurate with the time value of money and the underlying risks
of the subject investment. The Company is amortizing the fair value
of the customer list on a straight-line basis over the remaining
estimated useful life of ten years.
License agreements represent a combination of processes, patents,
and trade secrets that were used for existing and in-process
technology. These intangible assets were valued using the income
approach method. This method estimates fair value based on the
earnings and cash flow capacity of an asset. The Company is
amortizing the fair value of these assets over the remaining
estimated useful life of six years on a straight-line basis.
Acquired In-process Research and Development
Of the total purchase price, $386,749 has been allocated to
in-process research and development ("IPR&D") and was charged to
operations. Projects that qualify as IPR&D represent those that have
not yet reached technological feasibility and which have no
alternative future use. Technological feasibility is defined as
being equivalent to a beta-phase working prototype in which there is
no remaining risk relating to the development. At the time of
acquisition, Avensys had multiple IPR&D efforts under way for
certain current and future product lines. These efforts included
physical sensors, interrogation units, chemical sensors and
limnimeters. In applying the discounted cash flow method, the value
of the acquired technology was estimated by discounting to present
value the free cash flows expected to be generated by the products
with which the technology is associated, over the remaining economic
life of the technology. To distinguish between the cash flows
attributable to the underlying technology and the cash flows
attributable to other assets available for generating product
revenues, adjustments were made to provide for a fair return to
property and equipment, working capital, and other assets that
provide value to the product lines.
c) Canadian Security Agency (2004) Inc.
On February 17, 2004 the Company acquired all the issued and
outstanding shares of Canadian Security Agency (2004) Inc. ("CSA")
in exchange for 1,600,000 restricted common shares of the Company.
CSA is in the business of providing guard and security services in
Montreal, Canada. Pursuant to the terms of the acquisition
agreement, 600,000 shares were released on closing and 1,000,000
shares were held in escrow as contingent consideration related to
revenue targets and repayment of a note receivable. The note
receivable, originally in the amount of $473,271, is due from the
seller on or before February 17, 2005. The released shares were
recorded at their fair value of $468,000. The Company used the
purchase method of accounting for the CSA acquisition as at February
17, 2004 based on management's best estimate of fair values.
The purchase price was allocated to the following assets and
liabilities:
$
--------
Note receivable 473,271
Accounts receivable 149,328
Advances from the Company (203,897)
Property and equipment 8,347
Bank indebtedness (93,567)
Accounts payable (74,488)
Accrued liabilities (176,846)
Goodwill 385,852
--------
468,000
========
F-17
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
3. Business Combinations (continued)
c) Canadian Security Agency (2004) Inc. (continued)
The Company performed an annual impairment assessment of the
carrying value of the goodwill recorded in connection with the CSA
acquisition in June 2004 as required under SFAS No. 142. In
accordance with SFAS 142, the implied fair value of goodwill was
determined in the same manner as that which is utilized to estimate
the amount of goodwill recognized in a business combination.
The Company estimated the fair value of its CSA reporting unit
primarily using the discounted cash flow method. The discounted cash
flows for CSA were based on discrete five-year financial forecasts
developed by management for planning purposes and consistent with
those distributed to the Company's Board of Directors.
Upon completion of the annual impairment assessment for the year
ended June 2005, the Company determined the carrying value of the
CSA reporting unit exceeded its estimated fair value. As a result,
the Company charged operations with a goodwill impairment loss of
$63,774 (2004: $278,852).
The primary factors resulting in the impairment charge were: (i) the
loss of some customers due to consolidation in the industry and (ii)
lower revenue growth projections based on performance to date.
Accounting for Contingent Consideration
In connection with its acquisition of Canadian Security Agency
(2004) Ltd., the Company reserved additional shares of its common
stock for issuance to a former shareholder of the acquired company
upon satisfaction of certain future internal performance goals.
The following table presents activity in the Company's common stock
reserved for issuance upon satisfaction of future internal
performance goals related to the purchase of CSA:
Shares
#
--------
Balance at June 30, 2004 700,000
Shares reserved for certain future internal
performance goals --
Shares earned - valued at $148,000 (200,000)
Shares cancelled --
--------
Balance at June 30, 2005 500,000
========
In September 2005 the Company reached a settlement with the former
shareholder of CSA, which included the transfer of 200,000 shares
from escrow. Refer to Note 16(d)(ii).
The following table presents the allocation of contingent
consideration earned in connection with the satisfaction of the
internal performance goals of CSA and payment received to reduce the
note receivable (Refer to Note 9(b)):
June 30 June 30
2005 2004
$ $
-------- -------
Allocation of contingent consideration earned 148,000 303,000
-------- -------
Goodwill -- --
Stock-based compensation expense 148,000 303,000
Deferred compensation -- --
-------- -------
Total 148,000 303,000
======== =======
See Note 2 for a detailed explanation of the accounting policy
relating to the measurement, recognition and allocation of
contingent consideration.
F-18
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
3. Business Combinations (continued)
d) Condensed Balance Sheets (unaudited)
The following table presents details of the unaudited condensed
balance sheets of acquired companies at the dates of acquisition:
Fiscal Fiscal
2005 2004
Acquisitions Acquisition
$ $
------------- ------------
Current Assets 4,047,946 154,523
Property and Equipment 716,238 8,347
Goodwill 1,886,284 398,837
Other Assets 448,843 --
------------- ------------
Total Assets 7,099,311 561,707
============= ============
Current Liabilities 4,142,744 646,093
Long-Term Debt 1,748,082 --
Other Liabilities 20,146 --
Redeemable Preferred Shares 195,712 --
------------- ------------
Total Liabilities 6,106,684 646,093
Stockholders' Equity (Deficit) 992,627 (84,386)
------------- ------------
Total Liabilities and Stockholders' Equity 7,099,311 561,707
============= ============
The Company's fiscal 2005 acquisitions represent the purchase of
Avensys and CLI Group on February 28, 2005. The fiscal 2004
acquisition represents the February 17, 2004 purchase of CSA.
In connection with purchase transactions, the Company incurred
acquisition costs of $766,272 and $41,556 in fiscal 2005 and 2004,
respectively.
e) Pro Forma Results (unaudited)
The pro forma data of the Company set forth below gives effect to
the purchase transactions completed in fiscal 2005 and 2004 as if
they had occurred at the beginning of fiscal 2004. The unaudited pro
forma financial information is not intended to represent or be
indicative of the consolidated results of operations or financial
condition of the Company that would have been reported had the
acquisition been completed as of the dates presented, and should not
be taken as representative of the future consolidated results of
operations or financial condition of the Company.
Years Ended
June 30,
------------------
2005 2004
(In thousands, except per share amounts) $ $
------------------------------------------------ ------- -------
Pro forma net revenues 15,582 15,568
Pro forma net loss (7,131) (5,665)
Pro forma net loss per share (basic and diluted) (0.14) (0.13)
4. Acquisition of Assets
On January 21, 2005, the Company acquired the assets related to Markus 360
including the source code, the intellectual property, the trademark and
all customers. The purchase price was $125,000 paid with 164,474
restricted common shares of the Company. In parallel, the Company entered
into a distribution agreement with Multi-Hexa Laval Inc. ("Multi-Hexa")
which will receive 10% royalties of each gross sale of the software up to
a maximum of $812,084 (CDN$1,000,000) for the intellectual property. The
Company conceded an hypothec on all the rights related to the software, up
to an amount of $243,625 (CDN$300,000) in royalties and will need to be
executed within the five years following the closing date. In case of
default all the rights in the software will retrocede to Multi-Hexa
without compensation. The Company performed an impairment analysis at year
end and determined there was no future benefit related to the purchase of
Markus 360. As a result the net book value of $117,200 was charged to
operations.
F-19
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
5. Variable Interest Entity
The Financial Accounting Standards Board ("FASB") finalized FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities--An
Interpretation of ARB51" ("FIN46R") in December 2003. FIN46R expands the
scope of ARB51 and can require consolidation of "variable interest
entities" ("VIEs"). Once an entity is determined to be a VIE, the party
with the controlling financial interest, the primary beneficiary, is
required to consolidate it. During the year ended June 30, 2005 the
Company's wholly owned subsidiary, Avensys, Inc. ("Avensys"), transferred
its research activities to Avensys Labs Inc. ("ALI"). Avensys owns 49% of
ALI and the two entities have entered an Agreement ("the Agreement") where
ALI will perform research and development activities for Avensys. The
Agreement is for a period of five years and can be renewed for two years.
ALI will provide Avensys a commercialization license for products
developed and in return receive a royalty of 5% of sales generated.
Avensys sold intellectual property related to R&D projects to ALI in
return for 500,000 preferred shares redeemable for $408,030 (CDN$500,000).
ALI provides R&D for Avensys only, however it may enter into agreements
with third parties in the future. ALI has no other financing other than
received from Avensys.
As a result of the above, ALI has been included in the consolidated
financial statements as of June 30, 2005 since Avensys holds a controlling
financial interest and is the primary beneficiary. The impact to the
consolidated balance sheet include the approximate additions to current
assets of $162,000, net property and equipment of $106,000, and current
liabilities of $70,000. The impact to the consolidated statement of
operations was an increase in research and development expenses of
$94,000.
6. Goodwill and Purchased Intangible Assets
The following table presents details of the Company's purchased intangible
assets with definite lives:
June 30, June 30,
2005 2004
Weighted Net Book Net Book
Average Accumulated Value Value
Life in Cost Amortization $ $
Years $ $ (audited) (audited)
-------- --------- ------------- ---------- ----------
Licenses, patents and trademarks 5.6 2,197,241 194,554 2,002,687 52,290
Technology 1.7 574,285 323,010 251,275 394,835
Non-compete agreements 3.7 574,133 48,000 526,133 --
Customers lists 9.5 1,109,077 36,400 1,072,677 --
-------- --------- ------------- ---------- ----------
Total intangible assets 6.0 4,454,736 601,964 3,852,772 447,125
======== ========= ============= ========== ==========
Amortization expense of purchased intangible assets included in operating
expenses are as follows:
Years Ended
June 30,
$
-----------------
2005 2004
$ $
------- -------
Amortization expense of purchased intangibles 373,180 162,520
======= =======
F-20
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
6. Goodwill and Purchased Intangible Assets (continued)
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
2006 $ 772,602
2007 732,166
2008 610,081
2009 574,933
2010 457,200
Thereafter 705,790
----------
$3,852,772
==========
The changes in the carrying amount of goodwill during the years ended June
30, 2005 and 2004 is as follows:
Security and Security and
Investigation Monitoring
Services Devices Total
------------- ------------ -----------
Balance as of June 30, 2003 $ -- $ -- $ --
Purchase CSA (Note 3(c)) 385,852 -- 385,852
Impairment of goodwill during fiscal 2004 (278,852) -- (278,852)
------------- ------------ -----------
Balance as of June 30,2004 107,000 -- 107,000
Goodwill acquired during the period (Notes 3(a)(b)) 3,004,620 6,679,608 9,684,228
Impairment of goodwill during fiscal 2005 (63,774) -- (63,774)
------------- ------------ -----------
Total $ 3,047,846 $ 6,679,608 $ 9,727,454
============= ============ ===========
There were impairment indicators during the year ended June 30, 2005 as
shown above. Since the carrying amount of CSA's goodwill exceeded the
estimated fair values of that reporting unit, an impairment loss was
charged to operations. (Refer to Note 17 for description of reporting
segments).
7. Balance Sheet Details
June 30, June 30,
2005 2004
$ $
--------- -------
Other Receivables
Grants receivable 59,110 --
Investment tax credits receivable 596,417 --
Sales tax receivable 111,545 --
Other 132,176 --
--------- -------
899,248 --
========= =======
Inventory
Raw materials 261,445 8,295
Work in process 102,966 9,605
Finished goods 733,365 137,780
--------- -------
1,097,776 155,680
--------- -------
Accrued Liabilities
Payroll and benefits 693,040 125,785
Sales taxes payable 323,934 64,521
Income taxes payable 98,007 --
Accrual for litigation costs 160,392 --
Royalties payable 236,144 --
Other 509,610 42,399
--------- -------
2,021,127 232,705
========= =======
F-21
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
8. Property and Equipment
June 30, June 30,
2005 2004
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
--------- ------------- --------- ---------
Automotive equipment 34,627 17,318 17,309 --
Computers 608,248 475,300 132,948 40,532
Communication equipment 51,477 33,229 18,248 --
Furniture and fixtures 407,577 330,353 77,224 9,215
Laboratory equipment 399,449 161,527 237,922 --
Leasehold improvements 80,488 53,919 26,569 3,551
Machinery and office equipment 315,391 179,126 136,265 28,976
Software 78,229 42,384 35,845 --
Surveillance equipment 127,293 100,786 26,507 --
--------- ------------- --------- ---------
2,102,779 1,393,942 708,837 82,274
Office equipment under capital leases 37,930 15,692 22,238 --
--------- ------------- --------- ---------
Total property and equipment 2,140,709 1,409,634 731,075 82,274
========= ============= ========= =========
Depreciation during the period 88,639 14,936
========= =========
9. Related Party Transactions/Balances
a) The Company has received management services from officers and
shareholders. These related parties also paid certain operating
expenses on behalf of the Company and advanced funds for working
capital. The total amount due to officers and/or shareholders at
June 30, 2005 is $476,646 (June 30, 2004: $230,726). The amounts due
are non-interest bearing, unsecured, and have no fixed terms of
repayment.
b) The note receivable was due from the original owner and former
President of Canadian Security Agency (2004) Inc., and is delinquent
as of June 30, 2005. The Company has taken a provision against the
note for the full amount. The note receivable from a related party
was unsecured, non-interest bearing and was due on or before
February 17, 2005.
10. Loans Payable
a) CSA has bank indebtedness of $269,272 (CDN$329,965) at June 30, 2005
within a Corporate Credit Line facility in the amount of
CDN$400,000, fluctuating with cash flow and collection of accounts
receivable. Interest is charged at Canada bank prime plus 2% per
annum. The facility is secured by a movable hypothec over accounts
receivable and inventory of CSA; unlimited personal guarantee by the
former sole owner of CSA, supported by collateral second mortgage on
his personal residence and subrogation of the shareholder loan and
salary bonus. Upon the departure in April 2005 of the former sole
owner of CSA and the withdrawing of his guarantees with the Bank,
the Bank proceeded with a demand of repayment of his line of credit
with CSA . The position of the Bank was repurchased in July 2005 by
the Company and the Company is now subrogated in all the Bank's
rights . The Bank's proceedings were therefore terminated.
b) CLI has a credit agreement for an authorized amount of $264,550
(CDN$320,000), renewable yearly. Any utilized portion bears interest
at the Bank's prime rate plus 1,25% and is secured by a general
assignment of CLI's accounts receivable and CLI is required to
respect certain financial ratios. As at June 30, 2005, there was an
outstanding amount of $82,571 (CDN$101,183) and CLI is in compliance
with all financial ratios.
c) Avensys has designated the accounts receivable and inventories to
guarantee the line of credit. The line of credit, for an authorized
amount of $1,109,842 (CDN$1,360,000), bears interest at the Canada
bank prime rate plus 1.5% and is currently in renegotiation.
d) An irrevocable letter of credit for $81,606 (CDN$100,000) has also
been issued to an individual who has personally guaranteed a loan of
the Company. A term deposit is lodged as a guarantee for this same
amount.
F-22
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
10. Loans Payable (continued)
e) The Company's wholly-owned subsidiary, C-Chip Technologies
Corporation (North America) has an unsecured credit facility for an
amount of $1,000,000 (principal and interest) to finance service
fees and inventory that bears interest at 15% per annum. All
receipts from sales revenues will be placed into a designated bank
account and be used to reimburse any amount owed pursuant to the
credit facility. Amounts not paid within twelve months of the
execution of the credit facility will become payable in full. As at
June 30, 2005, there was an outstanding amount of $320,127.
11. Long-Term Debt
June 30, June 30,
2005 2004
$ $
------- ---------
Mortgage loan secured by the universality of Avensys' tangible
and intangible movables, (CDN$406,000), interest is prime rate
plus 2.75%, payable in monthly instalments of CDN$7,000 plus
interest, maturing in May 2010 331,320 --
Note payable, interest is prime rate, payable in six monthly
payments, maturing in October 2005 44,720 --
Note payable on demand (CDN$16,382) without interest 13,369 --
Note payable (CDN$12,778) without interest maturing in May 2006 10,428 --
Note payable (CDN$60,000) without interest, payable in monthly
instalments of $5,440 (CDN$6,667), maturing in March 2006 48,964 --
Note payable (CDN$5,000) without interest maturing in 2006 4,080 --
Note payable (CDN$15,202) without interest, payable in monthly
instalments of $691, maturing in April 2007 12,406 --
Redeemable preferred shares, 241 Class D shares issued by CLI
Non voting, non participating and redeemable at the holder's
option with a 1% monthly dividend on the redemption price 196,670 --
Obligations under capital leases, maturing at various dates
until 2009, payable in instalments totalling $7,188 (CDN$8,808)
in 2006 and 2007, $5,406 (CDN$6,624) in 2008 and $1,379
(CDN$5,406) in 2009 21,161 --
------- ---------
683,118 --
Instalments due within one year 199,878 --
------- ---------
Long-term debt 483,240 --
======= =========
Principal payments on long-term debt for the next five years are:
$
-------
2006 199,878
2007 276,521
2008 73,955
2009 69,928
2010 62,836
-------
Total 683,118
=======
F-23
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
12. Convertible Debentures
June 30, June 30,
2005 2004
$ $
--------- ---------
Senior secured convertible debentures at 7%, payments of
$233,750 for 20 months beginning June 16, 2005, interest payable
each June and December, maturing January 31, 2007, principal
amount of $4,675,000 (Note 12 (a)) 557,284 --
Secured convertible debentures at 9%, maturing February 2010,
principal amount of $1,387,302 (CDN$1,700,000) (Note 12 (b)) 1,387,302 --
Unsecured convertible debentures at 15%, maturing September
2005, principal amount of $397,829 (CDN$487,500) (Note 12 (c)) 336,152 --
Unsecured convertible debentures at 12% maturing September 2007,
principal amount of $326,424 (CDN$400,000) (Note 12 (d)) 300,002 --
--------- ---------
2,580,740 --
Instalments due within one year 893,436 --
--------- ---------
Long-term debt 1,687,304 --
========= =========
Principal payments on the convertible debentures for the next five years
are:
$
---------
2006 893,436
2007 --
2008 300,002
2009 --
2010 1,387,302
---------
Total 2,580,740
=========
a) Senior Secured Convertible Debentures
On February 16, 2005, the Company issued Senior Secured Convertible
Notes Series A ("Notes") and Series E and F Warrants (See Note
13(b)) for an aggregate principal amount of $4,675,000.
In accordance with EITF 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and with EITF 00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments", the Company allocated
$1,863,870 to the Warrants Series E, $339,456 to the Warrants Series
F and recognized an embedded beneficial conversion feature of
$2,470,674 accounted for as additional paid in capital and an
equivalent discount against the Notes. The carrying amount of the
Notes will be increased monthly by periodic accretion under the
interest method. The Company remains obligated for the entire
contractual balance of the Notes of $4,675,000.
These Notes bear interest at 9% per year from February 16, 2005
until the first principal payment date on June 16, 2005 and 7% per
year after this date. Principal on these Notes shall be paid in
twenty (20) equal monthly instalments of $233,750. Interest on these
Notes shall be payable on the last day of June and December of each
year commencing on June 30, 2005.
All payments of interest shall be made, at the option of the
Company, (a) in cash; (b) by the issuance of additional Series A
Notes in the principal amount equal to the interest payment due; or
(c) in shares of common stock of the Company valued at 90% of the
average price of such security in the most recent five trading days
("Market Price").
All payments of principal shall be made, at the option of the
Company, (a) in cash with a premium equal to 10% of the cash amount
paid; or (b) in shares of common stock of the Company valued at 85%
of the Market Price.
F-24
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
12. Convertible Debentures (continued)
a) Senior Secured Convertible Debentures
All payments made by the issuance of shares will be acceptable only
if the issuance of the shares of the Company has first been
registered with the Securities and Exchange Commission.
The holders of these Notes have the right, at their option at any
time, to convert some or all of the Notes including the principal
amount and the amount of any accrued but unpaid interest into a
number of common shares of the Company valued initially at $0.65 per
share, subject to certain adjustments as described in the purchase
agreement.
In connection with the placement of these Notes, the Company issued
Warrant Series: 1B1, 1B2, 1B3, 1B4, and 1B5 granting the right to
acquire up to 881,538 shares of the Company's common stock at prices
ranging from $0.01 to $0.75 per share (see Note 14(d)) and expiring
from three months following the date of their Registration until
February 16, 2010.
The Company valued the warrants at $486,586 and recognized this
amount to additional paid in capital of Warrants Series 1B1, 1B2,
1B3, 1B4, and 1B5 and as deferred issue expenses for the Notes and
issue expenses for the Warrants Series E and F.
To secure payment of the principal amount of the Notes and the
interest thereon, the Company hypothecated, in favour of the note
holders, the universality of all of the immovable and movable
assets, corporeal and incorporeal, present and future of the
Company.
The purchase agreement of these Notes contain certain covenants (a)
related to the conduct of the business of the Company and its
subsidiaries; (b) related to creation or assumption of lien other
than liens created pursuant to the Security Documents and Permitted
Liens, as defined in the purchase agreement; (c) for so long as at
least $2,500,000 principal amount of these Notes remain outstanding,
the Company shall not, without the consent of holders representing
at least 50% of the then outstanding principal amount, create,
incur, guarantee, issue, assume or in any manner become liable in
respect of any indebtedness, other than permitted indebtedness or
issue other securities that rank senior to these Notes provided
however that the Company may have outstanding bank debt.
b) Secured Convertible Debentures
On February 14, 2005, the Company issued debentures of an aggregate
principal amount of $1,380,543 related to the acquisition of the CLI
Group.
These debentures bear interest at 9% per year from February 14,
2005. Principal on these Notes shall be paid on February 14, 2010.
Interest on these debentures shall be payable on the first day
beginning of quarter, commencing on May 1, 2005.
The holders of these Debentures have the right, at their option at
any time, to convert in part or all of the Debentures into a total
number of 1,700,000 common stock of the Company valued initially at
$0.82 per share.
To secure payment of the principal amount of the debentures and the
interest thereon, the Company hypothecated, in favour of the
debenture holders, the universality of all of the movable assets,
corporeal and incorporeal, present and future of its wholly-owned
subsidiary 3828249 Canada Inc.
The purchase agreement of these debentures contain certain covenants
related to the conduct of the business of the Company and its
subsidiaries.
c) Unsecured Convertible Debentures
With the acquisition of Avensys, the Company assumed 15% unsecured
convertible debentures having a nominal value of $918,068
(CDN$1,125,000) and maturing on September 1, 2007. When the
debentures were originally issued, Avensys recorded an equity
component of $378,445 (CDN$463,747) and a liability component of
$539,623 (CDN$661,253), for a total of $918,068 (CDN$1,125,000). In
April 2005, the Company issued 680,000 shares in settlement of
$520,238 (CDN$637,500) of the debentures outstanding. The remainder
of the debentures, $397,829 (CDN$487,500) was replaced by a new 15%
unsecured debenture. The new debenture is convertible into shares of
the Company using the following formula: principal and interest
divided by a 17.5% discount on the 10 day weighted average price of
the Company's shares. At year-end the discount related to the
conversion feature is $61,677.
F-25
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
12. Convertible Debentures (continued)
d) Unsecured Convertible Debentures
With the acquisition of Avensys, the Company also assumed 12%
unsecured convertible debentures having a nominal value of $652,848
(CDN$800,000) and maturing on September 1, 2007. When the debentures
were originally issued, Avensys recorded an equity component of
$305,857 (CDN$374,797) and a liability component of $346,991
(CDN$425,203), for a total of $652,848 (CDN$800,000). In April 2005,
the Company issued 426,667 shares in settlement of $326,424
(CDN$400,000) of the debentures outstanding. The remainder of the
debentures, $326,424 (CDN$400,000) was modified to be convertible
into 330,251 shares of the Company. At year-end the discount related
to the conversion feature is $26,422.
13. Common Stock
Fiscal Year Ended June 30, 2005
a) During the year ended June 30, 2005, the Company issued 2,120,501
common shares for total proceeds of $205,012 from the exercise of
stock options.
b) During the year ended June 30, 2005, a total of 176,767 stock
options were exercised after issuance to settle outstanding payables
in the amount of $127,327.
c) During the year ended June 30, 2005, the Company issued 121,250
restricted common shares and 95,193 common shares for total proceeds
of $2 following the exercise of 216,443 Series IB1 warrants.
d) In May 2005, the Company issued 120,000 restricted common shares
with a value of $79,200 for consulting fees.
e) In April 2005, the Company issued 1,106,667 restricted common shares
valued at $830,000 following the conversion of convertible
debentures.
f) In April 2005, the Company issued 258,000 restricted common shares
valued at $175,182 as a finder's fee and 32,260 restricted common
shares valued at $32,260 as a consultant's fee related to the
acquisition of Avensys Inc. A total of 159,458 restricted common
shares valued at $146,701 were issued as a finder's fee related to
the acquisition of CLI Group (Notes 3(a) and (b)).
g) In January 2005, the Company issued 164,474 restricted common shares
with a value of $125,000 for the purchase price of Markus 360 (Note
4).
h) In March 2005, the Company issued 10,400,002 restricted common
shares having a value of $7,633,586 for the acquisition of Avensys
Inc. The Company issued 432,427 restricted common shares valued at
$324,320 as finder's fee related to the acquisition of Avensys Inc.
(Note 3(b)).
Fiscal Year Ended June 30, 2004
a) During the year ended June 30, 2004, the Company issued 788,206
restricted common shares for service valued at $261,534 being 50% of
the market price of the Company's stock at the date the services
were contracted.
b) During the year ended June 30, 2004, the Company issued 1,591,418
common shares for total proceeds of $339,618 from the exercise of
stock options.
c) During the nine months ended March 31, 2004 the Company issued
3,873,637 common shares at $0.55 per share for total cash proceeds
of $1,630,000, before offering costs of $82,319, and settlement of
the $500,000 promissory note under a private placement of units
consisting of one common share and one common share purchase
warrant. The common share purchase warrants expire in two years and
have an exercise price of $1.00 per share The Company's promissory
note of $500,000 was redeemed for 909,091 units as part of this
issue.
F-26
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
13. Common Stock (continued)
Fiscal Year Ended June 30, 2004 (continued)
d) In July 2003 a Debenture Payable, including accrued interest, was
converted into 3,910,120 restricted shares at a 15% discount from
market, using the face value of $2,000,000. This resulted in a
discount on conversion of debt in the amount of $1,418,451, which is
included in additional paid-in capital.
e) In April 2004 the Company issued 2,538,462 common shares for total
cash proceeds of $1,650,000 before offering costs of $143,209 under
a private placement of units consisting of one common share and one
common share purchase warrant exercisable for a period of two years
at an exercise price of $1.10 per share.
f) In February 2004 the Company issued 1,600,000 common shares for the
acquisition of Canadian Security Agency (2004) Inc.
14. Stock Options and Warrants
a) Fiscal year ended June 30, 2005
During the fiscal year ended June 30, 2005 the Company granted
2,365,000 stock options to employees with exercise prices ranging
from $0.20 to $0.92 and which vest over a period of one year. The
Company granted 1,492,668 stock options to non-employees with
exercise prices ranging from $0.0001 to $0.648 and which vest
immediately. Also a total of 176,767 stock options were issued to
settle outstanding payables of $127,327. During the year ended June
30, 2005 a total of 460,400 stock options were cancelled. The
Company charged stock-based compensation expense of $1,068,542 to
operations relating to stock options and $148,000 relating to
contingent consideration earned during the fiscal year ended June
30, 2005.
b) Fiscal year ended June 30, 2004
During the fiscal year ended June 30,2004, the company granted
2,183,918 stock options pursuant to the Plan at weighted average
exercise price of $0.47. The Company charged stock-based
compensation expense of $553,384 to operations relating to stock
options and $303,000 relating to contingent consideration earned
during the fiscal year ended June 30, 2004.
c) Stock options
On June 15, 2004 the Company filed a Form S-8 Registration Statement
with the US Securities and Exchange Commission to register 5,000,000
shares of common stock pursuant to the Company's 2004 Nonqualified
Stock Option Plan ("the Plan'). The determination of those eligible
to receive options under this plan, and the amount, type, price and
timing of each stock option and the terms and conditions shall rest
at the sole discretion of the Company's Compensation Committee,
subject to the provisions of this Plan. A total of 2,198,814 options
under the Plan remain available for issuance.
A summary of the changes in the Company's common share stock options
is presented below:
June 30, 2005 June 30, 2004
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- -------- ---------- --------
Balance, beginning of year 2,742,500 $ 0.40 2,425,000 $ 0.20
Granted 3,857,668 0.47 2,183,918 0.47
Exercised (2,297,268) (0.09) (1,591,418) (0.21)
Forfeited/Expired (460,400) (0.50) (275,000) (0.20)
---------- -------- ---------- --------
Balance, end of year 3,842,500 $ 0.65 2,742,500 $ 0.40
========== ======== ========== ========
F-27
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
14. Stock Options and Warrants (continued)
c) Stock options (continued)
Additional information regarding options outstanding as at June 30,
2005 is as follows:
Outstanding Exercisable
----------------------------------- --------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
Exercise prices Number of contractual price Number of price
$ shares life (years) $ shares $
---------------- --------- ------------ -------- --------- --------
0.00 - 0.25 602,500 3.00 0.20 602,500 0.20
0.26 - 0.50 10,000 5.00 0.45 -- --
0.51 - 0.75 1,772,500 4.21 0.67 2,005,000 0.63
0.76 - 1.00 1,457,500 4.53 0.76 667,500 0.83
--------- ------------ -------- --------- --------
3,842,500 4.13 0.65 3,275,000 0.61
========= ============ ======== ========= ========
The weighted average fair value of options granted for the fiscal
years ended June 30, 2005 and 2004 was $0.24 and $0.47,
respectively.
June 30,
2005
Common shares reserved for issuance: $
----------
Stock options:
Options outstanding 3,842,500
Reserved for future issuance 2,198,814
Warrants outstanding 14,390,652
Conversion of senior secured convertible notes 8,486,383
Conversion of secured convertible debentures 2,154,739
----------
Total common shares reserved for future issuance 31,073,088
==========
d) Warrants outstanding
Common share purchase warrants issued in February 2005 with the
private placement of the Senior Secured Convertible Notes Series A
("Notes") and outstanding at June 30, 2005 are as follows:
i) 5,394,131 Series E warrants exercisable at $0.75 each and
expiring in February 2010.
ii) 1,798,077 Series F warrants exercisable at $0.70 each and
expiring in February 2006.
iii) 120,192 Series IB1 warrants exercisable at $0.00001 each and
expiring in February 2010.
iv) 215,385 Series IB2 warrants exercisable at $0.65 each and
expiring in February 2010.
v) 323,076 Series IB3 warrants exercisable at $0.75 each and
expiring in February 2010.
vi) 107,692 Series IB4 warrants exercisable at $0.70 each and
expiring in February 2006.
vii) 20,000 Series IB5 warrants exercisable at $0.75 each and
expiring three (3) months following the effectiveness of a
Registration Statement to be filed with the Securities and
Exchange Commission and expiring in February 2006.
Common share purchase warrants issued with the private placements of
common shares during the year ended June 30, 2004 are as follows:
i) 3,873,637 warrants exercisable at $1.00 each; with expiration
dates ranging from August 2005 through February 2006.
ii) 2,538,462 warrants exercisable at $1.10 each and expiring in
April 2006.
F-28
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
15. Comprehensive Loss
The Company's accumulated other comprehensive loss consists of the
accumulated net unrealized gains or losses on foreign currency translation
adjustments. At June 30, 2005 the Company had an accumulated foreign
currency translation loss of $364,415.
The component of comprehensive loss was as follows:
June 30, June 30,
2005 2004
$ $
---------- ----------
Net loss (6,230,943) (4,590,561)
Foreign currency translation adjustment (374,275) 9,860
---------- ----------
Comprehensive loss (6,605,218) (4,580,701)
========== ==========
16. Contingencies and Commitments
a) Vehicle lease commitments are as follows:
2006 47,046
2007 17,960
2008 4,501
-------
$69,507
=======
b) The Company leases premises for its various offices located across
Canada. Total rent expense was $218,318 (2004 - $38,000). Minimum
lease payments for the next five years are $409,775 in 2006,
$181,329 in 2007, $108,454 in 2008, $105,417 in 2009, and $91,068 in
2010.
c) CSA has bank indebtedness of $269,272 at June 30, 2005 within a
Corporate Credit Line facility in the amount of CDN$400,000,
fluctuating with cash flow and collection of accounts receivable.
Interest is charged at Canada bank prime plus 2% per annum. The
facility is secured by a movable hypothec over accounts receivable
and inventory of CSA; unlimited personal guarantee by the former
sole owner of CSA, supported by collateral second mortgage on his
personal residence and subrogation of the shareholder loan and
salary bonus. Upon the departure in April 2005 of the former sole
owner of CSA and the withdrawing of his guarantees with the
financial institution, the financial institution proceeded with a
demand of repayment of his line of credit with CSA. The position of
the financial institution was repurchased in July 2005 by the
Company which is now subrogated in all the financial institution's
rights. The financial institution's proceedings were therefore
terminated.
d) Litigation and Settlement Costs
i) A lawsuit was filed on July 15, 2005, under Quebec law, in the
District of Montreal, Province of Quebec, for a total of
$81,600 (CND$100,000) with regards to alleged expenses
incurred by the plaintiff for the purchase of anti-theft
product known as the "Hawk 200". The Company intends to
contest the case vigorously and, in the event of an
unfavorable outcome, the amount of any damages will be charged
to the earnings of the quarter and is not expected to have a
material adverse impact on our financial condition.
ii) A lawsuit was filed on July 15, 2005, under Quebec law, in the
District of Montreal, Province of Quebec, for a total of
$506,000 (CND$620,000) with regards to alleged breach of
employment contract and wrongful dismissal of Charles
Finkelstein. This lawsuit was settled on September 2, 2005 for
an amount of $81,600 (CND$100,000) and the transfer of 200,000
shares of the Company, currently held in escrow. The parties
exchanged, under this agreement, a complete and final release
regarding their business and employment relationship.
F-29
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
16. Contingencies and Commitments (continued)
d) Litigation and Settlement Costs (continued)
iii) A lawsuit was filed on June 30, 2005 under Quebec law, in the
District of Montreal, Province of Quebec pertaining to a claim
in the amount of $88,900 (CDN$108,900) for alleged wrongful
and unnecessary use of force in the exercise of the Company's
employee security duties. The Company intends to contest the
case vigorously and, in the event of an unfavorable outcome,
the amount of any damages will be charged to the earnings of
the quarter and is not expected to have a material adverse
impact on our financial condition.
iv) A motion was filed under Quebec law, in the district of
Montreal, Province of Quebec, totalling $69,600 (CDN$85,348)
for an unpaid contract of credit. The Company intends to
contest the case vigorously and, in the event of an
unfavorable outcome, the amount of any damages is not expected
to have a material adverse impact on our financial condition.
v) A lawsuit was filed under Quebec law, in the district of
Laval, Province of Quebec, totalling $66,351 (CDN$81,306) for
compensatory damages and $12,240 (CDN$15,000) in punitive and
exemplary damages. The claim alleges that the Company
submitted erroneous evidence that was based on racial
profiling which led to the arrest of the plaintiff. The
Company intends to contest the case vigorously and, in the
event of an unfavorable outcome, the amount of any
compensatory damages will be covered by the Company's
insurance policy. The punitive and exemplary damages will be
charged to the earnings of the quarter and is not expected to
have a material adverse impact on our financial condition.
e) Other Contingencies
i) The Company's subsidiary, Canadian Security's Agency, has a
current outstanding balance for source deductions on payroll
expenses of $70,600 (CDN$86,539), an amount of $38,700
(CDN$47,427) owed to ADP as well as $250,380 (CDN$306,815) for
GST and PST payments and $50,000 (CDN$61,000) for unpaid
penalties and interest. The Company has no knowledge of any
other pending fines or penalties that may be related hereto.
ii) On August 24, 2005, following a Special Warrant Offer, ("the
Offer") the Company received notice from the United States
Securities and Exchange Commission ("SEC") inquiring about
details regarding the Offer. The Company has replied
accordingly and is waiting for a response from the SEC. (Refer
to Note 19(a)).
17. Segment Disclosures
The Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", during the previous year. . Reporting
segments are based upon the Company's internal organization structure, the
manner in which the Company's operations are managed, the criteria used by
the Company's chief operating decision-maker to evaluate segment
performance, the availability of separate financial information, and
overall materiality considerations.
The Security and Monitoring Devices reporting segment is comprised of the
operations of C-Chip Technology North America and Avensys. The Security
and Investigative Services reporting segment is comprised of the
operations of CSA and CLI.
Direct contribution consists of revenues less direct costs. Direct costs
include specific costs of net revenues, sales and marketing expenses, and
general and administrative expenses over which segment managers have
direct discretionary control, such as marketing and sales programs,
customer support expenses, bank charges and bad debt write-offs. Expenses
over which segment managers do not currently have discretionary control,
such as site operations costs, product development expenses, and general
and administrative costs, are monitored by corporate management and are
not evaluated in the measurement of segment performance.
F-30
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
17. Segment Disclosures (continued)
Fiscal 2005:
Security and Security and
Investigative Monitoring
Services Devices Consolidated
$ $ $
------------- ------------- -------------
Net revenues from external customers 3,440,609 3,580,619 7,021,228
------------- ------------- -------------
Cost of net revenues 2,360,042 2,306,458 4,666,500
Marketing and sales expense 218,094 732,666 950,760
Administrative expense 1,032,226 3,704,417 4,736,643
Bad debt write-offs 47,750 -- 47,750
------------- ------------- -------------
Direct costs 3,658,112 6,743,541 10,401,653
------------- ------------- -------------
Direct contribution (217,503) (3,162,922) (3,380,425)
Operating expenses and indirect costs of net revenues (1,989,088)
-------------
Loss from operations (5,369,513)
Debenture interest, accretion and conversion (878,511)
Interest and penalties expense (19,449)
-------------
Net loss before non-controlling interest (6,267,473)
Non-controlling interest (1,257)
-------------
Net loss before income tax benefit (6,268,730)
Income tax benefit 37,787
-------------
Net Loss (6,230,943)
=============
Fiscal 2004:
Security and Security and
Investigative Monitoring
Services Devices Consolidated
$ $ $
------------- ------------ ------------
Net revenues from external customers 830,676 210,222 1,040,898
------------- ------------ ------------
Cost of net revenues 559,352 102,487 661,839
Marketing and sales expense 58,955 237,435 296,390
Administrative expense 88,060 639,109 727,169
Bad debt write-offs 1,987 17,619 19,606
------------- ------------ ------------
Direct costs 708,354 996,650 1,705,004
------------- ------------ ------------
Direct contribution 122,322 (786,428) (664,106)
Operating expenses and indirect costs of net revenues 2,479,388
------------- ------------ ------------
Loss from operations (3,143,494)
Debenture interest, accretion and conversion (1,437,473)
Interest expense (9,594)
------------
Net Loss (4,590,561)
============
F-31
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
17. Segment Disclosures (continued)
The Company's long-lived assets are allocated as follows:
2005 2004
$ $
------- ------
Security and Investigative Services 202,943 8,747
Security and Monitoring Devices 528,132 73,527
------- ------
Total long-lived assets 731,075 82,274
======= ======
All the Company's long-lived assets are located in Canada.
The Company has three geographic business areas: North America, Europe &
Asia. Total revenues in Canada were $5,629,067 during the year ended June
30, 2005. During the year ended June 30, 2005, revenue from one customer
of the Company's Security and Monitoring Devices segment represented
approximately $866,915 of consolidated revenues. The Company has one
customer representing approximately $673,476 of the accounts receivable
total as of June 30, 2005.
Geographic Information
2005 2004
Revenues
$ $
--------- ---------
North America 6,100,744 1,040,898
Europe 657,520 --
Asia 262,964 --
--------- ---------
Total 7,021,228 1,040,898
========= =========
18. Income Tax
The Company utilizes the liability method of accounting for income taxes
as set forth in SFAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred taxes are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. A valuation allowance is recorded
when it is more likely than not that some of the deferred tax assets will
not be realized. The Company has incurred combined U.S. and Canadian
operating losses of $10,934,000 which expire starting in 2015. Pursuant to
SFAS 109 the Company is required to compute tax asset benefits for net
operating losses carried forward. The potential benefit of net operating
losses has not been recognized in these financial statements because the
Company cannot be assured it is more likely than not it will utilize the
net operating losses carried forward in future years.
A reconciliation of the benefit for income taxes at the combined U.S. and
Canadian tax rate compared to the Company's effective tax rate is as
follows:
June 30,
2005 2004
$ $
---------- ----------
Income tax at Federal US statutory rate (recovery) (2,118,521) (1,560,791)
Increase (decrease) resulting from:
Stock based compensation not deductible 401,061 291,171
Non-deductible interest 126,861 5,653
Unrecognized deductible temporary differences 1,347,024 1,263,967
Income tax rate differential of foreign subsidiaries 199,355 --
Non-deductible items and other elements 71,902 --
Other (65,469) --
---------- ----------
Income tax benefit (37,787) --
========== ==========
F-32
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
18. Income Tax (continued)
Deferred tax assets and liabilities and the amount of the valuation
allowance are as follows:
June 30,
2005 2004
$ $
---------- --------
Deferred tax assets:
Net tax losses carried forward 3,446,960 406,382
Difference between book and tax depreciation 83,298 --
Reserves and accruals not deductible for tax purposes 42,833 83,201
Research and development tax credits 621,022 --
Impairment of intangible assets -- 96,784
Valuation allowance (3,195,417) (586,367)
---------- --------
998,696 --
Deferred tax liabilities:
Difference between book and tax depreciation (981,560) --
Investment tax credits (17,136) --
---------- --------
Total deferred net tax assets -- --
========== ========
For the years ended June 30, 2005 and 2004, the valuation allowance
established against the deferred tax assets increased by $2,609,050 and
$561,207, respectively.
For Canadian income tax purposes the Company has approximately $1,561,684
of Scientific Research and Experimental Development expenses available
indefinitely to reduce taxable income in future years.
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. The amount of the deferred tax asset considered
realizable could change materially in the near term based on future
taxable income during the carry forward period.
19. Subsequent Events
a) In July 2005 the Company made a Special Warrant Offer (the "Offer")
to all Class A Series A, Series E, and Series F warrant holders. A
total of $2,576,168 was raised under this Offer. Under the terms of
the Offer, each holder participating in the Offer, by exercising any
Series E Warrants at $0.35 per share, received new Series G
Incentive Warrants (the "Series G Incentive Warrants") and new
Series I Incentive Warrants (the "Series I Incentive Warrants"),
each in an amount equal to one hundred percent (100%) of the number
of shares of the Company's common stock issued upon exercise of the
Series E Warrants pursuant to the Offer. A total of 3,797,976 Series
E Warrants were exercised which prompted the issuance of 3,797,976
Series G Incentive Warrants and 3,797,976 Series I Incentive
Warrants.
Holders who participated in the Offer by the exercise of any Class A
Warrants, Series A Warrants or Series F Warrants received new Series
H Incentive Warrants (the "Series H Incentive Warrants") and new
Series J incentive warrants (the "Series J Incentive Warrants"),
each in an amount equal to twenty-five percent (25%) and fifty
percent (50%), respectively, of the number of shares of the
Company's common stock issued upon exercise of the Class A Warrants,
the Series A Warrants or the Series F Warrants pursuant to the
Offer. A total of 3,562,359 Class A Warrants, Series A Warrants and
Series F Warrants were exercised which prompted the issuance of
890,590 Series H Warrants and 1,781,180 Series J Warrants.
As a result of the Offer, the Company, pursuant to the Warrants in
effect, adjusted the respective Warrants accordingly.
Following the Offer, the Company received notice from the SEC
inquiring about details regarding the Offer and the registration
amendment. The Company has replied accordingly and is waiting for a
response from the SEC.
F-33
Manaris Corporation
(Formerly C-Chip Technologies Corporation)
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2005
(Expressed in U.S. dollars)
19. Subsequent Events (continued)
b) In order to take account for the Company's default on its principal
and interest payment that was due on June 23, 2005, the Company
offered its investors the option to receive payment of the principal
payment in freely tradable shares. The shares issued in lieu of cash
were valued at 85% of the market price (5 day volume weighted
average price). In addition, since a notice was sent under 10
business days indicating the Company's intent to pay in shares, the
Company increased the amount of the principal to be reimbursed by
ten percent.
c) In July 2005 the Company issued shares of common stock for a
consideration per share less than the conversion price in effect,
which constitutes a "Trigger Issuance" under the Senior Secured
Convertible Note of February 16, 2005. Consequently, some investors
pursuant to the Senior Secured Convertible Note exercised their
right to convert part of the Note into common shares. A total of
$815,985 of the Senior Secured Convertible Note was converted.
Having made four principal payments, the balance remaining on the
Note Agreement totals $2,971,647.
d) On September 22, 2005, the Company decided to cease operations of
its wholly owned subsidiary, Canadian Security Agency (2004) Inc.
("CSA"), a provider of security services. As a result, CSA has
entered into an agreement pursuant to which CSA will sell its
customer list for CDN$100,000. The Company has owned CSA since
February 2004.
e) Refer to Note 16(d)(i) and (ii) for litigation and settlement costs
subsequent to June 30, 2005.
F-34
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other arrangement under
which any controlling person, director or officer of the registrant is insured
or indemnified in any manner against any liability which he may incur in his
capacity as such, is as follows:
1. Article XII of the Articles of Incorporation of the company, filed as
Exhibit 3.1 to our Form SB-2 registration statement.
2. Article X of the Bylaws of the company, filed as Exhibit 3.2 to our Form
SB-2 registration statement.
3. Nevada Revised Statutes, Chapter 78.
The general effect of the foregoing is to indemnify a control person, officer or
director from liability, thereby making the company responsible for any expenses
or damages incurred by such control person, officer or director in any action
brought against them based on their conduct in such capacity, provided they did
not engage in fraud or criminal activity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the offering (assuming all shares are sold), all of
which are to be paid by the registrant, are as follows:
SEC Registration Fee $ 1,399.08
Printing Expenses $ 5,000
Accounting/administrative Fees and Expenses $ 10,000
Blue Sky Fees/Expenses $ 0
Legal Fees/ Expenses $ 10,000
Escrow fees/Expenses $ 0
Transfer Agent Fees $ 0
Miscellaneous Expenses $ 0
TOTAL $26,399.08
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Except as set forth below, there were no sales of unregistered securities by
Manaris Corporation during the past three (3) years:
In June 2000, we issued 5,000,000 shares of common stock to Hugh Grenfal and
Mike Muzylowski, our founders.
On December 23, 2002, we acquired all physical assets and intellectual property
related to certain C-Chip technology owned by Capex Investments Limited
("Capex"), a corporation incorporated under the laws of the Republic of
Mauritius. Capex was owned and controlled by Forever Profit (China) Limited. The
assets acquired were used by Capex to develop and commercialize wireless
solutions targeting the credit and security management industries and the
emerging pay-per-use management industry. The consideration paid by us for the
technology was: (1) a promissory note in the amount of $500,000 bearing no
interest and payable in full on January 30, 2003; (2) 250,000 restricted shares
of common stock; and, (3) a convertible debenture of $2,000,000 maturing on
January 15, 2007 and carrying a coupon rate of 2.5% payable at the option of
Capex into restricted shares of the registrant's common stock at a discount of
15% from the market price of the common stock. In addition, we assumed up to a
maximum of $40,000 of the amounts disbursed by Capex from December 1, 2002 to
closing in order for Capex to maintain on-going operations related to the C-Chip
technology.
The Debenture Payable including accrued interest was converted into 3,910,120
restricted common shares at a 15% discount from market, using the face value of
$2,000,000.00. This resulted in a discount on conversion of debt in the amount
of $1,418,451, which is included in additional paid-in capital.
In January 2003 we declared a stock dividend of 19 shares of common stock for
each 1 share outstanding. The record date for the stock dividend was January 20,
2003 and the shares began trading on a post-dividend basis on January 23, 2003.
All per share amounts have been adjusted for the stock dividend.
On January 7, 2003 we issued 5,000,000 common shares, in part for the assets
acquired as described in Note 3. Subsequently a total of 100,000,000 shares were
returned to treasury and cancelled.
II-1
In 2003 we issued 3,000,910 common shares for total proceeds of $1,650,500 under
a private placement of units consisting of 1 common share and one common share
warrant. The Company's promissory note of $500,000 was redeemed for 909,090
units as part of this issue.
In October and November 2003, we issued 480,000 common shares for services.
In the first quarter of 2004, we issued 180,000 common shares for services.
In the first quarter of 2004, we issued 872,727 common shares for total proceeds
of $480,000 under a private placement of units consisting of 1 common share and
one common share warrant.
In February 2004, we issued 1,600,000 common shares for the purchase of 100% of
Canadian Security Agency (2004) Inc.
In April 2004 we issued 2,538,462 common shares of total proceeds of $1,650,000
under a private placement of shares and warrants.
In May 2004 we issued 128,206 common shares for services.
In June 2004 we issued 55,000 common shares for services.
In the third quarter of 2004 we issued 165,274 common shares for services.
In the fourth quarter of 2004 we issued 194,282 common shares for services.
In the first quarter of 2005 we issued: (1) 125,000 common shares for total
proceeds of $8,001 for services (2) 80,274 common shares to settle outstanding
payables in the amount of $64,606 and (3) 40,000 common shares for total
proceeds of $8,000 from the exercise of stock options.
In the second quarter of 2005 we issued: (1) 181,489 common shares for services,
(2) 12,793 common shares to settle outstanding payables in the amount of $8,290
and (3) 615,000 common shares for total proceeds of $123,000 from the exercise
of stock options.
In the third quarter of 2005 we issued: (1) 462,900 common shares for services,
(2) 83,700 common shares to settle outstanding payables in the amount of $54,431
and (3) 250,000 common shares for total proceeds of $50,000 from the exercise of
stock options.
In January 2005 we issued 164,474 common shares for the purchase of Markus 360.
In February, 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which the Company
agreed to issue Units consisting of (i) an aggregate of $4,675,000 of the
Company's 9.0% Senior Secured Convertible Notes, Series A, which are convertible
into shares of the Company's Common Stock, par value $0.00001 per share for a
maximum of 7,192,308 common shares, (ii) Series E warrants to purchase an
aggregate of 5,394,131 shares of Common Stock (subject to adjustment) for a
period of five (5) years at an exercise price of $.75 per share; and (iii)
Series F warrants to purchase an aggregate of 1,798,077 shares of Common Stock
for a period of one (1) year at an exercise price of $.70 per share.
II-2
In February 2005, we entered into an agreement to acquire one hundred percent
(100%) of CHARTRAND LAFRAMBOISE INC. ("CLI")for which we paid three million
dollars Canadian (CND$3,000,000.00) in cash and we issued a debenture,
convertible into 1,700,000 shares of the Company's common stock at price of
$0.82 per share.
In March 2005, the Company issued 10,400,002 restricted shares of common stock
for the purchase of Avensys Inc. The shares will be released to the shareholders
as follows: a first portion representing twenty percent (20 %) of the issued
shares will be released to the stockholders four (4) months following the
closing of the transaction, a second portion representing twenty percent (20 %)
of the issued shares will be released to the stockholders six (6) months after
the closing of the transaction, a third portion representing twenty percent (20
%) of the issued shares will be release to the stockholders nine (9) months
after the closing of the transaction, a fourth portion representing twenty
percent (20 %) of the issued shares will be released to the stockholders twelve
(12) months after the closing of the transaction and the last portion
representing the remaining twenty percent (20 %) of the issued will be released
to the stockholders eighteen (18) months after the closing of the transaction.
In March 2005 we issued 432,427 common shares for services linked to our
purchase of Avensys.
In the fourth quarter of 2005 we issued: (1) 366,112 common shares for services,
and (2) 80,000 common shares for total proceeds of $16,000 from the exercise of
stock options.
In April 2005 we issued 1,106,667 of our common shares to two institutional
investors who opted to convert a debenture they held in Avensys into shares of
our Company at conversion price of $0.75 per shares.
In April 2005, we issued 258,000 restricted common shares valued at $175,182 as
a finder's fee and 32,260 restricted common shares valued at $32,260 as a
consultant's fee related to the acquisition of Avensys Inc. A total of 159,458
restricted common shares valued at $146,701 were issued as a finder's fee
related to the acquisition of CLI Group.
In April 30, 2005, we issued 121,250 restricted common shares and in May 2005 we
issued 95,193 common shares for total proceeds of $2 following the exercise of
216,443 Series IB1 warrants.
In May 2005, we issued 120,000 restricted common shares with a value of $79,200
for consulting fees.
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In the first quarter of 2006 we issued 520,000 common shares for services, and
257,000 common shares to settle outstanding payables in the amount of $105,501.
In July 2005, the Company concluded a Special Warrant Offering which raised
gross proceeds of $2,576,168. In connection with the Special Warrant Offer, our
Company issued 7,360,336 common shares to Warrant Holders as well as new
warrants which were issued in the following amounts: (i) 3,797,976 Series G
Warrants, (ii) 3,797,976 Series I Warrants, (iii) 890,590 Series H Warrants and
(iv)1,781,180 Series J Warrants.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Manaris Corporation or executive
officers of Manaris Corporation, and transfer was restricted by Manaris
Corporation in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean Manaris Corporation, a Nevada
corporation.
3.1 Articles of Incorporation of Manaris Corporation dated June 22, 2000
(as incorporated by reference to Form SB-2 filed with the Securities
and Exchange Commission on September 29, 2000).
3.2 Bylaws of Manaris Corporation dated July 13, 2000 (as incorporated by
reference to Form SB-2 filed with the Securities and Exchange
Commission on September 29, 2000).
3.3 Manaris Corporation Specimen Stock Certificate (as incorporated by
reference to Form SB-2 filed with the Securities and Exchange
Commission on September 29, 2000).
3.4 Amended Articles of Incorporation (as incorporated by reference from
our Form 8-K filed with the Securities and Exchange Commission on March
18, 2003).
II-4
3.5 Amended Articles of Incorporation.
5.1 Consent of Sichenzia Ross Friedman Ference LLP.
10.1 Registration Rights Agreement dated February 16, 2005.
10.2 Placement Agency Agreement between Midtown Partners Co,. LLC and
Manaris Corporation dated February 2, 2005.
10.3 Series A Convertible Promissory Note (as incorporated by reference to
Form SB-2 filed with the Securities and Exchange Commission on May 9,
2005).
10.4 Placement Agency Agreement between Midtown Partners LLP and Manaris
Corporation dated July 19, 2005.
10.5 Form of Series G Warrant
10.6 Form of Series H Warrant
10.7 Form of Series I Warrant
10.8 Form of Series J Warrant
10.9 Form of Series K Warrant
10.10 Form of Series IB6 Warrant
10.11 Form of Series IB7 Warrant
10.12 Louis Laframboise Debenture dated February 14, 2005
10.13 Jean Talbot Debenture dated February 14, 2005
21 List of subsidiaries of Manaris Corporation
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1)
23.2 Consent of Manning Elliott, Chartered Accountants
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, 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.
II-5
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
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.
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:
a. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Not withstanding 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)
(Section 230.424(b) of this chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
c. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of this Form SB-2 Registration Statement and has duly
caused this Form SB-2 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Montreal, Quebec, Canada on this day
of November 7th, 2005.
MANARIS CORPORATION
BY: /s/ John Fraser
--------------------------------------------
John Fraser, President and Chief Executive
Officer (Principal Executive Officer)
BY: /s/ Andre Monette
--------------------------------------------
Andre Monette, Chief Financial Officer,
Secretary and Treasurer and (Principal
Financial and Accounting Officer)
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Stephane Solis, as true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendment (including
post-effective amendments) to this registration statement, and to file the same,
therewith, with the Securities and Exchange Commission, and to make any and all
state securities law or blue sky filings, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in about the premises, as fully to all
intents and purposes as she might or could do in person, hereby ratifying the
confirming all that said attorney-in-fact and agent, or any substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Form SB-2
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signatures Title Date
- ---------- ----- ----
/s/ John Fraser President and Chief Executive Officer November 7, 2005
- -------------------- (Principal Executive Officer)
John Fraser
/s/ Andre Monette Chief Financial Officer, Secretary and November 7, 2005
- -------------------- Treasurer (Principal Financial and
Andre Monette Accounting) Officer
/s/ Robert G. Clarke Chairman of the Board of Directors November 7, 2005
- --------------------
Robert G. Clarke
/s/ Cherry Lim Director November 7, 2005
- --------------------
Cherry Lim